Post on 01-Jan-2016
My Royalty Report
Says
I Owe How Much?
The hard part’s done... right?
You’ve pitched the product and beat the competition Negotiated the deal Developed the game
Which cost more than you thought, so the margin is less
Checked the review scores and smiled Seen the game published and smiled Received the first royalty report, and…….. Wept!
Welcome to our world!
Royalty accounting has become a major undertaking, complicated by
The growth of the industry More data to capture Millions of dollars, millions of units, dozens of territories Online and mobile gaming
Non-standard publishing and development deals Standard royalty reporting formats by publisher
So squeezing non-standard data into standard reports Merger, acquisition and bankruptcy of developers and
publishers alike Legacy accounting systems forced into an Excel spreadsheet
Publishers aren’t thieves!
Almost all the publishers MF audits strive to do well The royalty staff who work for them are not personally motivated
to deliberately defraud the developer Honest people trying to do a competent job Under-investment in accounting systems
There are exceptions Some publishers are less rigorous and accurate than others Royalties are a cost centre item and will be controlled like any
other cost – especially when cash is tight
Developers historically don’t push hard enough for what’s rightfully theirs
What is a royalty report?
A quarterly review of a title’s performance Calendar quarter reporting, but not always calendar quarters
reported E.g. December – February reported as Quarter 1, with the royalty
report being received 45 - 60 days after the quarter end. Cash flow effect means that royalties on sales made in December will
be paid to you in mid-May. Royalty report
Percentage of net receipts, however defined Fixed $ amount per unit
Distribution report Share of net income/profit of the game More complex analysis
The developer challenges
Every publisher has a different reporting style More than one publisher = numerous reports One style to accommodate numerous different contractual
requirements Lack of detailed information on the report Lowest common denominator information provided
Less work for the royalty accountant Less information = fewer questions In-house ability to interpret the information
Reporting styles change over time Systems changes Acquisitions and Mergers
The wish list
Detail the information requirements in the contract Include a royalty report template in the contract Get as much detail as possible
Sales units, gross revenues, returns units, returns amounts, price protection, net sales units, manufacturing costs, marketing spend and any other deductions……….by country
Whatever the contract specifies, make sure the detail is on the report.
Reject the royalty report if it doesn’t match up Ask questions – and don’t give up.
What can you do?
“Do the math” Publishers’ staff do make mistakes
$$ millions invested in SAP and Oracle and the royalty reports are put together on………….Excel!
People mess with the formulae on the spreadsheet And then they quit!
Check the column totals Check the brought forward numbers Check the percentage calculations Check for sub-licence and bundle activity
Especially if you’ve seen the products in store or on the web
What can you do?
“Do even more math” Divide gross revenues by gross units to get gross revenue per
unit New full price release should be minimum $30
Net sales units and revenues as a % of gross Top titles net sales usually > 85% of gross sales
Manufacturing costs PC CD < $1.50 Videogame <$9.00
If you can’t do the checks – hire someone who can
Outcome of actual games industry reviews
Understated sales revenues Overstated manufacturing/distribution/marketing costs
and other deductions Transposition errors onto statements Overstated bad debt provisions Incorrectly calculated and held retentions Inappropriate low price selling activity Weak consolidation activity by HQ
Understated sales revenues
Generally, revenue reporting is accurate Sales invoicing systems for sales to retail are the most robust Online and mobile gaming – different challenges
Errors and omissions of non-routine sales Rental income from Blockbuster and others Sales in new territories, missed off report Sub-licence, OEM and bundle activity not captured
Overstated deductions
Deductions may include Manufacturing (cost of goods) Distribution Marketing and MDF
Standard costs applied at the start of the deal Always err on the side of the publisher Rarely updated for actual cost unless audited Beware publisher inclusion of a percentage for their own staff
costs
Always seek support for marketing and MDF spend
Transposition errors
Not all publishers’ systems are “joined-up” i.e. sales and other data sources feeding directly into the royalty
report
Royalty report compiled by taking numbers from different reports and sources
Human error can and will happen And errors can go both ways!
Overstated bad debt provisions
Again, publisher will always be conservative i.e. they will over-provide initially, say, a “standard” 2.5%
Most publishers have actual bad debt of 1.0% – 1.5% A minimum of an extra 1% of revenue is being retained
by the publisher, which goes straight to their bottom line A 1m unit seller will have revenues of say $25m
1% over-retention is $250k A 15% royalty would mean you are owed $37,500
Only an audit would expose this over-statement
Retentions wrongly calculated and held
Provisions for returns and price protection i.e. a “standard” percentage of net revenues Usually 10% - 20%, released 3 – 12 months later
Beware Retentions at different rates to the contract Retentions not being released as actual returns and price
protection incurred Retention reserves wrongly carried forward
Simple transposition errors
Inappropriate low-price selling activity
Sales at low revenues per unit Particularly if soon after release Publisher moving inventory of poor-selling titles by mixing with
better titles at low prices Sales guys struggling to make targets at quarter end
Sales to European distributors at lower than US prices Affects European sales adversely
Sales to rental chains Low initial sale price augmented by rental income share Check the rental share is reflected
Weak consolidation activity by HQ
All territories’ results consolidated at HQ Forced into a standard spreadsheet
Scope for errors in Exchange rates used - $ counted as € “New” territories overlooked and not consolidated Simple addition errors if not computerised Deal format not reflected in standard spreadsheet
Too much human intervention Lack of continuity when someone leaves
So why should you audit?
A standard business practice Especially in the music and movie businesses Royalty auditing now accepted by publishers as a business
exercise An audit is a contractual right – enforce it
Good corporate governance When you suspect an error
Sell-through data doesn’t tie with royalty reports The math poses questions and you’re not getting answers When the publisher is uncooperative generally
For peace of mind It’s good to know you’re not being paranoid!
What do you need to do?
Make sure you have audit rights No, really…….you’d be surprised…….! Time expiration of audit rights Audits only permissible during certain months
Be organised Contracts (signed copies of originals) All royalty statements Amendments
Contractual, email or verbal amendments need noting Timely responses on questions during the audit
You audit, then what happens?
MF has always found inaccuracies Almost always in the developer’s favour
Two publisher approaches “You’re absolutely right, we’ll tighten up our systems and send a
cheque immediately” “So sue me”
A negotiating tactic to reduce the exposure and buy time Publisher will plan the “hit” into the next quarter in order to hide it Will not say, “Earnings lower than forecast due to errors in royalty
accounting”
Be prepared to go the distance
Summary
Royalty accounting is complex – a specialist area Little standardisation within or between publishers Numerous areas and scope for errors to be made Systems are lacking, not publishers’ integrity Review and question your royalty reports Audit as a matter of routine
It’s not personal, just good corporate governance Third party shareholders will expect it
As an absolute last resort, be prepared to sue
Media Forensics Ltd
Thank you for your attention We look forward to discussing individual
requirements at your convenience
Tim Christian Mobile + 44 (0) 7768 883808
Email tim.christian@mediaforensics.com Faye Sieracki
Mobile + 44 (0) 7971 966119Email faye.sieracki@mediaforensics.com