Should a Games Publisher provide Developers Money to finish a Game?

I have been to many game events over the past few years and often found myself being walked through a presentation by a developer and inevitably at the end of the presentation there is a slide that shows what resources that the developer needs to finish the game. I understand that in a perfect world, no one should be working for free, but accepting money from a publisher is sometimes a trap for both the publisher and a developer.

Full disclosure here, I work for a company called Feardemic and we have provided development budget in the form of advances for games that we have published (Let's call this Type 1), and we have also concluded deals where our only investment was in technical services and marketing (Let's call this Type 2). We have executed deals which are a combination of both, and although I have a personal preference that will become obvious in this article, we will likely execute both types and more combinations of both again at some stage in the future. The purpose of this short essay is to weigh up the pros and cons of the various arrangements and put forth a case for my personal preference.

Firstly, let’s be clear where the money comes from and how the development budget is handed out. In almost every case this development budget provided by the publisher is an advance against future earnings. It’s a loan pure and simple. Unless the publisher or business partner is specifically investing in the studio and through that investment has an interest in the intellectual property, any money you receive toward finishing the product is usually an advance against future earnings. This means that the provider of this development budget will take ALL the earnings of the game until which time the advance is paid down (or recouped).

In principal this seems like a very smart arrangement (Type 1). All parties’ interests are aligned. The developer is now determined to make the best game possible to ensure that they can earn revenue beyond the advance recoupment. The publisher is going to push as hard as they can to deliver the sales to ensure their advance is recouped. A win win right? But compared to an arrangement whereupon the no advance against sales is made (Type 2) does it makes much more sense?. Do both parties with ‘skin in the game’ — well the answer of course is NO. The sole risk is transferred to the publisher. What could possibly go wrong.

If you checked the last installment of the Black Hand Files, we explored just why you would probably do better in partnership with a Publisher. These reasons why a partnership with a publisher is a force for positive outcomes is the driver behind my preference for a deal (Type 2) where no cash advance is paid to the developer. This in my opinion is often the one that delivers for both parties the best outcomes.

Before my inbox fills with outrage and death threats, let me explain why.

1) The Value is in the IP

The real value of any idea a developer has is in the intellectual property. A publishing agreement usually doesn’t place any covenant on the intellectual property and therefor it’s hard to construct a strong partnership if advances are made against sales rather than invested in the intellectual property. An advance against sales is not as balanced as an arrangement as it looks. Frankly all the risk is moved to the publisher side. All the developer is now risking is time. Strong concept and solid game design should be able to stand by itself and find investors that are prepared to invest in the IP via equity in the studio itself.

2) The investment (time/or money) has to be made into the IP

Assuming the concept is strong then there is no reason why investors wouldn’t be attracted to the developer as a going concern, particularly as a vehicle for the future development of the intellectual property. If you expect a publisher to advance cash against sales, why wouldn’t you expect investors to see the studio as a potential opportunity so as to lock in an interest in the intellectual property. Studios or developers shouldn’t be afraid of investors in their business. An advance is temporary and recoupable whereas investments are usually made in exchange for equity.

3) NO advance, instant revenue stream

One of the absolute killers of revenue streams for developers after release day is the requirement to re-coup on advances and technical costs. Without the advance the developer is on track to a faster path to revenue streams. Revenue streams support a business, support debt — revenue streams are the difference in a lot of cases between life or death for the developer. Some publishing agreements guarantee revenue from first sale on a certain percentage of revenue — but if the bulk of funding has come from sources other than advances against sales, generally revenue streams appear more rapidly for developers.

Let’s go back to the advance deal (type 1). Setting aside the movement of the risk from the developer to the publisher, the other great danger of this type of deal is being able to keep control of the process. From a publisher’s perspective it is very easy for this type of deal to inadvertently transform the publisher to a client. That might sound strange, but you would be surprised how things can change over the course of a year or two. The temptation for the publisher to be involved in the creative process at each step, will have the studio taking what may be simply valid suggestions, as instruction and deeming the inclusion of that suggestion as necessary to receive that next milestone payment. The moment this happens both the studio and the publisher lose control of the process and what will be delivered at the end of the two-year development cycle will be a compromise between the initial vision of the game and the suggestion from the publisher, all packaged up in a box with a “this is what you wanted” invoice attached.

The game markets are fickle and what looks like a great idea in 2020, may not be a great idea in 2023 and developer comes to this realization and realizes the only revenue they will ever see is the milestones — it’s going to get messy.

There of course there are no firm rules in this business and as every game or entertainment product is different and so too are the arrangements that see them come to markets. Personally however, if asked about funding sources for game development, particularly new game concepts or unproven intellectual properties, I am always an advocate for funding development from sources that ARE NOT advances against sales unless this is a last resort.

If you do enter into this type of agreement, then tread carefully and work through all the potential scenarios together that may play out in the development cycle and the publishing process to avoid a committee driven game design disaster.

So, where does the developer find the money to create its masterwork if not from advances against sales?

That just maybe the topic of the next entry in the Black Hand Files.

The Black Hand Files — The Business of Games