Wednesday, May 21, 2008

Ownership: Have Your Cake and Eat it Too Edition


I know this sounds kind of preachy but the issue won't go away.  It rears its head in every deal. The most common "deal breaker" issue is ownership. I hear it over and over again from both sides. Publishers and developers alike consider ownership as binary. You either have it, it or you don't. This is just not the case.

My realization came from a September 1997 Forbes Magazine Article sidebar
Lucas may own The Empire Strikes Back and Return of the Jedi outright, but Spielberg virtually owns the cash flow from The Lost World and Jurassic Park.
Read it again and you will quickly get the point. When it comes to the IP, Lucas owns everything, Spielberg "owns" nothing, and they are both billionaires who control their IP. To put it in game terms, Scott Miller owned Max Payne, Sony owned Jak and Daxter, Scott Miller and Jason Rubin are both rich. Owning IP is much different than owning a pair of shoes.  In law school they taught us ownership is like a bundle of sticks. There is a stick representing the right to use, another representing the right to modify, another still is the right to receive revenue, and so on. The number of sticks and fragmentation is actually infinite. Both sides should only worry about the sticks they need and leave the others alone as motivation. 

Lucas owns Star Wars because he put his own money up to make the films and sought only distribution from studios. It was important to him make only what he wants, when he wants - including Jar Jar. If Empire Strikes Back failed at the box office, he would have been bankrupt. Spielberg gambles as well, but he plays with house money. His partner studios invest in his films and give him the same freedoms as George Lucas.  Even though Spielberg does not own E.T, Universal cannot make a dollar without giving him a piece of it. More significantly to many game developers, they cannot make another E.T., or Jurassic Park or other Spielberg feature, without his permission. 

Both scenarios work, but a developer must consider what they really want to do with their lives. From a revenue standpoint, Lucas' receives a majority of the revenue and exercises a majority of the control over his properties but bears more downside risk and infrastructure cost. Spielberg receives a smaller cut than his studio partners (of course he is an owner of his partner Dreamworks), but has no downside risk, no infrastructure cost and works on more projects.  Some may view Spielberg as having the worse financial deal, but in practicality it all balances out. Because the studio partner makes a majority of the revenue, they are more inclined to push a Spielberg project. Given the choice between a high margin opportunity, and a low margin opportunity, it is natural, reasonable and good business sense, to pick the high margin opportunity.   Lucas must support his own market and find ways to motivate the studios to support him.  It is easy with Star Wars because it is pre sold, new projects are harder. In the publishing world we see this when internal projects are given distribution preference over affiliate label products.

Back to video games.  When a publisher says "we want to own the IP" what they are really saying, is we are investing an awful lot of money and effort in this property and we don't want it to walk out the door with you after launch, and if you think we are going to bid for it on the open market, you are nuts.  They are also saying a bit of "we don't want you to devalue the property through inconsistent exploitation in other media." It would suck for us if you kill the franchise character in a feature film. When the developer says "we want to own the IP," what they are really saying is "we want to benefit from thing we create." We don't want you to fuck it up with a bad sequel or derivative work. We don't want you to terminate our agreement and have someone else finish it badly. We don't want you making a bad movie and ugly action figures. What they are probably not saying is "we want to build every sequel and version of this game for the next 20 years." Fortunately, the publisher and developer positions are not mutually exclusive.  The sticks can be allocated to meet all objectives. 

The publisher's position is actually good for the developer. In every case, the publisher acting in its own interest has more market impact than a developer. In most cases, the publisher wants the people who created the property to remain involved.  They understand the creator knows the property better than they ever will and if the creator demands involvement, the publisher will not object. To the developer, involvement includes, the right to participate in sequels (financially and development if they so choose), creative control over the property regardless of development involvement, and if the developer is in a position to do so, management of ancillary rights. In a best case scenario, the developer will secure a reversion in the property if the publisher decides not to publish any more.

Some may argue IP ownership is imperative to maximize the value of a developer for a sale. Simply untrue.  While IP ownership does enhance value and can achieve a significant amount of money on a sale, an equal number of developers have sold at equal or higher value based on track record and technology, without IP ownership.   

The moral of the story . . . stop worrying about ownership, think about what is important and close the deal.

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