During the latest Activision conference call, the mega-publisher was extremely bullish on the future prospects of Destiny, saying that they believe the Bungie-developed shooter will become their next billion dollar franchise when it is all said and done. While this is nice to hear from an investor standpoint, it is not a revelatory statement by any stretch if you take the time to look at the contract between Activision and Bungie, which proves that a billion dollar cash haul is not only expected, but basically required, for the developer to truly profit.
One of the interesting side effects of the Activision and Electronic Arts legal battle that went down last year was that the court required ATVI to unseal its contract with Bungie. This fascinating 27-page document highlights exactly what both the developer and publisher are expecting from their collaboration.
The most intriguing aspect of the contract is the fine print about the upcoming FPS. It states that Bungie will be making four massively multiplayer online shooter games, with the first being released in Fall 2013 (currently slated for Summer of 2014, as of this writing) and each of the following coming out in two year intervals. This includes a major DLC component, which is currently named Comet, that will be released in the years in between each of the games.
Bungie will also be allowed to devote 5% of its staff to the development of another shooter, which is currently named Marathon. It is still unknown whether this is a new version of Bungie‘s old-school Macintosh game (which helped develop the companies reputation), but it may have something to do with it.
Although the games are the most interesting aspect of this information for many, the financial agreement is just as newsworthy. From what is written, it seems that either Bungie is very confident in their ability to develop a billion dollar franchise or Activision truly is a shrewd and calculating publisher that knows how to get the upper hand in contract negotiotions (my money is on…both)
The contract itself contains a great deal of clauses that require the developer to hit some lofty numbers in order to get the bonuses and royalties it needs to see the benefit of this new relationship.
From looking at the numbers, Bungie will, in essence, have to likely sell a minimum of just under 5 million copies to break even. To get all of the bonuses, each Destiny release will have to sell 13 million units. This equates to $804 million in revenue, including the expansion pack sales.
Furthermore, the game series must hit an operating margin of 25 percent in order for Bungie to begin receiving substantial royalties. In simple terms, operating margin is the money “left over” after you factor in game development, marketing, promotion, production, advertising and distribution from the net revenue number.
For operating income up to $100 million, Bungie will get 20% or royalties, for $100m to $400m, it gets 24%, and for $400m and higher, the developer gets 35%. If the game goes into mega-hit territory, hitting $750m, Bungie gets a $25m bonus, along with another $25m for the franchise hitting $1 billion.
So, the numbers need to be huge for Bungie to make money on this deal, but if the developer does hit the upper echelons of its financial milestones….lets just say some very expensive champagne will be uncorked. But they must be wary and vigilant, because failure would mean Activision can enact some contractual sitpulations, including being able to cancel the entire contract if the first game does not sell 5 million copies in the first six months. Also, they can reduce royalties if the game comes out late (about that….)
Some of the more obscure clauses are also quite interesting. Activision does play a bit of defense with their banning of respected developers Valve, Gearbox and Epic from working on any Destiny or Comet adaptations, and the funniest requirement of the contract is the fact that Bungie must disclose all Easter eggs and secret rewards hidden in the game. I would expect nothing less.
This court-sanctioned disclosure of information is quite encouraging in my opinion. First of all, it simply proves that Bungie is going big on this series and is putting in a great deal of effort to make it a mainstream, appealing game title. Considering that the development is going to cost around $50 million, with a similar marketing budget, sales need to be massive. But this IS Bungie, so I am expecting great things. And from what we have seen up to this point, they are well on their way to cashing those bonus checks.