by Peter Phillips, MD of Amuzo Games
After three years working with the biggest hyper-casual game publishers in the business, Peter Phillips, MD of Amuzo Games, has some sage advice for small developers looking to make an elusive profit…
In the ever-evolving game development business it can take all your time just to keep on top of the latest trends and ensure your studio has the cashflow to keep ticking over. The last thing you need is for your publishing partners to short change you. The standard industry model for casual and hyper-casual mobile games is that the development studio creates a game prototype, the publisher tests this in the market, and depending on the test results (notably CPI and D1 retention) decides whether to partner with the developer to complete and market the game, with a view to sharing future profits. In some cases, the publisher contributes to the studio’s development costs in the form of advances on future royalties. But these advances, though welcome,are typically not sufficient to cover the full costs of development, and the real incentive for the developer is anticipation of their share of revenues when they create a successful game.
This is where developers need to be very careful. Your contract with the publisher is almost certainly going to offer you a share of NET revenues. Net meaning that after the publisher has deducted all their marketing costs. But the developer has no control over the level of those costs.
The publisher can, if they wish, spend all the revenues on more marketing. You might think that the publisher will use their expertise to maximise the profits from their campaigns and stop spending when an extra $1 spent no longer brings in more than $1 of revenue, but that may not be the case.
Some publishers are funded by private equity and these investors want to see fast growth, often with a view to selling the business on to another private investor within a couple of years. These investors may measure growth not in terms of profit but the size of the user base. An extreme example of this mindset could be Twitter, bought recently for $44bn despite losses of $1.3bn in the past two years. It may then be in the best interests of the publisher to spend all the revenue a game generates on more marketing to attract more downloads.
Hence no profit and no royalty for the developer, even for a hit game generating millions of installs. Have a look at recent press releases of your publishing partner. You may well find they boast of fast growth in game downloads or installs, but don’t mention profit at all. Even if your game does earn positive net revenues, the publisher will deduct any advances from your share before paying you anything. While that is fair enough, make sure your contract terms are specific to the individual game. Otherwise, any advances on games currently in development as well on past games that were not a commercial success, will eat up your royalties and your cashflow!
By way of example, a hyper-casual game we developed last year for a big-name publisher has had 15 million downloads in its first eight months, and has generated a seven-figure sum in revenues. Our share of this success? Not a cent, and there is no realistic chance that we will ever receive any profit share.
At the same time, from the publisher’s perspective, the hit rate for new game prototypes is low, particularly in the increasingly crowded hyper-casual market, and so it is not economical to fund the costs of prototypes that are very likely to fail, unless you are exceptionally good at spotting “winners” early. Very few are.
LESSONS FOR THE SMALL DEVELOPMENT STUDIO
Ask if your publisher is looking to maximise profits from your game, or are they motivated by growing the installed base? The contract is very unlikely to include a commitment from the publisher to maximise profits and so you will have to use your judgement, but be sure to explore this issue with your potential partner. A smaller percentage of gross revenues may well be a better deal than a higher percentage of net revenues. Also, if possible, keep your contracts with publishers specific to an individual game to avoid the ‘claw back’ clauses that can spoil the champagne celebration when you find a “winner”!
For the publisher, the cost of providing advances to developers in the hyper-casual sector has become too costly as the stores have become saturated with games and the failure rate for prototypes has soared. This puts the initial risk back on to the developer. As many studios are very small with tight cash flow, the loss of publisher advances may cause problems, but the upside is significant. If they are lucky enough to have the funding to cover their overheads, developers can develop their own ideas without the pressure from publishers for quantity and fast delivery over quality. They can also carry out their own initial testing and then approach a publisher in a much stronger position to negotiate a fair contract. As a result, publishers will get fewer but higher quality prototypes to test. So, as the industry adjusts, we have a potential win/win.