Making Convergence Pay Off

This article was published in the July 2004 issue of Counsel to Counsel, a publication of Lexis-Nexis, and is reprinted with permission.

Content convergence in the entertainment industries appears to be a fait accompli.

There are multitudes of examples of in-licensing of content into games, ranging from Madden NFL Football to The Matrix. Popular video games such as Tomb Raider and Super Mario Bros. also are leveraged into television shows and movies.

Many games also utilize Hollywood talent for voices and in-license the names and likenesses of well-known actors. In each instance, intellectual properties must be licensed and the economics of royalties and license fees factored into development cost and return on investment.

While content convergence creates opportunities, the economics remain somewhat troubling for traditional game developers, who have found that business models from other entertainment industries are not always a good fit. The music industry business model — which most video game publishers have used with their developers — involves a publisher paying development costs and then a backend royalty payment once those costs have been recouped.

Unfortunately, recoupment rarely happens. Only a handful of game titles in any year will actually sell enough to allow royalties to be paid to developers. And, perhaps more troubling, developers often have been forced to assign their IP rights in the developed games to their publishers. In many ways, this business model has been sustainable in music because a recording artist still has other non-royalty means of generating income, whereas developers do not.

When considering more viable business models, savvy counsel to gaming development companies will recommend ways to retain certain IP rights that will allow the companies to sustain themselves over larger numbers of projects.