Example compensation math in video game publishing

In the FREE e-book – Key Provisions in Video Game Publishing Agreements, I have given an overview of publishing agreements. In this post, I will talk about an example financial model for one hypothetical publishing agreement.

First, the hypothetical deal:

The developer has a title they want to develop. They have invested $250,000 into developing enough assets to show a publisher and now the publisher wants to fund development. The budget for the game is $5 million. The publisher is going to advance the $4.75 remaining cost and commit an additional $250,000 in marketing in exchange for a 1.5x ROI and 30% of adjusted gross on the back end.

There is a lot of information in that paragraph. Let’s break it down:

  • $250,000 invested by the developer before the deal.
  • $4.75M to be provided by the publisher for development. This is likely to be handed over in a series of smaller payments as milestones in development are achieved.
  • $250,000 to be spent by the publisher for marketing.
  • 1.5x ROI (this means the publisher will receive 1.5x its spend before the developer receives one dime).
  • 30% of adjusted gross. This means that 30% of the money coming in from the game on sales will be given to the publisher.

There are some things this post won’t address. For example, the developer will want to ensure the milestones are compensated in a way that provides adequate cash flow to the studio. The publisher will want to ensure the milestones aren’t too front-loaded. Also, the adjusted gross number could be defined a million ways. Here, I’ve assumed this number accounts for distribution (Steam, e.g.) but not chargebacks, returns, costs of goods sold, expenses and the like.

Let’s say our example game does well. It sells 1 million copies at $20 each. Again, this is extremely simplified for the sake of example. In that case, the math would likely break down about like this:

Sales * Price = Gross Income = 1 million * $20 = $20 million Gross Income

$20 million Gross Income – 30% of Gross taken by distributor = $14 million Adjusted Gross

The $14M adjusted gross amount is what will be split between developer and publisher.

First, the publisher gets its recoup.

Adjusted Gross $14,000,000
Developer Publisher
Publisher Recoup – Development $4,750,000
Publisher Recoup – Marketing $250,000
Remaining $9,000,000

Then, the publisher gets its ROI.

Remaining $9,000,000
Developer Publisher
Publisher ROI ($5M spend * 1.5 ROI = $7.5M total, less the $5M recoup received already) $2,500,000
Remaining $6,500,000

Only then does the developer start getting backend.

Remaining $6,500,000
Developer Publisher
Share 70% 30%
Payout $4,550,000 $1,950,000

In this scenario, everyone “wins.” The publisher makes back the costs it advanced and makes over $4M on the back end. The developer gets paid to make the game, then gets over $4M on the back end.

If the game does not sell as well, though, the math looks bleaker for the developer. Assume the same game sells only 500,000 copies. Let’s run the math again.

Sales * Price = Gross Income = 500,000 * $20 = $10 million Gross Income

$10 million Gross Income – 30% of Gross taken by distributor = $7 million Adjusted Gross

The $7M adjusted gross amount is what will be split between developer and publisher.

First, the publisher gets its recoup.

Adjusted Gross $7,000,000
Developer Publisher
Publisher Recoup – Development $4,750,000
Publisher Recoup – Marketing $250,000
Remaining $2,000,000

Then, the publisher gets (or at least calculates) its ROI.

Remaining $2,000,000
Developer Publisher
Publisher ROI ($5M spend x 1.5 ROI = $7.5M total, less the $5M recoup received already) $2,500,000
Remaining $0

In this scenario, the developer never gets any backend because the publisher never gets its full ROI.

Understanding this math is critical to ensuring a fair deal.

For more on fair deals, check out the eBook.