Traditionally, the video game industry has been comprised of large companies like Electronic Arts, Microsoft, and Nintendo selling their multi-million dollar budgeted, blockbuster titles directly to consumers. The industry now includes more web-based, lower-budget, independent games which find sponsors and audiences through websites like Flashgamelicense.com, Kongregate, and Addicting Games.
The Wall Street Journal recently carried an article on the trend, "Notes From the Underground: Indie Videogames Come of Age", written by Christopher Lawton. Lawton's article includes an estimate of the independent video game market or casual game market being at $1 billion when you factor in revenue from advertising, downloads, and subscription fees.
The trend spawns a growth in transactions in which independent developers earn income by licensing their games to intermediaries and/or by sharing in advertising and premium sale revenue with those intermediaries. As a business and intellectual property attorney who has worked on many licensing deals, I offer some issues about revenue-sharing, representations, and exclusivity for the consideration of those negotiating such video game licensing transactions
When compensation is via revenue sharing, parties need to understand exactly what revenue is being shared. The Wall Street Journal article mentions that some licensors are giving independent developers up to 70 – 80% of the revenue. I doubt it’s gross revenue that’s being shared Of course, licensees want to cover their costs before paying game developers. On the other hand, game developers need to consider what expenses are taken out before getting their cut and whether those expenses include “fat” hidden in nebulous administration fees.
Incorporating popular music, celebrity faces, and other cultural images into video games is common. Licensees should ask developers for representations that all material in the game is original content or used with permission. Game developers should make sure those representations are true. As a commercial distributor of the game, the licensee is still potentially liable if any elements of the game violate someone’s intellectual property or other rights. Potential rights violations are not always obvious to the uninitiated so a little due diligence by the licensee to verify the veracity of the developer’s representations is good practice.
I particularly noted mention in the Wall Street Journal article of the Dress Paris in Jail," game in which players dress Paris Hilton in various selections of prison attire including jail scrubs and tattoos. The rights clearance side of my mind pondered whether the game created any right of publicity issues. But I suppose that’s a topic better addressed on my intellectual property and licensing blog, GuideThroughtheLegalJungleblog.com.
Exclusivity may be a part of the licensing deal. And that’s okay if handled correctly. The licensee wants to make sure the game developer doesn’t release products that are directly competitive. At the same time, the game developer wants to make sure exclusivity provisions do not curtail his/her professional growth.