developer fees

[Ben Rubinstein]

on 18/6/02 12:12 pm, Mathewson at richmond at mail.maclaunch.com wrote:

> This is probably a massively naive question, but.........
> 
> I am at present developing a CD-ROM based Musical
> Encyclopedia: this involves minimal
> programming, massive audio and graphic work and about 600
> hours in total.
> 
> For this I am getting 2.5% royalties - or, to put it more
> concretely about 25p for every
> £10 CD.  Am I a complete sucker, or is this OK???

The way to answer this question is by comparison to the simple fee
alternative.

Decide what would be your flat fee for the job  - or more easily, decide
what your hourly rate for this work should be, in pounds.  Multiply by 600 *
4 (because 25p = one quarter of a pound, for those not in the UK).  Over
what will almost certainly be a limited life (two years would be average)
the product needs to exceed that number of sales by a considerable margin,
for it to be worth your while to take this deal.

If you are taking some or all of your fee in royalties, then you trade off
some security (getting paid in full when the job is completed, or even
earlier) against the possibility of greater rewards if the title is a
massive seller.  Even if it does pay off, you're getting paid later - hence
the need to exceed the simple break even point by a considerable margin.  As
well as the risk of the product not succeeding, there are also other risks -
eg the product sells just about OK from your point of view, but not
sufficiently well for the publisher or whoever you have your deal with; so
they either cease distribution of the product, or go bust.

So there are two questions.  One is what are the probabilities are: how
likely is that the product will sell sufficiently well for the publisher to
stay in business and keep selling it, for long enough to pay you better than
if you'd taken the fee upfront and put it in the bank.  You can get some
help in this question by talking to the publisher (or whoever) about their
sales forecasts, marketing plan, etc.  How much are they investing in the
product, both in production and marketing?  The other question only you can
answer, which is how much of this risk to you want to/can take.   If you've
got plenty of money in the bank, nothing else to do with your time, and
you'd enjoy working on the product even if you didn't get paid, then you
might be prepared to take a large risk.   Other circumstances, on the other
hand....

Note that the choice isn't limited to an upfront fee, or doing it all on
royalties.  Two common models are a fee plus royalty (ie you hedge your bets
by taking some of your fee upfront in cash, but discounting it against a
royalty of some size) - in this case you still need to weigh up the same
calculations about the chances that this will work out better than taking
the whole fee upfront, but you've reduced the downside risk.  The second
common model is an advance on royalties - so you keep the same (or similar)
royalty rate, but get paid an advance fee as well; in this case, you get
royalty statements, but don't start getting royalty cheques until sales have
passed the point where your advance has been recouped.

Finally, you can also get some idea about the publisher's expected sales by
exploring these alternatives with them.  If they're very happy to pay you
the full fee instead of a royalty, it suggests they're confident about the
sales.  You may still want to make your own judgement about whether their
confidence is justified (and still need to decide whether you can take the
risk).  If on the other hand they won't countenance more than a £5 advance -
then you should be considering very carefully how much you're prepared to
invest in this product.

Hope this helps,
 
  Ben Rubinstein               |  Email: benr_mc at cogapp.com
  Cognitive Applications Ltd   |  Phone: +44 (0)1273-821600
  http://www.cogapp.com        |  Fax  : +44 (0)1273-728866