Distributor Revenue Share Observations
The Contracts and Royalties panel at the Casual Games conference was easily the most interactive and informative discussion of the show. The moderator had asked the participants – (Greg Mills - , Rich Roberts – , David Nixon - Oberon Media, CJ Wolf – iWin, and Margaret Wallace - Skunk Studios) to put together business diagrams explaining how they each believed the margin split should work among the various players in the casual games value chain – developers, publishers, DRM providers and distributors. As one might expect, the content creators thought that distributors should receive about 30% of the revenue, while Greg Mills put the distributor number at 50% or more, much to the displeasure of many in the crowd. The panel then became a little bit of a critique of the distributors, with RealArcade taking the brunt of the abuse as the original creator of this system.
What was not brought up was that this perceived margin share imbalance is simply due to business leverage - there is no law of physics that says distributors should receive only 30%, even if that is common in many physical media businesses. This may not be a popular statement, but the developers/publishers currently need the distributors more than the distributors need them. A similar case exists in the cable world where a distributor like Comcast receives 60%+ of the margin since the content providers absolutely must have carriage on the platform – and this is for a much more mature business than casual games. No one says that content creators must distribute their content through companies such as Shockwave and – if they’re unhappy with the margins, then publishers should withhold their content. When I brought that up with various developers, they quickly stated that they wouldn’t be able to make enough money without strong distribution, which leads to the obvious margin split we now have which favors the distributors.
So instead of sitting their complaining about it, what should content creators do about this perceived problem?
- Make Great Games – this seems clichéd, but providing a hot game or preferably, set of hot games, will increase your leverage. Merely making clones of Zuma or Feeding Frenzy may have worked last year, but it is going to be increasingly less effective in a more competitive environment.
- Aggregate a Critical Mass of Games – distributors want to work with fewer content providers – Greg Mills made it clear they wanted to limit it to 4-5 providers at AOL. A distributor can’t continue to do contracts with tens of providers – it just doesn’t scale in a larger market. At Listen.com/RealNetworks, we signed over 200 label agreements before we finally made the call to funnel all new labels into a distributor such as or – it’s going to happen in this market.
- Strike Exclusive Deals with Distributors – it may make sense to strike a limited time exclusive (or even longer) with a certain Distributor in return for a better margin splits and additional promotion. It has the risk for alienating the other ones, but I think we’ll see more of it as Distributors look to differentiate their offerings from the competition
- Market and Brand your Games/Company – as was pointed out on the panel, most content providers do a great deal of their own marketing – e.g. MTV doesn’t wait for Cablevision to promote their channel – they drive demand themselves. Almost no developers/publishers currently do a lot of marketing to drive demand and create awareness – that may not have been necessary in less competitive times, but it’s becoming necessary now
- Work with Smaller Distributors, including non-US ones – it’s likely that a content creator can get better terms from smaller distributors, especially if they work with them closely as opposed to shipping them the identical product. This takes more work, especially outside the US, but content creators need to get more creative in how the look at the marketplace
I’m sure there are many additional ways to address this issue. But they all come down the inexorable fact that the casual game business is going to get harder and more complicated for all players, but that those content creators who can deal with the new landscape will actually come out ahead as the business expands, just as always happens in maturing media markets. It will not be business as usual by 2006.
re: Working with Smaller Distributors (#5)
While it's a good idea to get your games out to as many online channels as possible, and that means working with smaller distributors, Game Developers have to make sure that these smaller distributors are keeping good accounting and payment practices before signing up with these guys.
Sometimes a developer will lose money working with a smaller distributor who, for example, needs to be constantly reminded to send royalty reports and payments. The potential attorney fees you accumulate and time you waste directly on collecting late payments, etc., should compel developers to really investigate smaller distributors before giving them your games.
Otherwise, you may find yourself in a situation in which your revenues are being under-reported, or not reported at all -- and somebody else is pocketing profit that belongs to you.
Developers should also have final approval over any channel distributors take their games to.
Distributors should be able to furnish Developers with a list of channels in which their games are being distributed without any hesitation.
Smaller distributors can run the gamut from great business partners to a bit on the flaky side. Choose your distributors wisely lest you end up losing out on money owed to you for your IP.
Posted by: Margaret Wallace | July 25, 2005 at 02:31 PM
Sean,
Spot on. It's all about *Bargaining Power*. There is no set of "rules" for how deals are structured. It is *always* about who has more leverage, or bargaining power.
If you don't like the deal, figure out a way to INCREASE your bargaining power. It pretty much boils down to trying to increase demand (better content, better marketing) and increasing your channel power in various ways (deals, partnerships, etc.).
Great post!
Posted by: Kayvaan | July 25, 2005 at 03:38 PM
I can’t agree more with Margaret when she says that developers need to be careful when choosing who to work with (but they need to choose Boonty off course ;-)
However, I disagree on the “distribution channels final approval” sometimes requested by game publishers/developers. I think developers needs to focus on creating great games and company like mine will focus on selling those games. To talk only about Boonty, we have more than 150 distribution channels around the world and are signing new channels every week; we also have relationship with more than 100 game publishers/developers. Do the math, if I need to ask approval for my entire existing and future partners, this is a nightmare and cost will be higher. Same thing with developers. They deal with different companies and I’m sure it’s not easy to track all the rights.
My advice: No restriction, just make sure that you will get the money on time!
Posted by: Romain Nouzareth | July 27, 2005 at 08:44 AM