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How to Play the Game of Video Game Licensing

Video gaming has arguably become the single largest market for digital media licensing in the world, surpassing film, television, music and sports, and if there’s one thing that irritates Chris Petrovic and Shaan Akbar, it’s that video games are sometimes treated in the licensing world as the half-grown stepchild of more traditional media.

The two men are gaming industry veterans heavily involved in licensing negotiations for various developers. Petrovic is SVP and Head of Corporate Strategy, M&A and Business Development at Zynga, while Akbar is a D2C entrepreneur and advisor to the gaming industry, who has worked with major brands including Disney and the Star Wars portfolio.

“It wouldn’t be a gaming discussion without highlighting how big gaming is,” said Petrovic. “I think this is the statistic that keeps getting lost in the media and entertainment shuffle by both folks inside the industry and especially by those outside the industry, that gaming has for a long time now been the largest entertainment vertical in the world by revenue and continues to grow at a phenomenal pace relative to its brethren in TV, film and music.

“For a long time it has been the largest entertainment vertical in the world, and it’s still growing at a faster pace than TV, film and music.”

In fact, with $160 billion in global revenue last year, gaming is now around the same market size as TV, Film Box Office and Digital Music combined, which together earned about $163 billion.

 

Akbar agrees there is a disconnect, saying that in the licensing world, younger executives and companies tend to ‘get’ the video game industry, while more traditional media executives sometimes think of videogaming as an adjunct to its older entertainment cousins. 

“It has to do with demographics,” said Akbar. “You have millennials and Generation Z’ers who are gaming natives and they totally get it … but now you have the rise of mobile as a platform, so there are a lot of people who are now gamers, but they don’t consider themselves gamers.”

From a licensor’s point of view, Petrovic and Akbar say it’s important to understand that gaming is not just a single market sector, but a collection of sectors with their own specific dynamics. 

They divide the market into PC Games, Console Games, and Mobile Games, and say most people in film and television are surprised to learn that mobile gaming is be far the largest and fastest growing segment. In fact, as of this year mobile comprises almost half of the entire gaming market with $77.2 billion in revenue globally, or more than 48% of all gaming revenue. 

By contrast, console gaming titles primarily for XBox, Playstation and Nintendo generate $45.2 billion, while PC gaming generates $37 billion. 

But even more important when considering which platforms to focus on, Petrovic and Akbar point out that mobile is growing much faster than the console and PC markets, and has more room to grow. They point out that many of the markets globally are not well developed, but they are coming on fast. 

India is a key case in point, as that country has just surpassed China for the fastest Year on Year growth of mobile game downloads. 

Petrovic expects to see massive continued growth for mobile game apps in China and India, but also predicts accelerated growth in the 2020s in Southeast Asia, Latin America, and the African continent. 

“There is still a huge growth opportunity on a regional basis, so that market share for mobile is going to continue to grow compared to those other categories,” he said. 

Despite the rapid growth and market dominance of mobile gaming, which alone is larger than the entire global film industry, Akbar says IP licensing is only just starting to have a major influence in the mobile games market. 

Looking at the top 200 grossing games in the United States, Akbar points out that only 24 per cent are utilizing some type of licensed intellectual property, leaving most of that market untapped. 

The lion’s share of IP licensing in mobile, not surprisingly, comes from television shows and movies, comprising about 37% of licensing deals in mobile. The next largest categories, in order, were Consumer Products 17, Sports 15, Comics/Novels 12, Anime and Manga 12, and Celebrities 6. 

“I think this is really just the start” said Akbar. I think that large brands, even consumer brands, are still really nascent in terms of their interaction and licensing in the game space. I mean, if I was a Starbucks I’d have a coffee making game or something, and I think there is still a lot of opportunity for brands to get involved in the game space.”

Sources of Videogame Licensing

Petrovic says he’s still surprised that less than a quarter of the top grossing games are involved in some sort of brand licensing deal, but adds that there is a feeling in the gaming industry that many licensors don’t understand their industry, and as a result have crafted agreements that are often damaging to the game developer. 

“There have just been some poor executions of IP related games in the marketplace and also … up until recently there was a sentiment in the market place that licensors were creating really onerous and burdensome terms on content creators to be able to commercially exploit an opportunity with a license that could eventually be successful for them and the licensor,” said Petrovic. “I think as licensors have gotten more sophisticated and have learned from their early mistakes, I hope to see more evolution in their thinking, more of a long-term view, more of a partnership view than a ‘I just have to get my minimum guarantee, and that’s what’s looked at as successful.”

How to Make Video Game Licensing Work For Both Sides

Both Petrovic and Akbar believe part of the issue is that licensors often don’t take into account the very different nature of gaming, as opposed to other types of licensing like toys or clothing. 

Unlike other products, video games are interactive, and they also provide both customer data and a means to communicate directly with consumers in a way that is highly engaging and ‘sticky’. Gamers will literally spend hundreds of hours with a game, and sometimes much more than that for online games like Fortnite, or the venerable World of Tanks game that has been going strong for over a decade. 

Marvel recently launched a fourth wall breaking partnership with Fortnite, for example, by allowing the Avengers’ villain Thanos to appear temporarily in the Fortnite game; a deal that brought millions of Avengers’ fans to Fortnite, and millions of Fortnite fans to Marvel. 

Likewise, the admittedly less popular but long-running World of Tanks franchise recently launched multiple licensing deals, such as creating a new tank featuring the rock band The Offspring, and tank skins featuring the Amazon breakout hit The Boys. 

Petrovic, who has worked directly on several similar licensing deals with Disney, the Star Wars franchise, Harry Potter and more, says licensors need to understand that video game deals can offer more powerful and long lasting benefits than, for example, a one-time financial boost from merchandise sales. 

“I have found tremendous success in the past having very open conversations with licensors,” says Petrovic, “where I’ll actually show them on paper, based on metrics in a game … that you the licensor can make more net dollars over time if you lower your royalties from here to here, and let me spend that money on marketing the game, and know that the average lifetime value of those customers is worth X dollars, so more of those dollars will be coming to you.

“But if you hamstring me and I don’t have the profitability bandwidth to invest in the game because I have to worry about paying you your 25 or 30 per cent, this game is going to die on the vine and neither of us is going to make any money,” Petrovic added. “So, licensors need to continue to be mindful that this is a long-term endeavour and partnership and you hope that these games will live on for many, many years.”

Good examples of that point, as both Petrovic and Akbar explained, include game franchises that extended over many years, even though they were based on franchises that weren’t necessarily active during the same period. 

For example, Star Wars games were still successful during the years no Star Wars movies were being made, as were games based on Harry Potter, Star Trek or various comic book properties. The Arkham Asylum series of games, for example, were not tied to any releases of The Batman franchise, but succeeded both in attracting gamers and keeping the Batman franchise top of mind. 

“You as a licensor have to think about what you’re actually trying to achieve,” Akbar explained. “Are we just trying to generate profits and returns and an extension of our show or our film, or are we primarily trying to create awareness of our IP, or are we primarily trying to share the user data based on our IP. Once you know your goal, you will then have to sell into your own organization on why you are making this effort and what you are going to get out of it.”

But despite the benefits of long-term involvement with a solid gaming studio, both Akbar and Petrovic said the early days of the industry have been marred by difficult relationships between licensors – such as film studios – that want to make sure they get their money out quickly and up front. 

The issue is that launching and maintaining a successful video game franchise is very expensive and takes a lot of time. Most launches take 12 to 18 months, and if IP negotiations are involved this can extend to 24 months. Large upfront minimum guarantees and royalties may hurt the revenue stream for both sides, or even cause the game to fail. 

“You can come up with some pretty onerous deal terms,” said Akbar. “We’ve referenced MGs (minimum guarantees) quite a few times now, but I think that can be very shortsighted. 

“MGs, onerous royalties, capping what deductions you can have against revenue, like net revenue deductions, these are all things that as a licensor, you want to make sure you get your fair share of revenue, but you also want to ensure that you’re not bankrupting your developer in the process. 

“A lot of these smaller to medium sized devs don’t have a lot of cash and when you’re asking them to cough up a million, two million, whatever it is, that could be money that’s going to the development of the game. I have seen a number of devs bankrupted as the result of licensing deals.”

To make game licensing work, Akbar and Petrovic recommend a number of strategies to increase long term revenue by focusing on creating and maintaining a long-lasting game franchise, rather than on the short-term revenue opportunity. 

For example, in mobile gaming in particular, they note that developers have to pay 30 per cent of their revenue off the top to Apple or Android as sales commission, which causes them to take a longer time to reach profitability. The devs also have to market the game globally, and maintain it on a 24/7 basis, all of which is very expensive, but also essential to a successful launch. 

A large Minimum Guarantee or high initial royalty can literally kill the goose before it lays any golden eggs. This is even more true when the developer opts for a ‘free to play’ strategy. 

Free to play has been the most successful strategy for gaming over the past several years, and results in very sticky games that easily attracts users and keeps them for a long period, but the strategy does not work well if the licensor is expecting large payments over the short term. 

Another common mistake the panelists pointed out is to license a property to too many developers at the same time. While that strategy could work with a clothing manufacturer, gaming developers have to draw in hundreds of thousands or even millions of users to make a game profitable, so launching three or four Avenger games simultaneously will make it less likely that any of them will survive and prosper. 

“Licensors used to have a shotgun approach and try to get as many licenses as possible,” said Petrovic, recalling when he worked with author JK Rowling on a new Harry Potter game. 

“It was a journey to make Rowling feel secure on the integrity of the game and the Harry Potter IP, but they then agreed to space the various games out so that (the developers) each had their own ‘air cover’, so to speak.”

In fact, many IP holders are now shying away from licensing to multiple partners at the same time, choosing instead to focus on a partnership with a solid game developer with a proven history of launching successful, long-term franchises. 

For the developer, this is the ideal, says Petrovic. While dealing with licensors can be fraught with peril, developers also face the reality that there is a lot of competition in the market, and it is becoming increasingly difficult and expensive to attract gamers to a new franchise. 

Partnering with a highly successful franchise can make all the difference.

“It’s becoming more difficult to scale and launch new games,” said Petrovic. “There’s a saturation point that we’ve hit, so there’s a higher switching cost to get you off the game you are playing now and into another.

“The cost of acquiring the customer has increased over time, and things changing in terms of privacy requirements that Apple is leading on will make those costs even higher,” he added. “The right licensor can reduce that cost because they bring in more of their fans to that game, and you also need to believe the right IP can extend the relationship and engagement with your customer because it is that much more relevant and interesting.”

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