Recoupable expenses are a critical aspect of game publishing agreements, often reducing the revenue a developer ultimately receives. These costs, deducted from game sales before royalties are paid, can significantly impact profitability. Understanding what qualifies as a recoupable expense and how to negotiate favorable terms is essential for developers (and publishers) looking to maximize earnings.

What Are Recoupable Expenses?

Recoupable expenses refer to the costs that a publisher incurs while bringing a game to market. These expenses are deducted from revenue before any profit-sharing or royalty payments are made to the developer. They might not be called “recoupable expenses” in the agreement. They may be called “publishing costs”, deducted in the definition of net revenue or otherwise inserted somewhere innocuous in the terms. The point is the same: the publisher gets to spend money on these things and get that money back before paying the developer. Common recoupable expenses include:

• Marketing and Advertising Costs: Funds spent on promoting the game, including paid ads, social media campaigns, and influencer sponsorships.
• Localization and Translation: Costs associated with adapting the game for different languages and regional markets.
• Porting and Platform Fees: Expenses related to making the game available on different platforms.
• Quality Assurance and Testing: Ensuring the game meets technical and performance standards across various devices.
• Manufacturing and Distribution (for Physical Copies): Production and shipping costs for boxed versions of the game or merchandise.
• Legal and Compliance Costs: Fees related to ensuring the game meets regulatory and contractual requirements.
• Public Relations and Community Management: Expenses tied to managing player engagement, press releases, and media outreach.

The Impact on Developer Revenue

Because recoupable expenses are deducted before royalties are paid, they can significantly delay or reduce a developer’s earnings. For example, if a game generates $1 million in revenue but the publisher has $500,000 in recoupable expenses, royalties are often calculated only on the remaining $500,000.

Negotiating Recoupable Expenses

To protect their financial interests, the parties to a publishing deal should proactively manage and negotiate terms related to recoupable expenses. Some strategies include:

• Clearly Define Recoupable Expenses: Ensure that only defined costs are deducted, and include detailed breakdowns of each category.
• Secure Transparency in Accounting: Require detailed reports and audit rights to ensure that expenses are legitimate and fairly allocated.
• Establish a Recoupment Timeline: Avoid indefinite deductions by setting clear schedules. This can be especially important for games with a live service component. Is the publisher able to continuously spend such that there is never really “profit” only reinvested revenues?
• Approval Rights on Major Expenses: Who has the right to approve expenses? Publishers will want freedom, where developers will want control. This may lead to approval rights that only apply beyond a certain threshold, or only to specific big ticket items such as marketing campaigns or additional localization efforts.
• Pre-Approved Budgets: Agreeing on an upfront budget for marketing, porting, and other costs can prevent surprise deductions or difficult conversations in the future.
• Internal vs. Third-Party Services: If a publisher is paying out of pocket to unaffilated third parties, those costs are likely recoupable. But, should the same be true if the developer has internal marketing teams? Internal PR? Internal localization? Should their internal costs and overhead be recoupable, or should that factor into their royalty only? These terms will vary from publisher to publisher.
• Cross-Collateralization: Consider whether expenses invested in things like physical merchandise should be able to be deducted from sales of the game itself. This is called cross-collateralization. Things like porting expenses for a fringe new console should potentially be put into a “separate pot” – especially if the publisher has sole control over the decision to take such a risk.
• Revenue-Based Spending Limits: Some agreements include a structure where expenses must align with sales performance, preventing excessive spending in early stages of distribution. This can create odd incentives in areas such as marketing, though, where initial marketing spend may be necessary to drive sales. These provisions should be carefully considered.

Conclusion

Recoupable expenses can have a major impact on the financial success of a game. Developers and publishers should carefully review publishing agreements, negotiate favorable terms, and monitor expenses to ensure they retain a fair share of their game’s revenue. By taking proactive steps such as defining expenses, setting budgets, securing approval rights, and considering internal service alternatives, both parties can ensure there is alignment toward success and build a more sustainable business model.