Chapter 7.2Game Industry Rolesand Economics

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Video Game IndustryValue Chain

Development

Motion-capture provider

Delivery mediamanufacturer

Developer

Publisher

Platform holder

(Sony, Microsoft,Nintendo)

Gamecode

Gamecode

Data

Game code(master disk)

Finishedgoods

Bug list

Art/animation providerData

Distributor or rep group PR firm & ad agency

Media (TV, magazines, Internet)

Game samples & marketing materials

Game info

Retailer (Wal-Mart, Target, Toys "R" Us, EB)

Finished goods

Consumer

Game info

Contract QA provider

Gamecode

Finished goods

Finished goods

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Game Developers

Can be independent, or subsidiaries of publishers

Many developers started on PC due to accessibility of tools– Console development requires proprietary

development kits and preexisting relationship with publisher

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Revenue from $50 Console Game

Amount Purpose Paid By Paid To

$3 Cost of goods Publisher Media manufacturer

$7 Publishing license royalty Publisher Platform holder

$13 Retailer profit Consumer Retailer

$3 Markdown reserve Publisher Retailer

$8 Development cost Publisher Developer

$10 Operating cost Publisher Internal(overhead, freight, co-op, bad debt)

$6 Marketing Publisher Ad agencies and media

Items in bold can be converted to profit through careful publisher cost management.

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Platform Holders

Revenue comes from:– Hardware sales– Licensing fees from compatible peripherals– First-party games– Licensing fees from third-party games– Licensing fees from development tools– Revenues from sales of proprietary delivery

media

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PCs are an Open Platform

Intersecting relationships among: – CPU manufacturers, application software providers, graphics chip

manufacturers, and box assemblers CPU (Intel, AMD) and graphics chip (NVIDIA, ATI)

manufacturers provide developer support and market their technology benefits directly to consumers

Application software providers (Microsoft, Silicon Graphics) give developers free tools to ensure compatibility

Box manufacturers (Dell, HP) may bundle hot software titles to add value to their sale

Low barrier to entry for developers, but high competition for shelf space

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Consoles are a Closed Platform

Console companies (Nintendo, Sony, Microsoft) control nearly every aspect of games on their platforms– Proprietary development hardware and software

– Permission to become a licensed publisher

– License to use console company trademarks in marketing materials

– May require permission to start a game

– Certification of a finished game

Investment in hardware must be offset by revenue from software (around $7/unit for third-party games)

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Summary

Entities in video game industry haven’t changed much in 30 years

However, flow of money (ergo, balance of power) has shifted greatly

Balance of power will shift again in 2005 – 2006 as next-generation console project costs skyrocket

Chapter 7.3The Publisher-Developer Relationship

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Developer / Publisher Divide

The Developer is responsible for:– Game conception– Prototype– Design– Technology– Development and implementation

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Developer / Publisher Divide

The Publisher is responsible for:– Commission– Funding– Promotion– Marketing– Distribution– Support

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The Pitching Process: Prototype

Key game prototype features:– Core gameplay mechanic– Key USP’s / points of difference– Game engine / technological proficiency– Artistic / styling guide– Demonstration of control / camera system– Example gameplay goals

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The Pitching Process: Pitch Presentation

Key pitch presentation content:– Concept overview & genre profile– Unique selling points

• What makes it stand out from its competitors

– Proposed technology & target platform/s– Team biographies & heritage– Outline marketing information, including potential

licensing opportunities

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The Pitching Process: Game Design

Focuses on intimate detail such as:– Storyline – Control dynamics – Camera system – Level progression– Game features and functionality– Score systems etc.

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The Pitching Process: Technical Design

Covers technical topics including:– Graphics engine– AI routines– Audio system– Online capability and requirements– Peripherals/controllers– Development asset management/backup

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The Pitching Process: Project Schedule & Budget

Schedule & budget must:– Be detailed and transparent – Allow for contingency scenarios– Have several sets of outcomes for different size

publishers– Be realistic

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Deal Dynamics: IP Rights

Intellectual Property Rights include:– Game name – Logos – Unique game mechanics & storyline– Unique characters, objects & settings– Game Source Code including artwork &

associated assets– Unique sounds and music

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Payment Negotiation:Overview

Current approximate development costs:– $4-5 million for AAA multi-platform– $2-3 million for AAA PlayStation 2 only– $1 million for A-quality single platform

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Payment Negotiation:Deal Structure

The developer must carefully balance the following parameters:– Clearly defined PR & marketing support– Cash advance against royalties– Milestone payments– Post-release royalty payments

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Payment Negotiation: Advance Payments

An advance royalty payment is usually the agreed royalty rate multiplied against a percentage of the total unit guarantee

Advance royalties will generally fit in around the 60-100% mark of the predicted first year unit guarantee

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Payment Negotiation: Guarantees

Guarantees usually come in two forms:– A figure that is contractually guaranteed by the

publisher and must be paid for regardless of how well the game actually sells

– A figure that is based on an amount of units sold necessary to maintain title exclusivity with that publisher

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Payment Negotiation: Milestones

Milestone payments represent the agreed rate of release for development funding

Developers will usually be given a lump-sum advance payment, with the remainder of the payments split into regular milestones payable upon delivery of agreed content

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Payment Negotiation: Royalty Negotiation

Royalties are percentage payments of profits made above and beyond the recoup of development costs

Royalty rates are calculated the wholesale price of the product

Developer royalties can range from 0 percent for work for hire, to 40 percent for a self-funded AAA title.

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Development Milestones: Development Timeline

Here are some example development periods for different platforms: – 4-6 months for a high-end mobile game – 18-24 months for an original console game– 10-14 months for a license / port– 16-36 months for an original PC Game

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Development Milestones: Milestone Definitions

An example milestone schedule for a 20-month development cycle:

Pre-Production - Core Concept DocFull Concept Proposal

Project Scheduling and Cost

Proof of Concept

Alpha Stage

Beta Stage

QA Testing

Gold Master

Production and DuplicationPlatform Specific Testing

Milestone Phase Month 1-3 Month 16-18Month 4-6 Month 7-9 Month 10-12 Month 13-15 Month 19-21

Ship Date

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Development Milestones: Alpha Definition

At Alpha stage, a game should:– Have all of the required features of the design

implemented, but not necessarily working correctly

– Be tested thoroughly by QA to eliminate any critical gameplay flaws

– Still likely contain a certain amount of placeholder assets

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Development Milestones: Beta Definition

At Beta stage, a game should:– Have all content complete– Be tested thoroughly for bugs and gameplay

tweaks– Be shown to press for preview features

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Development Milestones: Gold Master Definition

At Gold Master stage, a game should:– Be sent to the platform holder/s (where applicable)

for TRC testing– Be sent to press for review– Be sent to duplication for production– Be backed up and stored

Chapter 7.5Intellectual Property Content, Law and Practice

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Categories of IP Protection

Patents– Protect certain novel, useful and nonobvious inventions having a

utilitarian function

Copyrights– Protect creative expression in a fixed medium

Trademarks– Confer exclusive rights in any word, symbol or device that serves to

identify the source or origin of goods or services

Trade secrets– Protect commercially valuable information whose contents are secured

from public knowledge and disclosure

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IP Content of Video Games

Patent examples– Hardware technology, media on which game is recorded, and software

that enables game to perform its functions Copyright examples

– Software, artwork, storyline, characters, props, costumes, text, dialogue, sound effects, music

Trademark examples– Business name of the developer and publisher, game title, mascots

(Mario and Sonic), designs, unique packaging Trade secret examples

– Confidential know how used to program, budgets, secret projects, contract terms

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Patents

Works Protected– Inventions and processes protected by utility

patents can be “any new and useful process, machine, manufacturer or composition of matter, or any new or useful improvement thereof…”

– So-called “method” patents are utility patents that cover computerized processes and functions

– The design of physical objects, such as the Xbox, can be protected separately by a design patent

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Patents

Standards– To qualify for utility patent an invention must be:

• 1. New

• 2. Useful

• 3. Nonobvious– Nonobviousness requires that the invention be sufficiently

different from known technology and knowledge so as not to be obvious to a person with ordinary skill in the field of the invention.

Patents

Ownership– In general, the inventor is the owner of the patent– The inventor may assign rights to the invention to others,

such as the inventor’s employer, through written agreement

– They may be multiple inventors in group works– Registration is essential to secure patent rights

Exclusive Rights– The patent owner can exclude others from making, using

or selling the patented invention or objects embodying the patented invention

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Patents

Duration– A utility patent is granted for 20 years from the date the

application is filed

– Patents issued prior to June 8, 1995, exist for 17 years from the date the patent is granted

– The patented invention may be freely copied once the patent expires

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Copyrights

Works Protected– Almost any recorded original expression such as:

• Literary works• Musical works (including lyrics)• Dramatic works (including music)• Pantomimes and choreographic works• Pictorial, motion picture, graphic and sculptural works• Sound recordings• Architectural works

Works Not Protected– Ideas, titles and names, facts

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Copyrights:Standards

A copyright has 2 requirements:– 1. Originality and “fixation in a tangible form”

• To be original, the work must not have been copied by the author and have a small level of creativity

– 2. The fixation requirement is met if the work is recorded in any medium such as:

• Text, videotape, photograph, sound recording, or CD

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Copyrights

Ownership– Ownership of a copyright belongs to author or authors of the work– The author is generally the creator of the work, but certain works made under

contract as “works for hire” are owned by the person contracting for the work– Registration is not required but confers enforcement rights

Exclusive Rights– A copyright owner has five exclusive rights:

1. Reproduction right (copy, duplicate or imitate)2. Modification right3. Distribution right4. Public performance right5. Public display right

Moral rights are granted to visual artists to prevent improper attribution and protect the integrity of the work

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Copyrights

Duration– For works created by an individual or individuals after January 1,

1978, the copyright lasts for the life of the author plus seventy years

– Copyrights in anonymous works and works made for hire exist for a period of 95 years from the date of first publication or 120 years from the date of creation, whichever is sooner

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Trademarks

Works Protected– Any word, symbol, name, slogan, picture, design,

shape, color, sound or smell that serves to identify the source or origin of goods or services can be a trademark

– A service mark is a trademark applied to services instead of products

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Trademarks

Standards– A trademark must be capable of distinguishing the owner’s

goods or services from the goods or services of others– The relative enforcement strength of a trademark is

determined on the basis of the degree of such differentiation:

1. Arbitrary or coined2. Suggestive3. Descriptive4. Generic

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Trademarks

Ownership– A trademark is owned by the first party to use it in

connection with the goods or services– Registration is not essential but establishes important

enforcement rights

Exclusive Rights– A trademark owner has the exclusive right to use the

trademark in connection with specific goods or services– Subsequent users of the same or similar mark are deemed

infringers

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Trademarks

Duration– A trademark continues as long as it remains in use– Federal registrations are subject to renewal every

ten years

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Trade Secrets

Works Protected– Each state has its own laws, but many have adopted

versions of the Uniform Trade Secrets Act

– The UTSA provides that information that derives “independent economic value” from not being publicly known and whose secrecy is properly guarded is protected from unauthorized use by others

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Trade Secrets

Standards– Trade secrets must have commercial value and

remain secret– There is no requirement that they be recorded and

there is no provision for registration– Unlike patents and copyrights, trade secrets can

include ideas that have no current utility or application

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Trade Secrets

Ownership– An employer generally owns trade secrets

developed by employees and by independent contractors hired to develop or create such information

Exclusive Rights– The owner of a trade secret can maintain it as long

as secrecy is properly maintained

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IP Transfers

The owner of IP rights can transfer all rights by written assignment or a portion of rights by a written license

Rights transfer between an employee or independent contractor is dependent on:– The nature of the rights transferred– The existence of an enforceable agreement

between the parties setting forth the terms of any such transfer

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Avoiding Infringement

Existing patents, copyrights and trademarks can be searched Trade secrets cannot be searched, but violation generally

requires intentional theft Copyrights are only violated if there is actual copying of the

protected work Patent infringement does not require intent or even knowledge

of the patent The standard of infringement for trademarks is whether there

is a “substantial likelihood of confusion” between trademarks among intended consumers

Chapter 7.6Content Regulation

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History of Censorship

Legal source of American speech protection is the 1791 First Amendment to the U.S. Constitution:– “Congress shall make no law … abridging the freedom of

speech…” First Amendment protection

– Extended to states and localities by Fourteenth Amendment in 1868

U.S. Supreme Court is ultimate interpreter of free speech rights

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Current Free Speech Standard

Sexually obscene expression can be censored– But only if the material, taken as a whole:

• Appeals to the prurient interest in sex• Portrays sexual conduct in a patently offensive way• Does not have serious literary, artistic, political or

scientific value

Violent but not sexually explicit expression is subject to “strict scrutiny” by the courts– A higher degree of constitutional protection

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Congress and Video Games

Senate hearings in early 1990s showed public concern for the emerging violent and sexual nature of video games reaching children

Harm to children was assumed – Rather than substantiated by experts who testified

Hearings carried an implicit threat of content regulation if children were not protected

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Industry Self Regulation

Following hearings, major game companies formed a trade association (Entertainment Software Association)– To devise industry standards– To create lobbying and public relations programs to deal

with censorship threat Electronic Software Rating Board (ESRB) was

formed– To develop and enforce voluntary video game ratings

based upon the model of the Motion Picture Association of America

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ESRB Rating System:ESRB Codes (On Front of Game)

EC (Early Childhood)– 3 and older – Contains no material that parents would find inappropriate

E (Everyone)– 6 and older – Minimal cartoon, fantasy or mild violence and/or infrequent use of mild language

E10+ (Everyone 10+)– 10 and older – Cartoon, fantasy or mild violence, mild language, and/or minimal suggestive

themes T (Teen)

– 13 and older – Violent content, infrequent strong language, and/or suggestive themes M (Mature)

– 17 and older – Mature sexual themes, more intense violence and/or strong language AO (Adults Only)

– Content suitable only for adults – not intended for under 18– Graphic depictions of sex and/or violence

RP (Rating Pending)– Has been submitted to the ESRB and is awaiting final rating

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ESRB Rating System:ESRB Descriptors (On Back)

In addition to the letter codes, the ESRB has promulgated 32 “descriptors” to further inform purchasers

Descriptors include:BLOOD AND GORE

CARTOON VIOLENCEFANTASY VIOLENCEINTENSE VIOLENCENUDITYSEXUAL VIOLENCESTRONG LYRICSSTRONG SEXUAL CONTENTUSE OF DRUGSUSE OF TOBACCO

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Criticism of ESRB Rating System

Voluntary system is too lenient and lacks effective penalties

Voluntary system is too harsh and is a form of overbroad self censorship

Ratings are incomplete and do not cover online-created content

Ratings are ignored or misunderstood by target audience

Publishers ignore ratings in marketing efforts

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Judicial Response to Video Game Censorship

Courts differentiate between sexual and violent video game content, affording greater protection to violent content

Early video game cases involved violence, newer games raise sexual content issues not yet decided by courts

Courts have found lack of reliable support linking game violence with harm to children and have ruled in favor of video game makers

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Foreign Content Regulation

The U.S. First Amendment legal scheme evolved over 200 years and is unique among countries

Other countries typically provide less protection to speech, and in particular sexual or violence oriented speech

Countries like Germany and China are among governments that ban games or game content that is politically offensive

Greece attempted to ban all video games as subversive The European Union, China and Australia are among

governments that enforce a rating system– Canadian game companies follow the ESRB ratings although they are

not members