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January 13th, 2012, 16:00
Lar has made another update to his blog where he briefly explains the revenues of a game with the promise to explain more about this at a later stage.
On a 39,95 game in Germany, this is a typical breakdown found in royalty reports (numbers rounded)
  • The state (VAT 19%): -7,5
  • Retail: -10
  • Inflated publisher costs: -5 (Logistics, sales and payment conditions)
  • Cost of goods: -1,5
  • Net revenue: 15,95
So if you sell 100K units in Germany, your net revenue in theory is about 1,6M. For the record, most games do not sell 100K units in Germany.
More information.
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January 13th, 2012, 16:01
So, if the price drops 50 or even 75% (Christmas sales for instance), what happens then? No revenue? Negative revenue?
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January 13th, 2012, 16:25
Then the (big) retailer tells the publisher "Lower the price by 50/75% and we'll calculate this into the next order, or we'll execute our return right and send you your whole rubbish back for 100%." The developer is "not asked" about such issues, because neither retailer nor publisher gives a shit about him.
Another reason why many developers want to get rid of the publisher.
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January 13th, 2012, 16:42
Personally, I haven't seen any substancial price drops within the last half year at the local electronics chain shop.

But I wasn't there after Christmas time, too.

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January 13th, 2012, 17:36
It often gets worse than that, too, as all the "revenue" that goes to the developer is booked against their "advance" given by the publisher. So rather than the cost of development being taken off the top like all of the publisher's costs, it's really more of an interest-free loan from the publisher to the developer to be paid out of their (reduced) percentage.

In the majority of cases, the developer never sees a dime on the back end, even if the publisher makes a profit (in spite of never seeing that advance "loan" paid off in full).
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January 13th, 2012, 17:56
Originally Posted by RampantCoyote View Post
It often gets worse than that, too, as all the "revenue" that goes to the developer is booked against their "advance" given by the publisher. So rather than the cost of development being taken off the top like all of the publisher's costs, it's really more of an interest-free loan from the publisher to the developer to be paid out of their (reduced) percentage.
I don't really see an issue with that. If the developer has been given an advance, why shouldn't it come out of the revenue when it is earned? Most publishing industries are like that.

In the majority of cases, the developer never sees a dime on the back end, even if the publisher makes a profit (in spite of never seeing that advance "loan" paid off in full).
So what happens after the advance is covered? Creative accounting? I know this is often how people get screwed in the movie industry. Distributor pays so much to its marketing subsidiary (which makes a huge profit) that there is no profit for royalties to be paid out of. I saw a breakdown of the 'loss' that the studio incurred on Harry Potter and the Order of the Phoenix. It was laughable.

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January 13th, 2012, 18:34
Originally Posted by blatantninja View Post
I don't really see an issue with that. If the developer has been given an advance, why shouldn't it come out of the revenue when it is earned? Most publishing industries are like that.

So what happens after the advance is covered? Creative accounting? I know this is often how people get screwed in the movie industry. Distributor pays so much to its marketing subsidiary (which makes a huge profit) that there is no profit for royalties to be paid out of. I saw a breakdown of the 'loss' that the studio incurred on Harry Potter and the Order of the Phoenix. It was laughable.
The publishers see it your way, too. And if that was all there was to it, the developer got to keep the I.P. rights, etc., then I'd probably agree with you. In fact, in my ideal world, that's exactly how it would work - the publishers would be commoditized, and would really just be a one-stop shop for developers seeking financing, marketing, and distribution for their games.

But that's not how it works anymore (or almost never how it works), and it's the developers who have gotten commoditized.

Scott Miller explains it at great length with a lot more detail than I could, here. He explains why paying for the advance out of royalties is effectively "double dipping" on the part of the publisher. I'll let you read the article and see if you are persuaded:

Scott Miller: Royal Tease

As far as Hollywood-style accounting: I'm sure some of that goes on, but to the best of my knowledge it has not gotten to be quite that bad. Publishers are quite experienced at figuring out likely costs and returns on games, and they spread out their risk among several titles per year. A single hit will finance a lot of failures. So they play the odds. A flop or two from a publisher isn't going to hurt them, but the lack of a major hit in a year very well might. So they do their accounting magic on the front-end. Unless the game is a major hit or a major flop, they've got it worked out so that they won't really lose any money, and will be making a big profit long before the studio starts seeing anything on the back-end.
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January 13th, 2012, 18:41
Miller's (Duke Nuk'em, Max Payne, … ) blog was superb. A lot of valuable insights into business aspects.

The key point behind the advance vs. royalties scheme is that if the game becomes a hit the developer pays for development & part of the publisher's infrastructure and the publisher generally demands the IP for his "risk".
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January 13th, 2012, 19:41
Shitty publishing deals and shady practices are what's fueling the eBook self-publishing trend with many writers. Check the stats with Amazon, Barnes & Noble, and the other eBook outlets. Many good writers can't get an agent and if they do, they can't get a fair publishing deal from a traditional publishing houses.
I can get a 70% royalty on every eBook I sell through Amazon in the U.S., Britain, Italy, Spain, and Germany. Granted, there is too much schlock being put out and it takes effort to winnow out the grain from the chaff. Eventually, the good will emerge and the crap will fade away as the market sorts itself out.
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January 13th, 2012, 19:56
AFAIK 70% only below the 10$ price point. Beyond that only 30 or 35%. Did this change in the last 12 months?
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January 13th, 2012, 20:14
Originally Posted by RampantCoyote View Post
In the majority of cases, the developer never sees a dime on the back end, even if the publisher makes a profit (in spite of never seeing that advance "loan" paid off in full).
This reminds me of the music industry

There things seem to be exactly the same, especially for smaller music groups.

That that is one of the reasons so many musicians go/went digital in the first place.

How similar some structures are !

Edit : And that's one of the reasons gaming companies are so much riding the argument of pirates : Apart from the REAL threat of pirates, they just misuse this argument for a scapegoat. I mean, they use the REAL argument of pirates (they are a threat, no doubt) for their own uses. Like a tool. Instrumentalization of a valid argument.

And they do it because they see so many developers and users trying to bypass the publishers - which leads them (the publishers) receiving less profits if everyone bypasses them.
Which is the reason why they battle against it, or try to publish things themselves and so that they CAN'T be bypassed. Origins, Steam, initially.
And now Steam is used as a tool to pull the same trick, this "publishing trick" again.
On smaller devs, this time.

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January 13th, 2012, 20:16
Originally Posted by RampantCoyote View Post
The publishers see it your way, too. And if that was all there was to it, the developer got to keep the I.P. rights, etc., then I'd probably agree with you. In fact, in my ideal world, that's exactly how it would work - the publishers would be commoditized, and would really just be a one-stop shop for developers seeking financing, marketing, and distribution for their games.

But that's not how it works anymore (or almost never how it works), and it's the developers who have gotten commoditized.

Scott Miller explains it at great length with a lot more detail than I could, here. He explains why paying for the advance out of royalties is effectively "double dipping" on the part of the publisher. I'll let you read the article and see if you are persuaded:

Scott Miller: Royal Tease
Thanks for posting that, it was an interesting read. I'm a business person (investments) so I probably see things differently than people working for developers. It seems like the writer of the article is arguing for a system that is more of a partnership than that of an investor/proprietor relationship.

He wants a system where all costs are covered before ANYONE sees a dime of profit, and I can understand why. I think though that he discounts the cost of capital and required return on investment that any investor sees.

Let's consider three different scenarios and how they affect each party under the current system and his proposed:

1) The game is a flop
2) The game breaks even on actual cost
3) The game is a hit

Under the current system, in each case, the employees of the developer (at least theoretically) have all been paid for the work they put into the game, paid out of the advance. The only risk in scenario 1 or 2 to the developer is that they may not have jobs anymore as I imagine it will be hard to get future games funded and published. The employees are not going to have their wages garnished or their savings raided cover the loss (in scenario 1) that the publisher has incurred.

However, the publisher in both scenarios has lost. In scenario 1, it has actually lost capital that it has no way to recover. So while the developer (and its employees) are still whole, the publisher is not. In scenario two, the publisher has recouped its capital, but it has opportunity lost. Say development was 3 years and the risk free rate of investment (IE US Treasuries in my case) is 3%, that means they've lost out on at least 9.2% total return (and possible more had they put the money into a better game). The point is that even though the costs of production were recouped, the developer has still lost out.

Now obviously in scenario 3, everybody wins, but the publisher wins more.

In investments, this is considered a perfect example of the risk/reward ratio. It's why US Treasuries yield say 3%, while IBM bonds yield 6% and Joe Blow Inc. yield 20%. As the risk to capital increases, the required return to make the investment increases. If all three yielded 3%, why would anyone buy IBM or Joe Blow Inc. bonds when they can get treasuries, with theoretically no risk, at the same return?

Now in the proposed system of treating it like an equal partnership, where all costs are pooled before anyone sees any profit, in scenario 1, both parties lose, same as before, and just as before, the publisher isn't able to recoup any of the lost capital from the developer. Scenario two is the same as well, except that it continues to a higher sales point.

Scenario three is different however. The developer gets a larger share of the profit than before because the advance is not charged against the royalties. So the publisher could actually still lose money in terms of opportunity cost (IE the return on capital is less than what their other options are as I described above), and always gets less than with the current setup. So the publisher has now taken increased risk with less return.

While you may say "so what, they're still making money" realize that owners of capital will (mostly) take their capital to the venue that offers the best risk/reward ratio. By compressing that ratio, you end up actually decreasing the amount of capital available to make new games because other avenues of investment become more attractive, relatively speaking, which means less developers in existence (though perhaps better for the developers that stick around).

I'm actually having a similar discussion with my brother. He's a home builder who wants to go out on his own (flips more then new builds though), but he doesn't have the capital. I have a decent amount of capital (mainly in my retirement assets, but enough for him to get started), but due to my position, not many places I can invest it. So we're trying to make a deal, but he doesn't understand why I want a percentage so much higher than he pays for his mortgage. I've had to explain to him that risk/reward relationship. If he fails, he can just go get another job and worst case he makes less over that time period than he would otherwise. My money is gone though.

Now the other issues he brings up in the article (lack of competition among publishers, depressed royalty rates, etc.) I do find very persuasive.

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Last edited by blatantninja; January 13th, 2012 at 20:29.
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January 13th, 2012, 21:19
The 70% royalty is for books priced from $2.99 - $9.99. Anything below or above pays a 35% royalty. Even the 35% royalty is far better than what the traditional publishers pay. Think about it: Your book stays on Amazon's 'virtual shelf' forever (or as long as they are in business) while a traditional book-seller keeps a print book on their shelf for a couple months at best and a few short weeks at worst.
Plus, you don't have to pay an agent a cut or repay an advance if it doesn't sell.
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January 13th, 2012, 22:10
Originally Posted by Zephyr View Post
The 70% royalty is for books priced from $2.99 - $9.99. Anything below or above pays a 35% royalty. Even the 35% royalty is far better than what the traditional publishers pay. Think about it: Your book stays on Amazon's 'virtual shelf' forever (or as long as they are in business) while a traditional book-seller keeps a print book on their shelf for a couple months at best and a few short weeks at worst.
Plus, you don't have to pay an agent a cut or repay an advance if it doesn't sell.
What about getting editing and such done? I've noticed that a lot of author's give credit to their editor. Is the editor independent or part of the publisher generally?

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January 13th, 2012, 23:08
We have a special thing here . http://en.wikipedia.org/wiki/Fixed_Book_Price_Agreement

This is meant to give both authors and publishers a guaranteed revenue.

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January 14th, 2012, 15:39
Fixed book prices lead to more variety, on cost of a free market which would drive the prices down. It's a poliical decision whether you want one or the other. You can't have both.
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January 14th, 2012, 19:48
Originally Posted by blatantninja View Post
What about getting editing and such done? I've noticed that a lot of author's give credit to their editor. Is the editor independent or part of the publisher generally?
As far as eBooks go, editing is up to the writer. The eBook sellers have publishing guidelines for writers to follow so their eBooks are in an acceptable format for their respective eBook readers. If a writer wants his work professionally edited or proofread, then he/she can do so at their own expense. That can get pricey and most writers starting off can't afford it, so they self-edit. This can give rise to quite a bit of schlock getting out in the market.
I can't speak to the print market, but I'm guessing that the degree of editing offered by a print publishing house depends on the how big a name the writer is. Joe Blow isn't going to get the same service as Stephen King.
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January 15th, 2012, 06:30
So eliminating Retail and Publisher, increases Net 15 Deutsche Marks, essentially your doubling Net.

Trust me, most of the names I have been called you can't translate in any language…they're not even real words as much as a succession of violent images.
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January 15th, 2012, 16:03
The retailer is still there: Amazon. It bothers me a bit what he does that's worth 65% of the cake.
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January 15th, 2012, 18:58
Originally Posted by Gorath View Post
The retailer is still there: Amazon. It bothers me a bit what he does that's worth 65% of the cake.
Well, as a fiction writer with a novel and a short story up on Amazon, I have virtual permanent access to the market. Not only in the U.S., but England, France, Spain, Germany, and Italy. Can, or more importantly will, a print publisher do that for me? Not hardly. If I price my work between $2.99 and $9.99, I receive 70% on each unit sold. If I price it higher or lower than that, I receive 35%. True, marketing and advertising and editing is up to me. But how many beginning or mid-level writers get much of that from a print publisher? That's reserved by-and-large for the very top level writers. It may not be an ideal situation, but it gives new writers a chance to crack the market, get their work noticed, and make some money. Amazon also offers a print-on-demand service called Create Space to market a writer's work in pint.
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