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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 2 of 2)
Drakkenfyre Dec 24th 2011 10:37AM
The oddballs are the ThinkGeek licenses. A relatively small company is able to get license deals with LucasFilms to create and sell products such as a TaunTaun sleeping bag.
Seriously, it started out as an April Fool's, and the demand was so great, they actually got the license, had them created, and sell them.
I wonder how much they had to pay for that. They have other products that are officially licensed, and they created them.
othragon Dec 23rd 2011 7:13PM
So assuming they have to fork over a percentage of the profit to Lucas, if they happen to have just enough profit to do so, that will unequivocally reflect itself in the quality of released game content... i mean if Blizzard keeps saying their resources are thin and must be directioned to where it really matters, i don't see Bioware being able to make a profit and releasing steady, engaging content every 5-6 months.
Eyhk Dec 23rd 2011 7:34PM
When they talk about resources, they are talking about man-hours. Working at Blizzard is incredibly demanding and hiring/training/maintaining the high-quality workforce is no easy feat, regardless of the amount of money you are willing to spend on hiring. I'm pretty sure the turnover rate of employees is higher than other tech companies, simply due to the sheer amount of work they require.
Money wise, they should be making metric tons of it.
maelwys22 Dec 23rd 2011 8:04PM
With a $50 million licensing fee, $2/sub and 10% cut off the software sales... this could extend their time that the game is profitable dramatically, if not indefinately.
I did some napkin math, and it went from about 6 months to 11 - and that didn't take into account any of their ongoing costs, maintenance, or future development - adding those components in, and you're talking 2 years or more to break even from the initial development cost debt ONLY.
Normally, I like to think that Bobby Kotick really is an arrogant prick without a clue about the gaming community, or the dynamics of the software industry... but in this case, he may just be right.
andrews Dec 23rd 2011 9:16PM
A point that you addressed in your post that is often overlooked as Blizzard complains about what it "can't do" for WoW is that the game is a huge cash cow for them. It would strongly seem that they are not putting most of the income from it back into the game to improve it, but using that for many other things and profit for the company.
Some profit is great and a very good idea, but they need to realize they need massive ongoing investment in the product, licensed or not, to keep people engaged. Making excuses won't cut it and losing a lot of subs will cost far more than the money saved by not investing in challenging content.
This is not to say they don't invest in the product, but I am getting the distinct impression it is nowhere near the income they make off of it. Your post just reinforced that view.
Suzaku Dec 24th 2011 5:23AM
As someone already said in the comments, when Blizzard doesn't have resources for something it's very unlikely that they're referring to funding.
It takes more than money to make a game. It takes a lot of man hours, and a lot of employees. Not just any employees, either. Skilled professionals with experience and a strong work ethic.
Blizzard pays good salaries, has internship and recruitment programs, and always has several positions open.
It's just one of those problems you can't throw money at to fix, especially if you're looking to produce a top-notch product. Short of cloning designers or building a time machine, there ARE concrete limits to the amount of resources you can invest in game design.
andrews Dec 24th 2011 10:59PM
Are you really going to stand behind the idea that Blizzard could not find the people they need? Perhaps they need to pay a higher salary for the positions. The supply of people is not unlimited, but it is not as constrained as you indicate.
It all comes down to dollars and cents for businesses. They decide how much to spend. If they really wanted more people they would spend more on recruiting and such. Most companies always have a few open positions, even those with hiring freezes, so that doesn't prove anything. Turnover happens.
Innovating is far more important than I think many in upper management realize. That tends to happen when you lack serious competition. They do need to keep in mind that other MMOs are not the only competition though.
mrtomhimself Dec 23rd 2011 10:16PM
Wonderful article, I'm anticipating the next one.
bluskreem Dec 23rd 2011 10:41PM
This makes me wonder about the DC Universe MMO. The game features DC's biggest characters, and many of the voice actors that are famous for playing these roles. The licensing fees must be enormous, yet only a few months ago the game went FTP. How can Sony afford this with out hemorrhaging money?
maelwys22 Dec 23rd 2011 10:58PM
DCUO uses the Unreal Engine 3 - just like the average game on the Xbox 360 or PS3. The infrastructure of the game was already in place. That saves all the ground up programming and design creation for a new system.
And it puts DCUO much more in the neighborhood of being a ramped up xboxlive game than a full on AAA MMO.
Encarmine Dec 23rd 2011 11:04PM
I can't take credit for the brutality of your childhood Lirdan, I haven't been on the brand long enough. There are however, some insanely talented designers who HAVE, going as far back as the Kenner days...those guys are legends (men who literally invented the 3 3/4 action figure during the oil crisis in the 70's).
Drakkenfyre Dec 23rd 2011 11:19PM
Want to know something neat? Gene Roddenberry has in his contract the clause that if anyone were able to invent a technology from Star Trek, they would be able to use the name. So if you were able to invent a Phaser, or a Tricorder, you could legally use the name, and he had no problem with it.
This has already been used once. A Canadian company invented a sensor device that measured light, temperature, EMF fields, color and more. They decided to market this as a Tricorder, called the Mark I (the Mark VII was the one currently in use on TNG at the time) but they went the whole hog, and got a license for Star Trek, and did it up with LCARS-style graphics. It wasn't quite as advanced as a "real" Tricorder, but the company basically said it was a "starting step". At $300 a pop, they didn't make many, and they closed a few years later, but even without the license, they would have been able to use the name.
Even after his death, this clause still keeps the option open. If you can create something from Star Trek, you can use the name.
Compare this to Lucas, who has gone after people for using "Droid" (the Droid phone actually has a license to use the name, from Lucas) and a medical company who marketed a laser scalpel as a "light saber".
This isn't an anti-Lucas rant, I like Star Wars, too, but Gene Roddenberry was far more leinent in his IP.
Bossy Dec 24th 2011 8:13AM
To the OP !!!Great article but also some serious errors in the calculation set up.
Revenue = NOT simply a matter of calculating the END price of a product * numbers.
For instance the author says $ 14.99 times X = ... for the subscriptions. The problem is that the paid subscription cards bring in only around $10 for each subscription card sold.
So the revenue of say 2 M subscriptions of which 50% depend on subscription cards is only 25 $M dollars per month instead of 30 $M.
In regards to the basic box sales of a game at least 40 % is lost due to distribution costs and retail.
So a game that sells 1M copies at 60 dollars, has a revenue between 30-40 M dollars instead of 60 M.
2. Revenue is not profit (of course). Mostly the gross revenue/profit ratio is around 80/20 %.
3. From what we know Lucas The Hutt gets a 30% cut on all gross profits from SW TOR.
So I made a calculation about the "business model" of EA's SW and it doesn't look great at all. I won't go into the detailed calcsn but ...
In the assumption SW will sell around 2.5 M copies at 60 dollars retail ($ 40 + retail and distribution), that would make for: $ 100 M gross revenue.
If the game would have 1M subscriptions for 6 months long (doubtful), the gross revenue would be $ 60 M coming from subscriptions.
On a yearly basis at 1 M subscribers this would come to a global gross revenue of $ 120M.
With a 80/20% turnover/profit ratio and the fact of sustained support for a game with 200+ servers, , it would mean SW TOR will have until the beginning of 2013 to begin making profits if the rumours are true the production, launch and marketing took over $200 M dollars for this game.
Now that's a VERY long period, IF they can sustain 1 M subscriptions throughout the coming year. If ANYTHING happens to the subscription based markets, ... they are screwed.
Now here it comes: the average retention rate of subscription based MMORPG's is far less than 40% over the first 6 months.
I think launching a subscription based game these days - with a huge franchising scope AND development costs - that will HAVE to make 1 M subscriptions for a full year before taking profits - is a VERY dangerous operation.
You know there is a reason why Bob Kotick took an ailing Activision in 1994 at 40 million dollars and let it grow to 4.3 billion yearly revenue. ... The estimated worth of Activison Blizzard is estimated now to be around 13.5 billion dollars these days.
Not bad for an "idiot" I guess.
This is all about economics, NOT a thing to be calculated by gamers.
amkosh Dec 25th 2011 3:37AM
I'm sorry, but there are several things here.
1) EA has gone on record to say that if TOR passes the 500k mark, they will be profitable. That's their "desired" mark.
2) Typically games try to make the development cost back from the box cost. Until NPD releases sales numbers, its impossible to know for sure, but the estimates I saw said anywhere from 1.5 to 4 million copies sold. We know that there are 1.5 million subs at the moment, and considering the fact that we're just 5 days in from launch, that's kinda nuts. With 30 days of free play, its very likely the sub count will be much higher. In any event, its very likely that the vast majority of the production cost is already paid for.
3) The profit to revenue ratio is not what you said. It is much much higher with MMOs. It boils down to economies of scale. I have heard people say that WoW enjoys a 50% or so net profit margin. Obviously TOR isn't going to have that, but if its not a large cash cow for EA, I will be shocked.
4) The 30% number is useless. My understanding is these licensing agreements are tiered and can have front payments. There's also likely incentives as well. BK is used to making failing Star Wars games, not successful ones. Given Bioware's success with KOTOR, I would be surprised if the agreement wasn't more friendly towards Bioware.
5) I don't see TOR in much danger. Even if EA only retains 40% of the current subs they'll still exceed their own internal expectations. They may take a hit from Wall Street, but that's not as simple as ATVI, as EA is more divested. Its likely the NBA lockout will hurt them more than if TOR were to only hit 600k subs. However, I predict that by the 1 year mark, you will see TOR at between 3-4 million active subs.
6) On the other hand I do see Blizzard in some danger. The annual pass does give them some security, but come October of next year, that will evaporate. Either MoP will have to be amazing, and more so than TOR, or 2012 could be a bad year for ATVI.
Encarmine Dec 24th 2011 8:14AM
Mega, While that may be as much fun for me as for interested people, I unfortunately can not say much more about what I do, other then I do it. Reading Matt's article you can imagine the money involved in such brands creates a high level of sensitivity to details and a need for nondisclosure. However, you can all smile knowing we do try listen to you all, are inspired by your enthusiasm in all that we do, and that we are all very much a part of the fan culture we attempt to cater to with our product line.
LivesUnderBridge Dec 24th 2011 9:51AM
Yeah, but what about all the licensing money that Blizzard pays to Games Workshop to license the Warhammer setting? Doesn't that kill Blizzard's profits as much as the Star Wars license does to Bioware?
Drakkenfyre Dec 24th 2011 12:20PM
There is no paying for licensing the "Warhammer setting", nice attempt at a troll. While it's true Blizzard started out working on a Warhammer game years ago, then Games Workshop decided to make the game themselves, Blizzard does not use the Warhammer universe or setting. That's like saying LOTO needs to have a license for using standard fantasy stuff outside of the setting of the books.
Bossy Dec 24th 2011 3:03PM
What a bunch of crap about this Warhammer TT copy.
There is ABSOLUTELY NOTHING that proves this theory that Blizzard worked on a Warhammer kind of game. EVER.
What IS correct is that CEO Mike Morhaime and Co played Dungeon and Dragons at school and High school. And they derived a lot of that game. Morhaime admits that he played D&D (just like everybody else in the late 70's/ 80's who were interested in Fantasy gaming (made by Gary Gygax)).
BTW the first miniatures fantasy game was invented by the same Gygax back in 1973 and was called "CHAINMAIL". Chainmail was the miniatures branch of battle of D&D. That was more than a DECADE before Warhammer miniatures was even born and had orcs, goblins etc LONG before Warhammer.
The complete MYTH that Blizzard was working on a Warhammer game was launched back in 2005/2007 by the Bioware/EA crowd to justify they would launch the "real MMO" against WOW based on Warhammer.
There is NO PROOF to be found that both Games Workshop or Blizzard had ANY talks about the franchise and frankly... it is one of those BIG internet lies that keep popping up on forums. It is enough that one crazy fool mentions it on a website and it can be considered a source.
Just ask Morhaime or the Directors at Games Workshop: such talks were never made.
It is the result of smart marketing of the old Mythic/EA and to this very day people still believe this myth spreading.
Bossy Dec 24th 2011 3:07PM
Edit: correction I should mention Mythic/EA as the companies behind Warhammer on line, not Bioware/EA like stated above (but you can't edit these posts).
amkosh Dec 24th 2011 7:55PM
Lucasarts is likely making bank from TOR, but then so is EA/Bioware as well. Kotick doesn't realize that every company that Lucasarts works with gets different license agreements, and typically if your product does well, your next agreement is more advantageous to you as the license holder has more of a "sure" thing. Actually I think its more that Kotick is an ass as opposed to being stupid.
One other thing about licensing, think about Warner/TT and Lego Starwars. They're paying two license holders and they're still insanely profitable. I doubt you'd see so many Lego X games if they weren't.
I think that unless TOR dies down pretty quick, it will have a ton of momentum, and that has to have Kotick worried.