Actually, they’re not – but, you have to admit, the headline did get your attention…
[Tim Christian kicks off a series of articles about the auditing process for royalties. This is essential reading for anyone working with a publisher.]
I’ve been in the UK computer games industry since 1991, initially on the publishing side as the head of the European operations at Accolade, Microprose and finally Hasbro Interactive and I’d like to think that during that time I ran a tight ship and certainly didn’t intentionally defraud the developers on whose creative talents we depended to make a living.
Fast forward from 2000, when I left Hasbro Interactive, to the present day as the owner of TC Associates Ltd, part of which has become the games industry’s leading independent royalty auditor, through an earlier involvement with Media Forensics Ltd., which I also founded, and an unhappily-ending flirtation running my own development business, and what do I have to report? Well, the good news is that the games industry continues to thrive, albeit in an ever-changing and very dynamic guise. Those early days of the Commodore 64 and 5 ¼ inch PC floppy disks are unrecognisable as the technology-changing times that they undoubtedly then were. In 2010, all the talk is of apps, mobile, digital download and the end of retail as we know it. However, somewhat depressingly, the majority of publishers’ accounting systems haven’t advanced as fast or as far as we could have expected. In fact, from a royalty audit point of view, I can still boast a 100% record of having discovered previously unreported royalties in almost every single royalty audit I’ve ever undertaken. In other words, almost every single royalty audit throws up errors and, interestingly, those errors are almost always in favour of the developer.
Now, as I said earlier, it’s not that (with the exception of a very tiny minority) games publishers go out of their way to short-change the developers, but it’s important to remember three things. Firstly, royalties are a cost, and the publishers will always interpret the contract to their best advantage. Secondly, the people who put the royalty statements together are only human and, yes, they make mistakes. Lastly, whilst the finance department may well rely on a multi-million dollar accounting system, the end royalty statement will almost always be generated on an Excel spreadsheet, which is not always the most sophisticated or error-free way of doing things. In the 8 years I’ve been in the audit business, I can only name two companies which I would say had deliberately set out to misrepresent the performance of a title to their own financial benefit. So, all the other royalty finds – which ranged from several thousands to a few millions of dollars – were down to questions of contractual interpretation or weaknesses in the financial systems.
So, where am I going with this? Well, over the next few months I hope to follow this article up with further detailed advice on why, when and how to carry out a royalty audit, as well as some observations on the games industry itself – its ups, downs and developments. In the meantime, with regard to the thoughts above, think about the following good business practices to get into the habit of following.
- Have your development contract professionally reviewed before you sign it (no, really, there are stories I could tell!). There are a number of experienced – and reasonably-priced – law firms with a specific games practice. If you can afford it, have your lawyer help you through the negotiation process too. Spending a few quid here could save you a bundle later.
- Make sure there is a right-to-audit clause in the contract (no, really, there are stories I could tell!). Again, no lawyer worth their salt would overlook this.
- Make the net receipts/royalty calculation clause as clear and as transparent as possible. A worked example of the royalty report layout can always be included in the contract as an exhibit. Again, time spent on this will save money later. If there’s no room for misinterpretation, there’s little room for argument other than over the maths. In my experience, when errors in the maths are found, there is no defence.
- Don’t fall for the publisher saying that unless you formally object to a royalty report within one year of its publication, the report can’t be challenged. This is designed to stop you from auditing. Hold out for two years at least – unless you do intend to audit within one year of release. If you do intend to audit every year, make sure you put the relevant dates in your calendar. Time flies …… and suddenly it’s too late.
- If the title recoups, or is close to doing so, or if you really think there’s something wrong with the royalty calculation and your questions aren’t being taken seriously, then audit the publisher. Trust me, they’re used to it and far from taking it badly, the publisher will actually respect your seriousness and professionalism. The costs of the audit are always negotiable and sometimes can be far less than you think – and if there’s an error in excess of 5% or 10%, the publisher will be obliged to pay for the audit (assuming you negotiated that in the first place).
So, a few do’s and don’ts with which to kick of this series of articles – they’re common sense, I know, but it does no harm to draw attention to them every so often.
As I said, I’ll be back over the next few months (assuming I’m invited!) to share more thoughts on royalty auditing in particular and the computer games industry in general. In the meantime, feel free to contact me at tc@tc-ltd.com or via www.tc-ltd.com
Loading ...
