The videogame development sector is a high technology industry, using highly skilled workers and cutting-edge technology, and investing massively in research and development (TIGA, 2016). While the data show that videogame developers spend on average 22 per cent of their organisation’s turnover on research and development, it is reported that these developers have had difficulty securing the IP rights for their videogames and on average they own only 51 per cent of the IP of their games (Wilson, 2015). Therefore, in spite of high levels of technical, creative skills and their continued production of world-class games, videogame developers face important structural weaknesses and above all limited access to finance and skill shortages (Mateos-Garcia, et al., 2014). These problems constrain the developers' capacity to generate their new ideas and own their IP. The revenue flows generated with the independent business model are insufficient to develop original ideas. As a result, developers have to rely on publishers' funding to survive and compete with the international rivals. The UK’s most successful independent studios derive two thirds of their gross revenues from contracts with publishers (Wilson, 2015). On the other hand, the publishers are cost-conscious, having great incentives to contract projects to cheaper studios in Eastern Europe and Asia. This competition is viewed as a threat to the UK developers and has made the sustainability of the development studios more perilous, as highlighted by the recent campaigning to gain greater tax breaks for British companies in order to stimulate local investment (Blake, 2014).
Despite new trends in the industry and opportunities for independence, development studios are still interested in collaborating with the publishers or being acquired by them in order to have access to finance, international markets and for the purpose of knowledge sharing (Cashman, 2014). PopCap is a previously independent developer that owns some of the most famous casual gaming IPs in the world and is behind very successful brands like Peggle, Bejeweled and Plants vs. Zombies. However, PopCap has been acquired by EA as part of a deal worth a reported $1 billion. Paul Breslin, PopCap’s managing director, was confident that the studio is going to benefit from its association with EA. He asserted, “EA gives us the ability to accelerate our plans to get our games into more people’s hands. There are 8,000 people at EA, and EAi, which
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we’re a division of, has a very good distribution capability. We can now tap into that distribution network and get more of our games out there” (Freeman, 2011, p.38).
The business between a third-party developer and publisher is formed and governed by a contract that specifies the game specifications, plans and milestones for the delivery of the game (while this thesis focuses on the relationship between third-party developer and publisher, I only use the term developer to refer to the third-party developers. This is done to simplify the language). Both publisher and developer contribute actively to the game design and production, but it is the publisher that is responsible for fully or partially funding the development. In return for this investment, the developer transfers full or partial ownership of their assets and their Intellectual Property. An industry source reports:
In most instances, it is the publisher that funds the development of a game it intends to publish. This normally takes the form of a royalty advance and is paid on a milestone basis. Once a game is released, the developer receives no royalty payments until the title [game] has recouped the publisher's advance (Game Investor, The Publishing Process, 2006).
The publisher-developer contract can value between a hundred thousand to tens of millions of pounds, depending on the type and the scope of the game, as well as the platform for which the game is produced. For instance, Schreier (2015) reports that EA paid $19,700,000 to 38 Studios for their deal to make a game in 2015. The publisher pays this amount to the developer at different stages, as periodic advances on royalties.
These advances are paid when the developer reaches certain stages of development called milestones. After the developer delivers an updated version of the game for each milestone, the publisher verifies that the project is progressing, meeting the publisher's criteria. Upon the publisher's approval of each milestone, the publisher pays the developer an advance on royalties (Walfisz et al., 2006). When the publisher finances development, it manages development risk and monitors the project with a team of producers and project managers. This team keep track of the progress of the project, critique ongoing development and assist the development team in production as necessary. The publisher team might be involved in designing the game or developing
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the concepts and art. The publisher's involvement in the development process varies from project to project.
From the developer’s perspective, signing a development agreement with a publisher provides a high level of security that they will have the required finance to complete the project (Bakhshi et al., 2010). The developer uses this money to fund its production and general operations within the studio. However, there has been abundant criticism of this publisher-developer relationship in the industry. The relationship has been defined as unequal and one-sided, where the publisher is the only beneficiary and the developer is described as being exploited. O'dea (2006) explains that it is "the publisher [who]
retains the largest share of the revenue generated by videogame sales at retail and enjoys significant profit margins" (p.41).
The industry is replete with stories that the publisher-developer relationship has contributed to the demise of the development studio (Kotaku, 2013), examples of which include the associations of Team 17 with Lilith Ltd (Booker, 2016) and Rockstar with Team Bondi (McMillen, 2016). Some criticise the structural weakness of the developers and their lack of financial stability (Wilson, 2015). Wilson (2015) explains that third-party game development is a volatile business because these developers can be entirely dependent on funding from one publisher, and a single cancelled game can lead the developer to go out of business. The continual struggle to get payment for milestones and to line up the next game contract is a persistent distraction to the management of every game developer. A common and desirable exit strategy for an extremely successful videogame developer is to sell the company to a publisher, and thus become an in-house developer.
The dominant rhetoric within the industry accuses the publisher of exploiting the developer in this relationship, thus damaging the publisher-developer relationship.
Doucet (2017) depicts the publisher-developer conflicts as below:
[Their] conflicts are obvious – the stereotypically greedy businessmen [publishers] who leverage their power to put themselves and their rich partners first, at the expense of ... the developers that toil under bad working conditions
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to produce them [the games]. This is a sadly familiar example in our industry (Doucet, 2017).
The publishers and developers are described to be different in skills and expertise.
Confirming these differences, Heaton (2012) explains that "developers are from Mars, publishers from Venus". The developers are described as "the real heroes of games development", while the publishers are portrayed as "lack[ing] the expertise to develop games" (Hill, 2012). In addition to these differences, it is highlighted that the publisher is the party with more leverage, thus controlling the relationship to secure their own interests. Hill (2012) claims:
Publishers expect developers to shoulder a huge burden and because they hold the purse strings they can be as demanding and difficult as they like. Most developers will be able to tell you some story about a ludicrous demand they received from a publisher and the bottom line is profit for publishers whereas for many developers all they care about is creating a great game (Hill, 2012).
While the publisher-developer relationship is said to be conflicting and problematic, some believe that the relationship is irreconcilable and they, therefore, suggest empowering developers within the industry, so that they can work independently from the publishers (Fahey, 2015). Johnson (2015) asserts:
I don't think [the publisher-developer relationship] is fixable. Big business mixing with small business never really works well as the entire mindset is mismatched. Neither party is doing anything deliberately, well not usually, so there's no real blame. Thankfully there are so many other publisher-free routes to market, available for the small guy [developer] that they at least have breathing space nowadays.
People have responded differently to this portrayal of publisher-developer relationship as incongruous and toxic (Fahey, 2015) and some disagree that this collaboration should be eradicated from the industry (Heaton, 2012). Instead, it is suggested that "the connection between developers and publishers is the great, largely unwritten, story of videogame history". Thus this business model should be reviewed and modified, and
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other approaches might be used to develop a better understanding of the publisher-developer relationship and create a more successful collaboration between the two (Heaton, 2012).