Franchising in Game Development: Costs, Fees, Licensing

Franchising is a business model in which a company (the franchisor) licenses their trade name, products, services, and operating systems to a franchisee in exchange for an initial fee and ongoing royalty payments. This model can be applied to game development, where a studio can franchise their IP to another company, allowing them to create and sell games based on that IP.

This approach can be beneficial for both parties, with the franchisor benefitting from increased revenue and reach while the franchisee benefits from the established brand and proven business model. Franchising can also be an effective way for a game development studio to enter new markets or genres without significant investment in research and development.

However, it’s important to note that franchising can be a complex and potentially risky business model. The franchisor must maintain the quality and integrity of the brand while managing their relationship with franchisees. The franchisee must also be prepared to adhere to the franchisor’s rules and operating systems, and have a solid business plan and sufficient resources to ensure success in game development and marketing.

Franchising in game development can bring both benefits and risks. Below is an in-depth overview of some of these advantages and disadvantages:

Advantages:

1. Established Brand Recognition: One of the key benefits of franchising in game development is the established brand recognition that comes with it. By using a well-known and popular franchise, game developers can tap into an existing fanbase and enjoy a built-in market for their games. This can help to reduce marketing costs and increase the likelihood of success for the game.
2. Access to Existing Intellectual Property: When franchising in game development, game developers have access to a wealth of existing intellectual property, including characters, settings, and stories. This can help to speed up the development process and reduce the amount of time and resources required to create a new game from scratch.
3. Marketing and Distribution Support: Franchise holders often provide marketing and distribution support to game developers who use their franchises. This can help to increase the visibility of the game and ensure that it reaches a wide audience.
4. Predictable Revenue Streams: By using a well-established franchise, game developers can benefit from predictable revenue streams. The franchise’s existing fanbase provides a level of security and can help to ensure the game’s success.

Disadvantages:

1. High Development Costs: Developing a game based on a franchise can be expensive, as the franchise holder may charge licensing fees for the use of their intellectual property. These fees can add significantly to the development costs of the game, which can make it more difficult for the game to be profitable.
2. Creative Restrictions: When developing a game based on a franchise, game developers may face creative restrictions imposed by the franchise holder. These restrictions can limit the creative vision of the game and prevent game developers from exploring new ideas and innovations.
3. Dependence on the Franchise: When franchising in game development, game developers are dependent on the franchise to drive sales and revenue. If the franchise loses popularity or becomes associated with negative press, this can have a direct impact on the success of the game.
4. Competition: With many game developers using popular franchises, there is often a high level of competition in the market. This can make it more difficult for a franchised game to stand out and be successful.
5. Reputation Management: When developing a game based on a franchise, game developers must also manage the reputation of the franchise. Any negative press or public backlash can reflect poorly on the franchise, which can impact the success of the game.

Franchising and intellectual property

In our previous article, we discussed the transfer of intellectual property from white label development companies to clients. In this article, we will explore how franchising handles the transfer of intellectual property in game development.

Franchising in game development often involves the use of intellectual property such as characters, settings, and stories that are owned by the franchise holder. The franchise holder licenses this intellectual property to game developers in exchange for licensing fees. The use of intellectual property in franchised games is subject to intellectual property laws, including trademark and copyright law. The franchise holder must protect the intellectual property and ensure that it is used with their permission, while game developers must ensure that they use the intellectual property in a compliant and legal manner.

When developing a franchised game, game developers typically enter into a licensing agreement with the franchise holder. This agreement outlines the terms and conditions of the use of the intellectual property, including the rights and obligations of both parties. The agreement may specify the duration of the license, the amount of the licensing fee, and any restrictions on the use of the intellectual property. The franchisee will typically pay the franchisor a royalty fee on each unit sold or a percentage of their revenue. This fee compensates the franchisor for their investment in the intellectual property and covers the ongoing costs of supporting the franchisee.

To maintain the quality and consistency of the brand, franchisors often have strict brand standards that franchisees must follow. This includes using specific logos, packaging, and marketing materials. To ensure that all games produced under the franchise align with the franchisor’s vision, training and support are typically provided to the franchisee, including assistance with game development, marketing, and operations. This collaborative effort helps both parties to achieve success.

While complying with intellectual property laws is critical, game developers must also consider the impact of their use of the intellectual property on the franchise as a whole. This means ensuring that the game aligns with the established story and characters of the franchise and does not damage the reputation of the franchise.

The licensing agreement between the franchisor and the game developer includes provisions for terminating the franchise arrangement. This can occur either by mutual agreement or for cause. The franchisor may terminate the arrangement if the franchisee fails to meet their obligations or if the franchise arrangement is no longer viable.

To transfer intellectual property in franchising for game development, the following steps are typically involved:

1. Negotiations: The franchise holder and the game developer discuss and negotiate the terms of the licensing agreement, such as the licensing fee, duration of the license, and any limitations on the use of the intellectual property.
2. Drafting the Licensing Agreement: The franchise holder and the game developer draft the licensing agreement, which sets out the terms and conditions of the use of the intellectual property. Both parties review and approve the agreement before it is signed.
3. Payment of Licensing Fees: The game developer pays the franchise holder the agreed licensing fee in exchange for the right to use the intellectual property in their game.
4. Use of Intellectual Property: The game developer uses the intellectual property in their game according to the terms outlined in the licensing agreement.
5. Monitoring and Enforcement: The franchise holder monitors the game developer’s use of the intellectual property to ensure that it complies with the licensing agreement. If there is a breach, the franchise holder can take legal action to protect their intellectual property rights.

Both the franchise holder and the game developer must understand their rights and responsibilities under the licensing agreement and the relevant intellectual property laws. This helps ensure that the transfer of intellectual property is successful and benefits both parties.

Successful game franchises

Based on their estimated revenue, these are some of the most successful video game franchises of all time:

1. Pokémon – $90 billion: With over 47.5 million copies sold, the Pokémon Red/Green/Blue/Yellow series ranks as the seventh highest-selling video game of all time. The franchise has also earned a significant portion of its revenue from merchandising.
2. Mario – $30.25 billion: Mario, the iconic character that has been a staple of the video game industry since his inception in 1981, has brought in nearly $15.9 billion for Nintendo with the Super Mario series alone.
3. Call of Duty – $17 billion: The Black Ops 4 title of this franchise alone generated $1 billion in sales, and it continues to gain popularity as a blockbuster in the industry.
4. Wii – $14.808 billion: The Wii, a video game console and a branch of video games in its own right, has attracted novice gamers in a family-focused environment with popular series such as Wii Sports, Wii Play, and Wii Fit.
5. Pac-Man – $14.107 billion: The popular arcade game from the 1980s continues to be a hit, with many throwback titles and new puzzle games still promoting the world-famous pellet-muncher.
6. Space Invaders – $13.93 billion: This classic game from 1978 is still popular every time it is re-released, and its popularity shows no sign of waning.
7. Dungeon Fighter Online – $11.8 billion: This hugely popular South Korean multiplayer “beat-em-up” game, with around 600 million players worldwide, may not be well-known to non-gamers in the US.
8. Street Fighter – $11.279 billion: Considered the most popular fighting-style video game of all time, Street Fighter is known for its movies, games, and crossovers, and outpaces its popular competitor Mortal Kombat by nearly $10 billion.
9. Final Fantasy – $10.656 billion: This critically acclaimed role-playing game series is considered the top RPG among the best-selling franchises and has set a standard that all other RPGs strive to meet.
10. Warcraft – $10.627 billion: This top name in MMORPGs among the biggest video game franchises in the US has been explored by gamers in popular titles like Hearthstone, Warcraft: Orcs & Humans, and World of Warcraft (WoW) since 2004.

Should you consider franchising?

Franchising in game development can provide advantages like utilizing well-known brands, access to existing intellectual property, and marketing and distribution assistance. Nonetheless, it also poses risks such as substantial development expenses, creative limitations, reliance on the franchise, competition, and the requirement to uphold the franchise’s reputation. Therefore, game developers must thoughtfully weigh these aspects before opting to franchise in game development.