Rusty G. Weiss
Partner, Sidley Austin LLP
Email: rweiss@sidley.com
"Rusty" Weiss is a partner in the firm's Century City office and a member of the Technology and IP Transactions practice and Media and Entertainment industry group. Rusty represents clients in the media, entertainment and technology industries on complex transactions with a particular focus on transactions involving the convergence of entertainment and technology.
Maria A. Abesa
Associate, Sidley Austin LLP
Email: mabesa@sidley.com
Maria has experience representing companies and private equity firms in mergers and acquisition and a variety of corporate matters. She is a member of the Global Finance, M&A and Private Equity practices.
Video game subscription models have been successfully implemented: PlayStation Plus, EA Access and Origin Access have all found some degree of commercial success. Cloud gaming, on the other hand, has much less of a proven track record.
But what is cloud gaming, exactly? Where a subscription model is a method of paying for games, cloud gaming is a method of playing games. In a nutshell, cloud gaming moves game processing from the player's hardware to off-premise servers (i.e., servers in the "cloud") provided by the cloud gaming platform provider. The player accesses the cloud through a thin client, such as an internet browser. The player's inputs are transmitted to the cloud, which performs the computations and streams back the resulting gameplay. This constant exchange of inputs and resulting gameplay mimics the traditional gaming experience -- except without the need for downloads, installation or hardware on the player's end.
Cloud gaming isn't entirely novel. Industry leaders have piloted cloud gaming platforms for years. However, the technology has failed to gain much traction primarily because internet speeds haven't been sufficiently fast and processing power hasn't been sufficiently strong. Judging from this year's Electronic Entertainment Expo, 2019 might be the year cloud gaming surges to the forefront because many industry leaders such as Google, Ubisoft and Electronic Arts have announced their plans to launch cloud gaming services.
Blessing or Curse?
Cloud gaming appeals to video game publishers and owners because streaming obviates the need to put a copy of the software in the hands of players. Thus, it functions as a barrier to piracy and allows video game publishers to retain control of game content. The appeal on the players' side is hardware agnosticism -- i.e., they will not need to buy consoles or high-spec gaming PCs, nor will they need to worry about next-generation hardware upgrades. Players will also have the ability to switch from device to device when playing (analogous to seamlessly moving from a television to a phone while streaming videos on a service such as Netflix). Should platform providers adopt a subscription model, paying a single subscription fee for access to multiple titles may also appeal to players, as will freedom from hacks, cheat codes and other exploits that may spoil the gameplay experience.
Along with this potential comes important commercial considerations for the platform providers. Too much fragmentation may lead to the inability of any given platform provider to develop a critical mass of players or games and create a self-imposed marginalization. Video streaming services may be headed down this path because movie studios and television networks are about to launch their own streaming services and have elected to pull content from the existing streaming services so that they can exclusively include such content on their own streaming services. Price-sensitive players may be unwilling to pay for multiple cloud gaming services, forcing platform providers into price competition.
Key Legal Documents
As important as the commercial considerations are, platform providers and video game publishers need to pay close attention to the legal considerations as well. The legal framework of cloud gaming will be the product of the following four key documents: the publishing agreement between the platform provider and the video game publisher; the terms of service that governs a player's use of the cloud gaming service; the privacy policy that governs the use of data obtained from the player's use of the cloud gaming service; and the end user license agreement between the video game publisher and the player.
Business and Legal Considerations
Platform providers and video game publishers must consider several key business and legal points when negotiating the publishing agreement. The following is a non-exhaustive list of these key business and legal considerations: scope of the license grant; key financial terms; data collection, ownership and use; service levels; marketing commitments and activities; limitations of liability; ongoing development obligations; customer support obligations; and source code access. This article provides a cursory overview of these issues. In-depth industry knowledge coupled with intellectual property and commercial law expertise is necessary to properly navigate these business and legal considerations.
Scope of License Grant. The scope of the license that the video game publisher grants to the platform provider should address the following questions: What is the term and territory of the license grant? Should the license grant be exclusive and, if it's exclusive, how is exclusivity defined and does it apply to the video game publisher? Does the license grant apply to new versions, sequels, prequels and/or spinoffs of the licensed game? May the platform provider use third parties to exercise the licensed rights on its behalf?
Key Financial Terms. Several factors must be considered when negotiating the key financial terms. In particular, the manner in which the video game publisher will be compensated for having its game on the cloud gaming platform will depend on several factors such as: Will the player pay a one-time fee to gain access to a game or does the player pay a monthly subscription fee to gain access to the cloud gaming platform and some (or all) of its games, or will a hybrid of the foregoing two business models be used? Will the player be able to make in-game purchases? Will advertisements be served on the cloud gaming platform or video streaming platforms owned by the platform provider from which game video will be streamed? Ultimately, the video game publisher and platform provider need to determine how to share (or not share) the various revenue streams. Additionally, they need to determine other financial terms such as whether the platform provider should pay the video game publisher an upfront license fee/advance and commit to a minimum guarantee. Finally, the parties should address financial reporting and audit rights.
Data Collection, Ownership and Use. Given the proliferation of privacy and data protection laws coupled with the great value that can be unlocked from the collection, ownership and use of data, each party's rights and obligations relating to the data collected from the availability and use of any given game on the cloud gaming platform is almost always a hotly negotiated area. Some considerations include: Should the platform provider be obligated to share with the video game publisher any of the non-game specific data relating to its cloud gaming platform, and for what purposes, if any, may the video game publisher use this data? Which party or parties may collect and own game-specific data (including data regarding the players) and to what extent should this data be shared with the other party? What are each party's obligations to protect, control, retain and delete this data? What are each party's obligations if and when a data breach occurs, including each party's financial obligations relating to the remediation of any such breach? Should each party have the right to audit the manner in which the other party uses its data?
Service Levels. Legal and business issues may arise from cloud gaming's inherent dependence on always-on connectivity. The commercial viability of cloud gaming rests heavily on robust internet connections. Unlike downloaded games or games on physical media, cloud gaming requires relatively high and consistent upload and download speeds, particularly for "twitch" games (i.e. games that rely on quick reflexes and near-instantaneous player input). Accordingly, from the video game publisher's perspective, it's essential that the cloud gaming platform is available nearly all of the time (i.e., at least 99.9% of the time), excluding periods of scheduled maintenance which should take place during off-peak hours. If the game isn't always available, the players will choose to play other games. It's also essential from the video game publisher's perspective for the platform provider to eliminate latency (i.e., delayed response times) on its cloud gaming platform. If a player notices latency in his/her gameplay due to the cloud gaming platform, he/she eventually will get frustrated and stop playing the game. In light of the foregoing, the parties need to agree on (a) the uptime and latency service level guarantees for the cloud gaming platform, (b) the length of the cure periods for when one or both of these service levels is breached, and (c) whether the video game publisher should receive any sort of special consideration from the platform provider when one or both of these service levels is breached. Finally, the parties need to agree on how to measure whether these service levels are being met as well as the reporting process when a service level is breached.
Marketing Commitments and Activities. To increase the financial success of allowing a platform provider to include a game on its cloud gaming service, video game publishers should decide whether to obligate the platform provider to a marketing commitment (i.e., an obligation to spend a minimum amount of money on the marketing and promotion of the game). A marketing commitment is especially important when the video game publisher grants the platform provider exclusive rights in the game. Additionally, the video game publisher should consider whether the platform provider should be required to submit a quarterly (or annual) marketing plan setting forth the specific marketing activities on which the marketing commitment will be spent and whether each marketing plan should be subject to the approval or consultation rights of the video game publisher.
Limitations of Liability. Significant negotiation often relates to the limitations on the platform provider's liability in the event that certain things go wrong. The publishing agreement usually contains limitations on both the amount and types of liability that either party may incur in connection therewith. In particular, the platform provider will insist that the maximum amount of liability that either party may incur should correlate to the amount of money that the platform provider receives in connection with the exploitation of the game on its cloud gaming platform and that neither party should be liable for consequential, incidental, indirect, special, punitive or similar damages. The video game publisher will insist that liability arising from data breaches, breaches of confidentiality obligations and certain tortious conduct (e.g., gross negligence, recklessness and intentional misconduct) should be excluded from these limitations of liability.
Ongoing Development Obligations. If the game will continue to evolve after it's initially published on the cloud gaming platform (e.g., if new in-game items, enhancements, modules or seasons will be periodically offered), the parties need to negotiate the video game publisher's ongoing game development obligations. In particular, the amount of, type of and development schedule for these items should be included in the publishing agreement, as well as whether the platform provider will be obligated to contribute to the cost of these ongoing development obligations.
Customer Support Obligations. Generally, the video game publisher will provide first level customer support directly to the players and the platform provider will provide second level customer support directly to the video game publisher, if and when needed. The parties will negotiate the manner in which such customer support will be provided (e.g., in-game chat, email, telephone) and the time in which a party must respond to a customer support request (e.g., within one business day).
Source Code. Video game publishers are loath to share their "secret sauce" (i.e., the game's source code) with third parties because they fear that their source code could get into the hands of a competitor or be released on the internet. Accordingly, video game publishers and platform providers engage in serious negotiations regarding under what circumstances, if any, should the platform providers obtain access to the game's source code. If the platform provider is going to modify the game to optimize its performance on its cloud gaming platform, the platform provider likely will require access to the game's source code. On the other hand, since the ongoing development activities as well as customer support activities generally are handled by video game publishers, platform providers generally will not receive access to the game's source code for these purposes. Video game publishers and platform providers also negotiate timing relating to when the platform provider will get access to the source code and when the platform provider must return the source code to the video game publisher. The parties also typically spend considerable time negotiating (1) special confidentiality and security provisions to which the platform provider must agree, (2) whether the game's source code should be held by a reliable third-party technology escrow agent that will release the game's source code to the platform provider under certain enumerated conditions, (3) the scope of the source code license granted to the platform provider, (4) to whom the platform provider must return the source code promptly following the platform provider's use thereof, and (5) which party owns the modifications made to the source code by the platform provider.
Conclusion
The proliferation of cloud gaming holds significant promise for video game publishers, platform providers and players, but also creates a new landscape that must be carefully navigated. Nascent platform providers need video game publishers on board, and video game publishers need stable, secure avenues to get their games in front of as big an audience as possible. For these parties to succeed together, they need to establish good relationships built on open and fair negotiations, clear expectations and a skillfully crafted legal framework. This in turn requires that they thoughtfully and deliberately consider the business and legal issues that will inevitably arise as the game publishing paradigm shifts.
This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. The content therein does not reflect the views of the firm.