Game development covers a wide range of professions. Somewhat less glamorous, but equally important are the legal and business contributors. Our own Director of Finance, Ron Kerwin, recently attended the “Summit on Law and Business of Video Games Conference” in Dallas. Here are his notes on what proved to be a very informative event.

Recap of The Summit on Law and Business of Video Games
SMU Guild Hall and Dedman School of Law
 

Day 1
Seminar on Game Development & Business Models
Hosted by Joseph Olin, President of Academy of Interactive Arts & Sciences
Speakers: Steve Nix-Director of Bus Dev at Id Software
Jason Holtman-Dir. Of Bus Dev/Legal Affairs at Valve
Dan Ferguson-Dir. Of Game Development at Blockdot

Steve Nix went first, his talk didn’t really focus on any new or aggressive business models, but instead mainly focused on the many ways that id has been able to distribute and redistribute their mega hits using new delivery methods/platforms as they emerge. They currently are using Valve’s Steam platform to re release all of their different Doom, Quake, and Wolfenstein titles for play on the PC. They are also in the Free to Play market with Quake Live, which is totally supported by in game advertising. In addition, they generate revenue by licensing their technology to other developers, most notably for Valve’s Half Life.

Jason Holtman was next, and due to the success of their Steam platform was much more focused on using or creating new business models and looking at problems through new paradigms. Steam currently has 15M worldwide users, 1.5M who are connected on any given day. Valve has used Steam extensively to gather data on customer behavior and track purchase patterns, so Jason had some strong opinions on a lot of the conventional wisdom in the industry. On the ascendance of online distribution versus retail distribution, they note that although online sales have surpassed retail, retail sales are still growing so devs/pubs should not write off the retail space just yet. They have noticed that if they give gamers a free ‘taste’ of a game on Steam, users who like it will buy the full version at both retail and online, there is no cannibalization of retail sales by offering online download/purchase as well. Their feeling is that if instead of charging for content and upgrades you give them away, total sales of that game will increase by both attracting new players and keeping current players playing and paying. One of the statements that generated the most discussion/buzz at the conference was when Jason said that Valve views software pirates not as thieves or someone to combat, but rather as grumpy or underserved customers that cannot find a particular game in their language or for sale in their country at all. As a result, Valve tries to release their games in multiple languages and countries immediately or shortly after shipping the game in English, with the game audio, text, and user interface and the local instance of Steam updated in the local language. Valve has offices in many foreign countries to help facilitate this process via their Steam portal.

Dan Ferguson went last, their experience at Blockdot is more applicable to a small/medium sized developer that Valve or id. Blockdot develops only FTP games that are either solely dependent on advertising, or developed specifically for a corporate website in order to help bring traffic to that site. Blockdot first noted the viral nature of casual internet content when they developed a game/app called Elf bowling that went viral a few years ago. In the meantime they have developed similar content either for corporations to host on their home website or portals as a way to draw traffic(Chicktionary on MS search engine or M&Ms game on M&M Mars homepage), or for distribution via Blockdot’s own portals like Kewlbox.com or Boxerjam.com. Their games are also available on Iphones and mobile devices and in print. In their experience, players are not turned off by games with advertising or educational messages.

In the recap session after their speeches, the common theme was that as game content has gotten better across the board, the way in which you distribute your content has become perhaps the most important aspect of the business and the way in which you can differentiate yourself in the crowded marketplace.

Discussion on Impact of Economy on Game Development

This session was a panel of consultants from the Price Waterhouse Coopers Gaming and Interactive practice and analysts from several capital firms, all of whom were cautiously optimistic about both the short and long term market for games. In the near term, growth will continue due to the relatively new platforms from Sony, Microsoft and Nintendo driving continued sales, but not as rapidly as was seen over the past 2-3 years. One of the common memes was that as people/families evaluate where to spend their entertainment dollars, games stack up well compared to movie theatres, concert tickets, and sports tickets in terms of total dollars spent and for the number of times games can be played once purchased. Periferals were mentioned as a source of increased revenue, compared to formerly being deal killers, but outside of rock bank related games nobody had any idea if the trend would last. Instead, unlocking more functionality out of new hardware like the Wii controller and Iphone, as well as the network/online and progress tracking and rewards functionality of the Sony and Microsoft platforms, would be a better bet for increased sales. The panel was also unanimous that devs and pubs of all sizes must be flexible in adjusting their cost structures in order to survive in the near term, mostly by taking advantage of outsourcing where appropriate, and by sharing existing tech and assets between teams/projects as well as being flexible in employing staff between projects.

Session on Legal Issues and Challenges in the Game Industry
Edward Cavazos-Partner, Fish & Richardson
JJ Richards-GM of Platform Svcs, Microsoft Advertising (Former Xbox Live)
Zach Bishop-Partner, Hunton & Williams
Barry Seaton-Barry P Seaton, PC

Each of the speakers focused on a couple of issues apiece where they had some knowledge of recent trends or things to watch out for. They could be boiled down to:

Licensing Issues
Concentrated on covering yourself contractually when it comes to:
Licensing 3rd party tech/middleware/tools -Don’t forget about using fonts
Using open source code within your code-If you use open source software in your code, then all your code could be considered open source software
Ancillary rights-developers need to make sure that they have rights or royalty % on ancillary products, too

Labor Laws
Exempt vs. Non Exempt classification – overview of recent lawsuits that have challenged non payment of overtime for dev staff
Unionization- Overtime uproar in recent years had led to some talk of unionization, but momentum for it has declined

Work for Hire Content
Whether for art, voice, acting, motion capture, whatever, make sure the agreement spells out ownership & use of final assets by both parties. In sequels, add-ons, etc. too.

Indemnity Agreements
Developers need to make sure that they are indemnified against anything provided to them by the publisher

Non Competes
Talked about enforceability of non compete agreements, including ‘worldwide’ provisions in the online age. Non competes are generally unenforceable in a lot of jurisdictions, except when involved in the aftermath of a sale of a company.

Place of Law provisions
Don’t give away the place of law to the other party in contract negotiations without first doing research on prior litigation in that place. Also, specifying an extremely inconvenient or expensive place of law in a contract can be a good way to ensure the parties use the mediation provisions in the contract first in case of any disputes.
 

Day 2
Games In Asia-Development, Business, and Legal Issues
Hosted by Xuan Thao Nguyen-SMU Dedman School of Law
Speakers: Roxanne Christ-Partner, Latham & Watkins
Jerry Zang-Deputy General Council at Shanda
Zack Karlsson-Director of Bus Dev at Namco/Bandai

Discussion mostly focused on China and the challenges or legal issues US companies face in doing development there or in conducting business there at all. The most common theme was the need for US companies to take the time and money to build local relationships to learn the market in China and navigate the intricate maze of government/administrative approvals, or find a middleman who has the established relationships and knows the proper govt. agencies to make the proper introductions for you. Companies who do not almost always fail to get approvals from all of the required agencies and run afoul of officials/agencies who feel that they have lost face because you did not seek their approval upfront, the most glaring example being game machines/consoles being banned in China since the late 90’s due to Sony’s overlooking the approval from just one agency when trying to release Playstation there. Online games are permitted however, mainly due to their willingness to cooperate with the government and because the government feels online games have a positive impact on the telecom, IT, and media industry in China.
Other issues related to China that the panel wanted us to know about:
 Virtual Goods Sales – Although taxation of virtual goods sales has only been debated here in the US, in China they have started to tax them (if declared) at 20%. Sales of virtual property/goods have been driving gaming revenue growth in China, so the government there has been taking the lead in the area of taxation of virtual goods sales when compared with the west.

Chinese Legal System – Chinese courts are civil based, not case based like in the US and focus more on torts than on contract law. Although they have not traditionally used prior cases as precedent or for reference, but due to the increase in IP related lawsuits in China over the recent years, judges there have started to share information and review other cases as they are decided. Copyright protection is starting to emerge in the Chinese legal system, there is no actual copyright protection for games in China, only for software. Chinese companies and thus Chinese courts have become very aggressive about protecting IP assets, their courts are seeing more IP related litigation than in the US, mostly Chinese companies suing other Chinese co’s, but foreign companies have been able to file IP cases, too (about 5% of total IP cases in 2007). Generally in IP cases, the remedies available to foreign companies in Chinese courts can be injunctive relief, monetary damages, and most importantly in China, a public apology by the loser of the case, who will then lose face in the business community.

Roxanne Christ of Latham & Watkins (they did the deals where Vivendi bought Blizzard and the sale of Club Penguin), mainly reiterated how hard it is for US companies to operate independently in China due to all the regulations, so they have to form partnerships w/Chinese companies or set up entities in China to hold all of the government permits. These complex business structures lead to a lot of legal risk and ambiguity over who owns what or who is responsible for what when legal issues arise.

Jerry Zang from Shanda also gave a talk, mostly about Shanda’s history and business models that they have used. Shanda started out strictly dependent on licenses from other companies at first and was purely subscription based (Come-pay-stay, or CPS in their terms). After going public in 2004, in 2005 they changed their business model to come-stay-pay (CSP), free to play where players pay for in game value added services or virtual property. In 2007, they created their own online platform/portal similar to Steam that hosts all their content available for purchase. Jerry said that Shanda has 3 major plans that currently focus on:
Feng Yun – work with and fund/acquire small game companies & use Shanda’s standard platform to host/operate their games
18 Plan – meet 18th of every month with developers, distributors, in house studios to determine funding, acquisition, and facilitate cooperation between all the parties
20 Plan – Provide up to 20% of total revenue of a specific game to the top performing team every year

Panel on Games and Gaming Litigation
This panel featured several lawyers, each of who had a wealth of experience to relate regarding litigation between developers, publishers, middleware providers, licensors, etc. The main takeaway is that litigation is usually very slow and expensive, so try to build all safeguards and define all rights possible in the respective development, publishing, licensing, etc. agreements. Be specific as possible in the important areas of the agreement, and where that would be too lengthy or complicated, spell it out in detail via the exhibits of the agreement. Including provisions for fast alternative dispute resolution in lieu of legal proceedings was also stressed.

User Created Content-Ownership rights and liability for virtual property created in game by users.
Use EULAs and Terms of Service agreements to:
- enforce developer/publisher rights in the IP
- define relationship as license versus sale/ownership
- define ownership of virtual property
- control user created in game advertising
- define punishment or termination for spammers, cheaters, or those would create liability for the dev/pub via their behavior or virtual property created
- limits users rights/claims
- define authorized activity

Defining the relationship strictly as a license agreement signifies that users have a conditional right to use the software, while the dev/pub retains control and can punish misuse. Sale to the user signifies that they have control and the right to modify, dispose, etc. at their will without recourse from the dev/.pub.
If the EULA/TOS is specified strictly as a license agreement, the license can condition use so that unlicensed use= copyright infringement and thus subject to stronger remedies in Federal court than if it were a violation of a contract covenant. Courts determine whether the term at issue is a condition or limitation, and therefore an infringement, or if it is merely a covenant (usually not involving rights to make copies or resell)

Claims against Publishers and Developers over Game Content are mainly of three types:
Direct infringement of trademarked or copyrighted material – recent rulings have held that incidental use of trademarked/copyrighted characters/material or likenesses thereof are allowed as long as they are for artistic use only and are not used for promotional material, on exterior packaging, or to mislead consumers as to the content of the game.
Violations of right of publicity in celebrity names, images, voices, etc. – California courts (9th Circuit) are more likely to find in favor of celebrities in right of publicity cases. However, even in California, as long as the persona, voice, etc. is used for artistic or nominative purposes only and not for commercial promotion of the game/product, use is generally allowed by the courts
Infringement of trademark or copyright via user generated content – As long as dev/pub is not specifically encouraging or intentionally providing tools by which users can create content containing or resembling trademarked/copymarked material, there is usually considered to be no infiringment. However, if dev/pub or the user is using the content for commercial or promotional purposes, or intended to at some point but could not reach an agreement, then behavior could be seen as infringement.

This entry was posted on Thursday, March 19th, 2009 at 2:43 pm and is filed under Developer Blogs . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.