Discounted (or Free) Royalties and/or Licensing Fees
A console maker can also choose to lower their licensing fees or royalties to a game developer to make an exclusive game for their consoles. In extreme cases, it might waive any fees altogether.
The effect for a console maker is as follows:
2 million games
“Normal” fees = $8 per game
Expected revenue if no deals or moneyhatting = $16 million
“Discounted” fees = $4 per game
Expected Revenue with deal = $8 million
In this example, the console maker foregoes the additional $8 million in fees, for an exclusive game.
If we assume that the $8 million is “pure profit”, then the console maker is expecting that by foregoing $8 million, it can recoup it through additional (marginal) sales of consoles, games, or any other related items.
In the business sense, this is a logical way to entice a game developer to make an exclusive/timed exclusive game. The console maker does not “lose” any revenue, since ANY GAME is not guaranteed to sell at a particular number.
Business wise, the console maker conserves cash flow with this method, compared to a loan, direct cash payment or even with a guaranteed games purchase.
Out of all those other moneyhat methods, this is the LOWEST RISK for the console maker. However, it also has the potential to have the highest FOREGONE REVENUE, if the game goes on to sell an insane amount of units.
The numbers become greater if the actual license fees are waived (ie. $0 revenue).
The risk to the console maker is that the additional sales of consoles, other games, accessories, etc. may be enough to offset any potential lost revenue. However, one has to consider that without this “exclusive” game, the console maker will not earn any additional revenue anyways.
For the GAME DEVELOPER, the effect will be that they reduce their costs in producing the game. It will conserve their cash flow IF LICENSE FEES are paid at the actual “printing” or “selling” of games, not during their production.
On their financial statements, the Cost of Revenue will be “lower” than normal, due to the lower fees. Consequently, their gross margins would be higher than normal. If the game is big enough to affect the whole company, then it might be noticeable in their financial statements.
For the game developer, this method does not represent any IMMEDIATE benefit, compared to the other methods. The developer still assumes all the risks of game development, including the risk of the game NOT SELLING.
If the game developer is VERY CONFIDENT that their game will sell a lot of units, this method can “save” them the most money – which by definition “makes them the MOST money”.
Example for Console Maker:
Console Maker – discounts fees to $4 (from $8)
Expect to sell 2 million units
Expected Foregone Revenue = $8 million
Breakeven Point on Expected Foregone Revenue:
Consoles = 320,000 units (based on profit of $25 per unit)
Other Games = 1,000,000 units (based on profit of $8 per unit)
Accessories = 800,000 units (based on profit of $10 per unit)
You can see that the console maker should expect to sell those amounts (or a combination) to break even on the expected foregone revenue.
If a console maker does not expect to sell those amounts, then on its own merits, this type of moneyhatting will not justify itself monetarily.
The possible reason to do it (as with other types of “moneyhatting”) is to increase your games library, and keep this game from the competing consoles.
Example for Game Developer:
Expected savings at 2 million units = $8 million
Expected savings at 5 million units = $20 million
Expected savings at 10 million units = $40 million
If the game costs $20 million to make, then at the level of 5 million units of sales, the game developer will have “PAID FOR” the game. All revenues will have effectively been pure profit.
