Pop quiz – Your game costs $1 million to develop (funded by the publisher in the form of an advance against royalties).
Your publisher gets $10 (net sales) for every copy of your game they sell.
You (the developer) get 15% of net sales.
If your game sells 500,000 units how much money do you get in royalties?

The math is simple. 15% of $10, multiplied by 500,000 equals zero.

OK yes it is a trick question. The math obviously doesn’t add up to zero but none the less that is how much money you would actually receive in royalties on a standard publisher funded deal. This is because of the phrase “Fully recoupable but non-refundable advance against royalties” which appears in virtually all development contracts.

Here’s how it works….

• The publisher loans you $1 million spread over 18 months while you make your game. – this is a recoupable advance against future royalties, which means you have to pay it back.
• When the game is finished the publisher sells it and, after costs are deducted they end up with $10 (net sales).
• Your 15% of net sales is equal $1.50 so, if your game has sold 500,000 units (which isn’t bad), then you have earned $750,000 in royalties…. unfortunately you owe the publisher $1 million so all of your royalties go back to them.
• You still owe the publisher $250,000 so clearly this was a bad deal for the publisher…. except that it wasn’t.

In exchange for the $250,000 (the money you didn’t repay) the publisher earned $5 Million (their 85% of net sales = $4,250,000 + the $750,000 you paid back). Of course that is a slightly simplified model and despite the fact that many of the publishers costs are deducted earlier (wholesale minus costs = net sales) lets assume that they spend another $1.5 million on marketing, overheads and other sundries. So, they invested a total of $2 million, you repaid $750,000 of that, so they have actually spent $1,250,000 and in return they earned $4.25 million.

Meanwhile you spent $750,000 making the game and have a paper debt of -$250,000. You don’t actually have to pay that money back but the next $250,000 of royalties will go straight back to the publisher. If you do sell enough units to recoup the advance (666,667 units should do it) you have now spent $1 million dollars making a game, earned zero profit and the publisher has over $6 million.

So what’s the solution?
There are various options but the simplest is to build 20% profit into your development costs and manage your project properly. Ensure that if the publisher requires changes that they pay for them and that you don’t spend your profit making the game better in the hope of making more in royalties. Yes, it is possible for a game to sell millions of units and for the developer to make millions, even under a recoupment deal – but how many games are released each year (in excess of 3,000) and how many make the huge numbers (one, maybe two)?  You need to run your company on the assumption that it will conform to the rule and not in the hope that it will be the exception. You need to make your game based on a plan that will generate real profit, not mythical royalties.