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Tier Two: Royalties > Royalty Rates - Pg. 182

The Publishing Contract Cross-Collateralization 182 Cross-collateralization means that the publisher can recoup development advances from more than one SKU (retail term meaning "stock-keeping unit;" each platform is considered a separate SKU) or category. Some publishers will want to cross-collateralize every revenue stream from you against every contract it has with you. So, for instance, royalties from a game done with a publisher now can be withheld to repay any unrecouped advances from a contract ten years earlier. You will want to keep the fictional third party in mind when arguing for limiting cross collateralization to: · Platform by platform,-- so that a profitable Xbox SKU will not be used to subsidize an unprofit- able Gamecube SKU, and the U.S. release will not be cross-collateralized with the Chinese localization. · Simultaneous releases,-- for example sequels, will not be cross-collateralized against the orig- inal. · Games only. In other words, the publisher cannot cross-collateralize across categories like ancillary products or revenue from the licensing developer's IP, whether technology or enter- tainment (other media, such as a film or soundtrack, based on the same property). Note TIP A developer can resist platform byplatform cross-collateralization byarguing that if a third party developedthe port or localization, the publisherwould not be able to wait to pay royalties until it had recouped development fees for the original game. Note TIP A developer can argue that if athird party developed the sequel,the publisher would not be able towait to pay royalties to that thirdparty until the publisher recoupeddevelopment fees for the originalgame. Note NOTE This is crucial when you own the content intellectual property. You canresist cross-collat- eralization from entertainment based on your IP byarguing that if the publisher had pur- chased, for example, film rightsfrom a third party, it would not be able to withhold royalties from thatlicensor until the publisher had recouped development fees. If, for instance, a publisher purchases the rights to make games andother entertainment based on a popular card RPG and then sublicenses the right to make a film to a third party, the publisher will most likelyhave to share revenue with the card RPG licensor from the first dollarthat the publisher receives from the film producer. The publisher wouldprobably not be able to recoup its game development costs before paying the card RPG licensor for film- related revenue. Therefore, when thedeveloper is also the licensor, the publisher will be no worse off than if ithad licensed the property from a third party (like a card RPG licensor)if it does not recoup development costs before paying license revenuesto the developer. For more on this topic, see Chapter 7: "Licensing." Royalty Rates The royalty rate paid to a developer varies significantly based on reputation, platform, whether it is developing its own content, and the size and leverage of the publisher. Some publishers like to grant a flat amount per unit sold, which can put your heart at ease over accounting chicanery (see net sales discussion, below), but the percentage of net sales is more common. Wherever the Note NOTE