How much is a brand name license worth?
by Mathew McCurley 
Dec 23rd 2011 at 5:00PM
Back at the beginning of the year, I wrote a piece for The Lawbringer called The power of licensing, including a brief account of what licensing is and what effects and benefits licensing your product has on brand recognition and where you make money on your product. Licensing is essentially granting someone the right to make and sell stuff with your intellectual property on it. Usually, you're not allowed to sell "stuff," in the loosest sense of the word, with images, artwork, characters, and so on that are not yours. Ownership rights are a little weird to grasp.
Back in November, Activision Blizzard CEO Bobby Kotick made some comments before the launch of Star Wars: The Old Republic concerning whether the game would be profitable at all, given the amount BioWare is paying to Lucas for the rights to even make a Star Wars game. Kotick's comments rang a very special bell in my brain, prompting me to think about the licensing contract that BioWare and Lucasfilm have over the Star Wars franchise, as well as the reverse Blizzard model in which the entire franchise is owned in-house.
George Lucas was a pioneer in the realm of movie merchandising, keeping the rights to all of the Star Wars characters and creating one of the most profitable toy and promotional brands in the history of entertainment. The Star Wars franchise is so incredibly far-reaching and part of our society that my younger brother knew that Darth Vader was Luke Skywalker's father years before he ever saw the movies. He was, however, very surprised at the whole Luke and Leia sibling deal. The reach, power, and control that Lucas exerts over his licensee partners is second to none.
An expensive proposition
With the release of Star Wars: The Old Republic and the Star Wars brand back in the gaming spotlight for a little while, a lot of money is going to be made off of lightsabers, the Force, and everything else under the Star Wars banner. It's expensive to be able to slap the Star Wars logo on your stuff, considering the massive audience that comes with it. Lucasfilm and Lucasarts also develop and create their own products, but when companies team up like BioWare and Electronic Arts did to fight for the Star Wars franchise, the license went outside of the Lucas world. I'm not sure of the story, about who pursued whom for the project to create The Old Republic, but it was a massive deal nonetheless.
World of Warcraft is a wholly owned Blizzard property. StarCraft and Diablo are also under that wholly owned banner, making the suite of Blizzard universes entirely under Blizzard's control. If you thought that WoW and StarCraft were big brands, Star Wars is the monolith in the room that all other franchises look up to and wish and hope that one day they can even walk the same path as.
As owners of its property, Blizzard has the ability to license out its characters, logos, names, merchandising, and everything else that is derivative of its products. T-shirts, key chains, FigurePrints, the Trading Card Game, board games, books, officially licensed peripherals ... someone bid real money to Blizzard in order to be granted licensing rights to make products bearing the Blizzard name. Blizzard's revenue stream, with respect to the licensing of its original products, is all gravy because it's essentially free money. The costs of intellectual property come from filings, protecting your intellectual property, and developing new, potential revenue streams with that IP.
Bobby Kotick's complete quote was as follows:
"Lucas is going to be the principal beneficiary of the success of Star Wars," he argued. "We've been in business with Lucas for a long time and the economics will always accrue to the benefit of Lucas, so I don't really understand how the economics work for Electronic Arts."What Kotick means by Lucas being the principal beneficiary of the success of The Old Republic is that there are most likely clauses in the license agreement that give percentages, points, or another denomination of revenue out to Lucas and his people just for the Star Wars name, and that amount is presumed to be a great deal of money. Kotick is saying that because the cost of the license is so prohibitive, as he has personally had experience with in his position as CEO of Activision Blizzard, that EA will not be able to be profitable because of the hemorrhaging of money to the licensor.
While owning your own property reaps some of the best benefits -- namely, freedom to do what you want with what you own and little cost associated with just having your property -- licensing a big-name franchise can offset the cost of paying for that franchise. Are we to believe that the cost of the Star Wars license for an MMO that will be run on a subscription model and most likely perform better than any AAA MMO title in recent years will not be able to turn a profit?
Let's pretend World of Warcraft was not owned by Blizzard. Let's pretend, instead, that World of Warcraft -- Thrall, Varian Wyrnn, the whole thing -- was owned by the Hasbro toy company. Now imagine that for every subscription to the game, Hasbro wants $2 from each and every subscription to use the World of Warcraft license. That seems like a ton of money, doesn't it? Your profits are already slashed by a crazy margin, with two-fifteenths of your total revenue going to a company who just lets you use its names and properties. Sounds like a pretty crappy deal for Blizzard, right?
The brand name gamble
Well, maybe. There's also the matter of 10 million subscriptions at $14.99 a month. Shave off the $2 per sub, and that's still about $129 million in just subscription revenue per month. I would guess that World of Warcraft requires far less than $1.5 billion a year to run. Of course, everything from the T-shirts to toys require a licensing contract and payouts to the right people, but you can understand the drive of a big brand to bring in the big bucks. Even with the costs associated with paying for the license, a game with 10 million subscriptions makes money hand over fist, regardless of costs.
How about we engage in some completely speculative math? Let's say that after a year, SW:TOR now has 1.5 million steady subscriptions and has leveled off, with players paying $14.99 a month. For one year at 1.5 million subscriptions, BioWare and EA rake in $22,485,000 in gross income per month. Per year, we're looking at a cool $269 million gross from just the subscription costs. How much would the licensing rights be worth for this kind of cash? If Lucas charged $50 million for the rights to use Star Wars, wouldn't it still be worth it? At $50 million, yes. At the real cost that this deal really transpired at? Oh, I would love to know ...
Betting on the brand name to bring in the playerbase is a risky move, because hundreds of millions of dollars are on the line. I understand what Kotick was saying, because we're talking gross revenue here. After the licensing costs, paying the employees who created and currently run the live team, and everything associated with facilitating a AAA MMO are steep. Development costs have been said to have hit well over $200 million for just the game. Maybe Kotick was right. These costs are piling up...
Was it the right move? Well, yeah, definitely, at this very moment. The Star Wars license is too good to pass up, no matter the cost. Next week, we'll continue the discussion of licensing with relation to WoW and SW:TOR and talk about what is really going on when a company decides to make some merchandise with its characters and IP and how much of the real money made doesn't actually come from the subscriptions (in WoW's case, at least).
See you guys next week.
This column is for entertainment only; if you need legal advice, contact a lawyer. For comments or general questions about law or for The Lawbringer, contact Mat at mat@wowinsider.com.
Filed under: Analysis / Opinion, The Lawbringer
Reader Comments (Page 1 of 2)
Randomize Dec 23rd 2011 5:14PM
Having the Star Wars IP back up their game was a big boost to Bioware's game, no doubt about it. Even if it was the best game ever made, it would not be easy to break into a saturated market without a big franchise behind it. Kotick was and still is an idiot for making such a stupid comment. He damn well knows that if Activision had a chance to pick up such an offering it would do so in a heartbeat.
shatnerstorm2 Dec 23rd 2011 5:47PM
I think "idiot" is a bit harsh. Judging from his comment, Kotick didn't say that TOR wouldn't be profitable; he simply was *implying* that after Lucas' cut and the development costs, he "wasn't sure how the economics would work", i.e, it would be difficult to make a profit from his point of view.
Of course, all of this depends on exactly how big Lucas' cut was from TOR, but I think Kotick's point was that putting "Star Wars" on your product isn't cheap. Whereas with Blizzard, their games are essentially 100 percent profit for them because they own all the licensing rights.
emberdione Dec 24th 2011 12:57PM
Considering Kotick is a Moneyball fan, I doubt it. That is exactly the mentality he is applying here. 1.5 million subs where he keeps all the money is better than 2 million subs where he has to share it. Also the point is, we don't know the share breakdown. It could be 2 dollars, it could be 7.50. Lucas has some pretty nasty lawyers on his side.
Encarmine Dec 23rd 2011 5:21PM
As Senior Designer of Star Wars at Hasbro Toys, and avid WoW player, I found this article VERY close to home. Thanks for explaining the chaos of reality to the rest of the class.
Mathew McCurley Dec 23rd 2011 5:27PM
I don't think I'm more interested in anything more than I am about licenses.
Gendou Dec 23rd 2011 5:53PM
Encarmine: I do not envy you that job. Trying to balance the realities of toy design (design, manufacturing, costs) with one of the more obsessive fanbases out there must be frustrating.
I'm sure it's rewarding as well, but still...
Iirdan Dec 23rd 2011 6:05PM
@Encarmine: So YOU'RE the person I have to "thank" for all these bruises inflicted by Jedi younger siblings!
Mega Dec 24th 2011 7:21AM
You should totally do a AmA( AskMeAnything) over on reddit.com/r/IAmA/ I think a ton of people would be interest in what you do.
jordan Dec 23rd 2011 5:36PM
Blizzard's reply to Uwe Boll's request to the WOW movie rights:
"We will not sell the movie rights, not to you... especially not to you,"
Encarmine Dec 23rd 2011 5:39PM
There may yet be a future for you in the business! Consider how corporations such as Disney, and Hasbro (now self titled in recent years as: "The Licensed Play Company"), are positioning their futures in building strong IP's. In only the last couple years Hasbro has turned IP's like Transformers, G.I.Joe and Battleship into major motion pictures with a massive partnership with Paramount, and started a joint venture television channel (the HUB) to further showcase brands such as My Little Pony, Strawberry Shortcake and Family Game Night. Company's are now using their brand's to expand the scope of their business, as well as break into international markets, by following the same business model's that made Star Wars the success it continues to be. The world gets smaller everyday, and these strong IP's help company's to bridge the cultural divides as they expand their business across the globe.
Gniver Dec 23rd 2011 5:42PM
Licences bring another problem: cancellation. When you buy a big licence you have to pay regardless of the game's success. This means that if the game isn't a big success right away the licensee must cancel in a hurry. The same if the game starts to do so-so business for a period.
But MMO's are a long haul business. If the customers fear that the characters that cost so much time and effort will be deleted and the game they bought unplayable, they will keep away. A licensed MMO could have a real rapid death spiral.
perderedeus Dec 23rd 2011 6:03PM
Naturally, licensing IP is going to cut into your profits. I would say Bioware made a mistake if and only if the IP wasn't particularly powerful... but Star Wars? It is a powerhouse. Let us also remember that Bioware has been responsible for making two very popular Star Wars adventure/RPG games, strengthening their hold on the genre and their capabilities with the IP. If Lucasarts went it alone, sans Bioware, I doubt they would have anywhere near the same success... perhaps initially, but long-term?
Of course, we'll have to see if even this Bioware-backed MMO will have long-term success. I can say this... I'm savoring it, and enjoying it immensely. It's just what I needed to break a 7 year stint of WoW. I like that there are story elements crafted for my experience alone, but also multiplayer options a-plenty for when I want to partner with fellow players.
Yar Dec 23rd 2011 6:13PM
FILM HISTORY BUFFS LISTEN UP\
First error in this article is to say that George Lucas "kept" the rights to the sequel to Star Wars. A little know fact is that this was a LEGAL CONTRACT ERROR by the lawyers at 20th Century Fox. After the first Star Wars film was such a big Box office draw. all Fox could do is fire a few lawyers and be real nice to Mr. Lucas. EVERY contract a major writes when they fund a film contains a sequel rights clause. They just left it out by mistake. So we are talking about a multi-billion dollar error.
Having a screenwriter put in charge of everything led to some real problems. More importantly, Fox hired Barry Diller after that and he fired everyone AND I MEAN EVERYONE that had any knowledge on how to make film unless their specific department was way in the black. Craft departments were shutdown wholesale. So Mr. Lucas got all the money from the sequels and everyone at the film company got canned because of a legal contract error.
Kind of comparable to FOX's film Cleopatra [Elizabeth Taylor; Richard Burton] that cost so much money to make it could not possibly take in that amount at the box office and THAT forced FOX to sell all of Century City, which used to be 100% Fox's backlot. Only darrly Zanuck coming in with the film "The Longest Day" , and his subsequent work saved Fox. The Zanuck sound stage at Fox is still where many films are mixed today. I was privileged to meet the head mixer many years ago Don Bassman [Hunt for Red October], who died later from cancer. he survived the "Diller firings" because he was in such high demand to mix films, he got paid a million dollar mix fee. Sound is half the film and producers were willing to pay anything to guarantee the film came out right.
In short. Film companies tend to go from one disaster to the other. At this point in time they are 99% merely a distribution hub. That they are good at. Film Production... not so much.
icepyro Dec 23rd 2011 6:36PM
So it is a mistake to say Lucas kept the rights because a common business practice was not employed and this contract error allowed Lucas to keep the rights? That aside, I almost wonder if he casually changed the contract to exclude that and change something else, allowing him to have to get fresh signatures and Fox agreed with that other change, not realizing the omission of the sequel clause.
Either way, Lucas has made so much money that to even look in his direction for licensing will cost you, so regardless of the reason he has a stranglehold on his IP, he does have said stranglehold.
Junglebabe Dec 24th 2011 2:13PM
I thought Lucas took the money from Episode IV to build "Industrial Light & Magic", which he used to do the special effects for episodes V and beyond.
Also, Lucas personally canvassed film production companies to find one that would give him exclusive rights over everything about the brand name. Fox just happened to be the sucker.
Dan Dec 24th 2011 4:46PM
While it is standard to have sequel rights clause, you should bear in mind that this wasn't the case in the 70's. Jaws and then Star Wars literally invented the concept of a "blockbuster film." After the end of the studio system, Hollywood was in it's post-classical, "American New Wave" era, which was defined by alternative, auteur-istic film making with very little focus on franchising or building brands. Rather, directors focused on making movies that were stand-alone artistic vehicles. This era lasted from the late 60s until the end of the 1970s. While it's easy to look back and realize their mistakes in hindsight, studios had very little, if any, experience developing a film as an intellectual property instead of just a movie. Here's an excerpt from wikipedia:
"In retrospect, Jaws (1975) and Star Wars (1977) marked the beginning of the end for the New Hollywood era. With their unprecedented box-office successes, Steven Spielberg's and George Lucas's films jumpstarted Hollywood's blockbuster mentality, giving studios a new paradigm of how to make money in the changing commercial landscape. The focus on high-concept premises, with greater concentration on tie-in merchandise (such as toys), spin-offs into other media (such as soundtracks), and the use of sequels (which had been made more respectable by Coppola's The Godfather Part II), all showed the studios how to make money in the new environment."
Those two, "unprecedented" (read: without precedent) films changed the way the business worked and how they made money. What's not mentioned is that these films also pioneered wide release patterns, making a national film release a viable option to turn profits.
On the original topic. When the World of Warcraft novels are written, are they done so as just a work for hire, with Blizzard taking responsibility for publishing? Or are the rights acquired by the author/publisher independently and royalties are paid through them?
James Dec 23rd 2011 6:38PM
LucasArts will net about 35% after EA recoups their costs.
http://www.eurogamer.net/articles/2011-11-30-lucasarts-to-take-around-35-percent-of-old-republic-revenue-report
It's not a bad deal. Of course, it won't be anywhere close to WoW numbers until they pull off some miracles. But they should enjoy a nice profit, especially since EA will get to cover costs with 100% of profit before they split the pie.
Eyhk Dec 23rd 2011 7:26PM
If they did actually make a deal where the Lucas cut comes in AFTER return on investment, that is an incredible deal. I was actually thinking more in line with 'huge up-front amount regardless of profitability, along with a sizable chunk of subscriptions'
Rhüarc Dec 23rd 2011 10:34PM
@Eyhk
Yeah, I can't remember any links off the top of my head, but I do remember reading in several places where it was reported that, thanks to some contractual magic, LucasArts gets 0 money until Bioware recoups their investment costs on making the game.
So LucasArts is taking a huge gamble, just as huge as Bioware if not bigger, in this venture. Until Bioware breaks even on SW:TOR, LucasArts sees 0 money.
If SW:TOR flops, LucasArts sees 0 profit from the game. Though I highly doubt SW:TOR will flop. I was in the Beta for TOR, and I also played SWG. SWG sucked majorly compared to TOR, and look how long SWG limped along.
In the end, I don't think SW:TOR will be WoW-killer, mainly because it's a totally different game (different genre, different playstyle, different themes and storylines, etc.) than WoW. But I do see TOR having the potential to be a major player in the MMO scene. And it is because of this potential that I see Bioware making a ton of money off of this license agreement, even after LucasArts takes their cut.
icepyro Dec 23rd 2011 6:59PM
With Lucasfilm, anything you are allowed to license is go big or go home. Yes, you get the blessing of instant audience, but you pay so much for those rights, it is difficult to be profitable unless you are well prepared. I feel BioWare is up to the challenge, and it will be very interesting to see how this plays out. I hope it sticks around.
I can understand Kotick's comment very well. It is difficult enough to launch successfully if your marketing game or timing is off. Blizz and Valve are both notorious for being good at neither of those (particularly timing) when it comes to launching new content. If they had to pay for rights like BioWare is doing, it would take some serious theoretical math style accounting to cook a profit from those books for the first year or so. On the other hand, BioWare keeps gradually earning my respect, so it may just be the company to pull this off.