1. Chapter 7.2 Game Industry Roles and Economics

2. CS 44552 Video Game Industry Value Chain

3. CS 44553 Game Developers Can be independent, or subsidiaries of publishers Many developers started on PC due to accessibility of tools –Console development requires proprietary development kits and preexisting relationship with publisher

4. CS 44554 Revenue from $50 Console Game AmountPurposePaid ByPaid To $3Cost of goodsPublisherMedia manufacturer $7Publishing license royaltyPublisherPlatform holder $13Retailer profitConsumerRetailer $3Markdown reservePublisherRetailer $8Development costPublisherDeveloper $10Operating costPublisherInternal (overhead, freight, co-op, bad debt) $6MarketingPublisherAd agencies and media Items in bold can be converted to profit through careful publisher cost management.

5. CS 44555 Platform Holders Revenue comes from: –Hardware sales –Licensing fees from compatible peripherals –First-party games –Licensing fees from third-party games –Licensing fees from development tools –Revenues from sales of proprietary delivery media

6. CS 44556 PCs are an Open Platform Intersecting relationships among: –CPU manufacturers, application software providers, graphics chip manufacturers, and box assemblers CPU (Intel, AMD) and graphics chip (NVIDIA, ATI) manufacturers provide developer support and market their technology benefits directly to consumers Application software providers (Microsoft, Silicon Graphics) give developers free tools to ensure compatibility Box manufacturers (Dell, HP) may bundle hot software titles to add value to their sale Low barrier to entry for developers, but high competition for shelf space

7. CS 44557 Consoles are a Closed Platform Console companies (Nintendo, Sony, Microsoft) control nearly every aspect of games on their platforms –Proprietary development hardware and software –Permission to become a licensed publisher –License to use console company trademarks in marketing materials –May require permission to start a game –Certification of a finished game Investment in hardware must be offset by revenue from software (around $7/unit for third-party games)

8. CS 44558 Summary Entities in video game industry haven’t changed much in 30 years However, flow of money (ergo, balance of power) has shifted greatly Balance of power will shift again in 2005 – 2006 as next-generation console project costs skyrocket

9. Chapter 7.3 The Publisher-Developer Relationship

10. CS 445510 Developer / Publisher Divide The Developer is responsible for: –Game conception –Prototype –Design –Technology –Development and implementation

11. CS 445511 Developer / Publisher Divide The Publisher is responsible for: –Commission –Funding –Promotion –Marketing –Distribution –Support

12. CS 445512 The Pitching Process: Prototype Key game prototype features: –Core gameplay mechanic –Key USP’s / points of difference –Game engine / technological proficiency –Artistic / styling guide –Demonstration of control / camera system –Example gameplay goals

13. CS 445513 The Pitching Process: Pitch Presentation Key pitch presentation content: –Concept overview & genre profile –Unique selling points What makes it stand out from its competitors –Proposed technology & target platform/s –Team biographies & heritage –Outline marketing information, including potential licensing opportunities

14. CS 445514 The Pitching Process: Game Design Focuses on intimate detail such as: –Storyline –Control dynamics –Camera system –Level progression –Game features and functionality –Score systems etc.

15. CS 445515 The Pitching Process: Technical Design Covers technical topics including: –Graphics engine –AI routines –Audio system –Online capability and requirements –Peripherals/controllers –Development asset management/backup

16. CS 445516 The Pitching Process: Project Schedule & Budget Schedule & budget must: –Be detailed and transparent –Allow for contingency scenarios –Have several sets of outcomes for different size publishers –Be realistic

17. CS 445517 Deal Dynamics: IP Rights Intellectual Property Rights include: –Game name –Logos –Unique game mechanics & storyline –Unique characters, objects & settings –Game Source Code including artwork & associated assets –Unique sounds and music

18. CS 445518 Payment Negotiation: Overview Current approximate development costs: –$4-5 million for AAA multi-platform –$2-3 million for AAA PlayStation 2 only –$1 million for A-quality single platform

19. CS 445519 Payment Negotiation: Deal Structure The developer must carefully balance the following parameters: –Clearly defined PR & marketing support –Cash advance against royalties –Milestone payments –Post-release royalty payments

20. CS 445520 Payment Negotiation: Advance Payments An advance royalty payment is usually the agreed royalty rate multiplied against a percentage of the total unit guarantee Advance royalties will generally fit in around the 60-100% mark of the predicted first year unit guarantee

21. CS 445521 Payment Negotiation: Guarantees Guarantees usually come in two forms: –A figure that is contractually guaranteed by the publisher and must be paid for regardless of how well the game actually sells –A figure that is based on an amount of units sold necessary to maintain title exclusivity with that publisher

22. CS 445522 Payment Negotiation: Milestones Milestone payments represent the agreed rate of release for development funding Developers will usually be given a lump-sum advance payment, with the remainder of the payments split into regular milestones payable upon delivery of agreed content

23. CS 445523 Payment Negotiation: Royalty Negotiation Royalties are percentage payments of profits made above and beyond the recoup of development costs Royalty rates are calculated the wholesale price of the product Developer royalties can range from 0 percent for work for hire, to 40 percent for a self-funded AAA title.

24. CS 445524 Development Milestones: Development Timeline Here are some example development periods for different platforms: –4-6 months for a high-end mobile game –18-24 months for an original console game –10-14 months for a license / port –16-36 months for an original PC Game

25. CS 445525 Development Milestones: Milestone Definitions An example milestone schedule for a 20- month development cycle:

26. CS 445526 Development Milestones: Alpha Definition At Alpha stage, a game should: –Have all of the required features of the design implemented, but not necessarily working correctly –Be tested thoroughly by QA to eliminate any critical gameplay flaws –Still likely contain a certain amount of placeholder assets

27. CS 445527 Development Milestones: Beta Definition At Beta stage, a game should: –Have all content complete –Be tested thoroughly for bugs and gameplay tweaks –Be shown to press for preview features

28. CS 445528 Development Milestones: Gold Master Definition At Gold Master stage, a game should: –Be sent to the platform holder/s (where applicable) for TRC testing –Be sent to press for review –Be sent to duplication for production –Be backed up and stored

29. Chapter 7.5 Intellectual Property Content, Law and Practice

30. CS 445530 Categories of IP Protection Patents –Protect certain novel, useful and nonobvious inventions having a utilitarian function Copyrights –Protect creative expression in a fixed medium Trademarks –Confer exclusive rights in any word, symbol or device that serves to identify the source or origin of goods or services Trade secrets –Protect commercially valuable information whose contents are secured from public knowledge and disclosure

31. CS 445531 IP Content of Video Games Patent examples –Hardware technology, media on which game is recorded, and software that enables game to perform its functions Copyright examples –Software, artwork, storyline, characters, props, costumes, text, dialogue, sound effects, music Trademark examples –Business name of the developer and publisher, game title, mascots (Mario and Sonic), designs, unique packaging Trade secret examples –Confidential know how used to program, budgets, secret projects, contract terms

32. CS 445532 Patents Works Protected –Inventions and processes protected by utility patents can be “any new and useful process, machine, manufacturer or composition of matter, or any new or useful improvement thereof…” –So-called “method” patents are utility patents that cover computerized processes and functions –The design of physical objects, such as the Xbox, can be protected separately by a design patent

33. CS 445533 Patents Standards –To qualify for utility patent an invention must be: 1. New 2. Useful 3. Nonobvious –Nonobviousness requires that the invention be sufficiently different from known technology and knowledge so as not to be obvious to a person with ordinary skill in the field of the invention.

34. Patents Ownership –In general, the inventor is the owner of the patent –The inventor may assign rights to the invention to others, such as the inventor’s employer, through written agreement –They may be multiple inventors in group works –Registration is essential to secure patent rights Exclusive Rights –The patent owner can exclude others from making, using or selling the patented invention or objects embodying the patented invention

35. CS 445535 Patents Duration –A utility patent is granted for 20 years from the date the application is filed –Patents issued prior to June 8, 1995, exist for 17 years from the date the patent is granted –The patented invention may be freely copied once the patent expires

36. CS 445536 Copyrights Works Protected –Almost any recorded original expression such as: Literary works Musical works (including lyrics) Dramatic works (including music) Pantomimes and choreographic works Pictorial, motion picture, graphic and sculptural works Sound recordings Architectural works Works Not Protected –Ideas, titles and names, facts

37. CS 445537 Copyrights: Standards A copyright has 2 requirements: –1. Originality and “fixation in a tangible form” To be original, the work must not have been copied by the author and have a small level of creativity –2. The fixation requirement is met if the work is recorded in any medium such as: Text, videotape, photograph, sound recording, or CD

38. CS 445538 Copyrights Ownership –Ownership of a copyright belongs to author or authors of the work –The author is generally the creator of the work, but certain works made under contract as “works for hire” are owned by the person contracting for the work –Registration is not required but confers enforcement rights Exclusive Rights –A copyright owner has five exclusive rights: 1. Reproduction right (copy, duplicate or imitate) 2. Modification right 3. Distribution right 4. Public performance right 5. Public display right Moral rights are granted to visual artists to prevent improper attribution and protect the integrity of the work

39. CS 445539 Copyrights Duration –For works created by an individual or individuals after January 1, 1978, the copyright lasts for the life of the author plus seventy years –Copyrights in anonymous works and works made for hire exist for a period of 95 years from the date of first publication or 120 years from the date of creation, whichever is sooner

40. CS 445540 Trademarks Works Protected –Any word, symbol, name, slogan, picture, design, shape, color, sound or smell that serves to identify the source or origin of goods or services can be a trademark –A service mark is a trademark applied to services instead of products

41. CS 445541 Trademarks Standards –A trademark must be capable of distinguishing the owner’s goods or services from the goods or services of others –The relative enforcement strength of a trademark is determined on the basis of the degree of such differentiation: 1. Arbitrary or coined 2. Suggestive 3. Descriptive 4. Generic

42. CS 445542 Trademarks Ownership –A trademark is owned by the first party to use it in connection with the goods or services –Registration is not essential but establishes important enforcement rights Exclusive Rights –A trademark owner has the exclusive right to use the trademark in connection with specific goods or services –Subsequent users of the same or similar mark are deemed infringers

43. CS 445543 Trademarks Duration –A trademark continues as long as it remains in use –Federal registrations are subject to renewal every ten years

44. CS 445544 Trade Secrets Works Protected –Each state has its own laws, but many have adopted versions of the Uniform Trade Secrets Act –The UTSA provides that information that derives “independent economic value” from not being publicly known and whose secrecy is properly guarded is protected from unauthorized use by others

45. CS 445545 Trade Secrets Standards –Trade secrets must have commercial value and remain secret –There is no requirement that they be recorded and there is no provision for registration –Unlike patents and copyrights, trade secrets can include ideas that have no current utility or application

46. CS 445546 Trade Secrets Ownership –An employer generally owns trade secrets developed by employees and by independent contractors hired to develop or create such information Exclusive Rights –The owner of a trade secret can maintain it as long as secrecy is properly maintained

47. CS 445547 IP Transfers The owner of IP rights can transfer all rights by written assignment or a portion of rights by a written license Rights transfer between an employee or independent contractor is dependent on: –The nature of the rights transferred –The existence of an enforceable agreement between the parties setting forth the terms of any such transfer

48. CS 445548 Avoiding Infringement Existing patents, copyrights and trademarks can be searched Trade secrets cannot be searched, but violation generally requires intentional theft Copyrights are only violated if there is actual copying of the protected work Patent infringement does not require intent or even knowledge of the patent The standard of infringement for trademarks is whether there is a “substantial likelihood of confusion” between trademarks among intended consumers

49. Chapter 7.6 Content Regulation

50. CS 445550 History of Censorship Legal source of American speech protection is the 1791 First Amendment to the U.S. Constitution: –“Congress shall make no law … abridging the freedom of speech…” First Amendment protection –Extended to states and localities by Fourteenth Amendment in 1868 U.S. Supreme Court is ultimate interpreter of free speech rights

51. CS 445551 Current Free Speech Standard Sexually obscene expression can be censored –But only if the material, taken as a whole: Appeals to the prurient interest in sex Portrays sexual conduct in a patently offensive way Does not have serious literary, artistic, political or scientific value Violent but not sexually explicit expression is subject to “strict scrutiny” by the courts –A higher degree of constitutional protection

52. CS 445552 Congress and Video Games Senate hearings in early 1990s showed public concern for the emerging violent and sexual nature of video games reaching children Harm to children was assumed –Rather than substantiated by experts who testified Hearings carried an implicit threat of content regulation if children were not protected

53. CS 445553 Industry Self Regulation Following hearings, major game companies formed a trade association (Entertainment Software Association) –To devise industry standards –To create lobbying and public relations programs to deal with censorship threat Electronic Software Rating Board (ESRB) was formed –To develop and enforce voluntary video game ratings based upon the model of the Motion Picture Association of America

54. CS 445554 ESRB Rating System: ESRB Codes (On Front of Game) EC (Early Childhood) –3 and older – Contains no material that parents would find inappropriate E (Everyone) –6 and older – Minimal cartoon, fantasy or mild violence and/or infrequent use of mild language E10+ (Everyone 10+) –10 and older – Cartoon, fantasy or mild violence, mild language, and/or minimal suggestive themes T (Teen) –13 and older – Violent content, infrequent strong language, and/or suggestive themes M (Mature) –17 and older – Mature sexual themes, more intense violence and/or strong language AO (Adults Only) –Content suitable only for adults – not intended for under 18 –Graphic depictions of sex and/or violence RP (Rating Pending) –Has been submitted to the ESRB and is awaiting final rating

55. CS 445555 ESRB Rating System: ESRB Descriptors (On Back) In addition to the letter codes, the ESRB has promulgated 32 “descriptors” to further inform purchasers Descriptors include: BLOOD AND GORE CARTOON VIOLENCE FANTASY VIOLENCE INTENSE VIOLENCE NUDITY SEXUAL VIOLENCE STRONG LYRICS STRONG SEXUAL CONTENT USE OF DRUGS USE OF TOBACCO

56. CS 445556 Criticism of ESRB Rating System Voluntary system is too lenient and lacks effective penalties Voluntary system is too harsh and is a form of overbroad self censorship Ratings are incomplete and do not cover online- created content Ratings are ignored or misunderstood by target audience Publishers ignore ratings in marketing efforts

57. CS 445557 Judicial Response to Video Game Censorship Courts differentiate between sexual and violent video game content, affording greater protection to violent content Early video game cases involved violence, newer games raise sexual content issues not yet decided by courts Courts have found lack of reliable support linking game violence with harm to children and have ruled in favor of video game makers

58. CS 445558 Foreign Content Regulation The U.S. First Amendment legal scheme evolved over 200 years and is unique among countries Other countries typically provide less protection to speech, and in particular sexual or violence oriented speech Countries like Germany and China are among governments that ban games or game content that is politically offensive Greece attempted to ban all video games as subversive The European Union, China and Australia are among governments that enforce a rating system –Canadian game companies follow the ESRB ratings although they are not members