ROYALTY MANAGEMENT | BETA
To get a publisher’s perspective on this, I spoke to Laura Cohen, royalty director at THQ. I chose THQ because the publisher offers an excellent example of how systems and processes should work in the video game business. “The relationship between a publisher and developer should not be negatively influenced if the developer exercised their audit rights,” said Cohen. “Many times developers are just looking for a royalty statement that provides sufficient unit and net sales information to see how calculations are derived from the contract language previously agreed upon by the parties.” She added: “This information often reduces developer concerns that sometimes lead to the exercising of audit rights. If an audit is requested by the developer, it is up to the third party auditor and the publisher to ensure the audit is conducted professionally, timely, and in a smooth and non disruptive manner. Written notice should be given to the publisher notifying them of the developer’s desire to audit. The publisher and independent third party auditor should agree to the scope of the audit and the support that will be provided prior to any fieldwork. The publisher should be allowed enough time to gather and organize the support before actual fieldwork begins. If these preparation steps are taken, the audit can be conducted in a timely manner.” Oxford-based handheld and iPhone developer Exient, has adopted an RM model for the past five years. “We’ve employed RM specialists to provide analysis and reports on our royalty statements, and we regularly receive feedback and advice on contract points,” explains David Hawkins, managing director of the firm. “Exient benefits from a consistently current and accurate picture of the commercial success of our titles. This, in turn, frees up my time so that I can focus on other business priorities knowing that I will be provided with the guidance and information when needed.” DISCREPANCIES As we can clearly see, an audit carried out in the correct way has the potential to do a lot more good than harm. In fact, there are very few reasons not to audit. DEVELOP-ONLINE.NET
But what about when an audit shows a discrepancy? After all, my opening paragraph stated a figure of $16m so there are clearly accounting discrepancies to report. Should we assume that there has been some catastrophic failure in the system and everyone is ganging up against the developer? No, not in the slightest. Most errors are just that – errors, mistakes. These can be made throughout the statement, for example with incomplete sales numbers, missed bundle sales, OEM and license deals omitted,
An audit could result in getting you nearer to ‘recoup’, and also helps to reassure the company directors and shareholders that you are managing and verifying the flow of data into your company. incorrect royalty percentages applied, underspend on marketing, cost of goods overcharged – the list is almost endless. Errors made are rarely, in my opinion, malicious. Of course, there is also the flipside of the coin – the one where audits actually go against the developer. It rarely occurs, but I have seen corrections needed which reduce royalties payable to the developer. In my experience it tends to be a small correction and, as long as there’s no refund clause, it won’t cause the developer to lose sleep. EXPENSES There are obviously costs involved in auditing a royalty statement, and these costs can vary greatly depending on which route you take. A typical audit within the UK – most audit companies can also carry out work in overseas markets – can take as little as one day and as long as three weeks. If you have a very successful triple-A product released across three or four platforms on a co-publishing agreement, then you could realistically expect
the audit to take between eight and ten days. The going rate for an audit company can be anywhere between £500 and £1,000 per man day. Accounting firms may choose to charge differently, depending on whether a partner or junior member of staff is working on the audit. If available cash is tight, then a good option may be to negotiate a lower day rate and higher contingency or bonus, but check your contract first as a contingent auditor is not always contractually permitted. Auditing is sometimes seen as a bit of a black art, but it should be seen as an almost essential part of a developer’s business strategy. An audit could result in getting you nearer to ‘recoup’, and also helps to reassure the company directors and shareholders that you are managing and verifying the flow of data into your company. Additionally, the information you learn from the audit could be of real value elsewhere in the business so there are really very few circumstances where an audit is a waste of resources. THE REST OF THE WORLD Outside of the videogames industry is a world of licensors and licensees; those that own IP and those that effectively lease it. These various industries adopt an annual approach to auditing and treat it as part and parcel of the bigger picture. It is, in effect, the norm. With the continued maturation of the publishing and development industries isn’t it perhaps time that royalty management was seen as an entirely normal business practice within these disciplines as well? Faye Sieracki will be speaking at ‘Best Practices in Running a Games Business’, a free event hosted by Sheridans, on the 28th January, 2010 from 5pm. Spaces are limited. To attend email: events@sheridans.co.uk Faye Sieracki headed up the Customer Logistics team for Microprose in the ‘90s. Her remit included all aspects of supply chain and distribution, including royalty statement production for third party developers. In 2002 she co-formed Media Forensics, a dedicated games audit company. In March 2009 Loxley was born to continue the great work of Media Forensics.
www.mediaforensics.com DECEMBER ‘09/JANUARY ‘10 | 59