24th September 2020Can licence agreements in the gaming industry hold water?

Digital transformation in the gaming industry has only been accelerated by the coronavirus pandemic, with the global video game market now forecast to be worth $159 billion in 2020 – around four times box office revenues and almost three times music industry revenues.

The potential for new revenue streams as a result of digitalisation in the gaming industry is huge. Developers and publishers alike are realising the potential, not just in freemium models, but also in providing additional monetised content to their customers. In-game advertising, in-game credits, DLCs, expansion packs, lootboxes, pay-to-play rewards, skins and mods all offer additional revenue sources. There is no doubt that this can be lucrative, but for IP owners, video game developers, and rights holders, the question is whether existing agreements are fit for purpose.

Our Forensic team outline how games developers and publishers can make the most of the opportunities digitalisation in the gaming industry provides and ensure the correct pay outs are received.

Construction of Agreements

Agreements drawn up over the last ten years may not be fit for purpose, particularly around digital rights. New ways of selling games, such as subscription services, raise additional questions. Despite its digital transformation in recent years, surprisingly, the gaming industry has lagged behind other entertainment industries, as large publishers have backed the distribution channels of physical media, particularly on consoles, by charging a premium for digital editions.

Things are now changing rapidly. Major players are attempting subscription based services (PlayStation Now, Apple Arcade, Xbox Game Pass); big freemium titles are released on digital platforms (Fortnite perhaps being the largest example); and AAA games are offered to customers free of charge (Epic Games, PlayStation Plus). This is before considering all the various ways that in-game content has been monetised.

When revenue structures change, it is vital that the agreements in place reflect these changes, and that the IP owners are adequately compensated. If not, the publisher may retain the benefits of the IP without allocating a share to the licence holder, by stating that the agreement is silent on digital rights.

Key questions to consider include:

• Does the Agreement offer a percentage participation? If so, how will the revenue be allocated and what revenue is included within the Net Sales clause?
• Will the rights owner receive a share of all revenue, or just on the initial sale of the game?
• What will the compensation be if a flat fee is received by the publisher, and does this change if the fee is structured as a Guarantee?
• Is the licensee entitled to make deductions and to what extent?

Our team at HW Fisher Forensic regularly work with clients to determine whether certain income types will be covered by their agreements, and how they might improve their agreements to better reflect the way in which the intellectual property is being used. We frequently assist clients with drafting key clauses in their agreements, particularly around revenue recognition and the ‘audit rights’ of a licensor. Although we are not a substitute for legal advice, our extensive hands-on experience with the practical implementation of various agreements means we can offer very relevant guidance. Get in touch if we can help review or draft an agreement for your business.