Back at the beginning of the year, I wrote a piece for The Lawbringer called The power of licensing, including a brief account of what licensing is and what effects and benefits licensing your product has on brand recognition and where you make money on your product. Licensing is essentially granting someone the right to make and sell stuff with your intellectual property on it. Usually, you're not allowed to sell "stuff," in the loosest sense of the word, with images, artwork, characters, and so on that are not yours. Ownership rights are a little weird to grasp.
Back in November, Activision Blizzard CEO Bobby Kotick made some comments before the launch of Star Wars: The Old Republic concerning whether the game would be profitable at all, given the amount BioWare is paying to Lucas for the rights to even make a Star Wars game. Kotick's comments rang a very special bell in my brain, prompting me to think about the licensing contract that BioWare and Lucasfilm have over the Star Wars franchise, as well as the reverse Blizzard model in which the entire franchise is owned in-house.
George Lucas was a pioneer in the realm of movie merchandising, keeping the rights to all of the Star Wars characters and creating one of the most profitable toy and promotional brands in the history of entertainment. The Star Wars franchise is so incredibly far-reaching and part of our society that my younger brother knew that Darth Vader was Luke Skywalker's father years before he ever saw the movies. He was, however, very surprised at the whole Luke and Leia sibling deal. The reach, power, and control that Lucas exerts over his licensee partners is second to none.
An expensive proposition
With the release of Star Wars: The Old Republic and the Star Wars brand back in the gaming spotlight for a little while, a lot of money is going to be made off of lightsabers, the Force, and everything else under the Star Wars banner. It's expensive to be able to slap the Star Wars logo on your stuff, considering the massive audience that comes with it. Lucasfilm and Lucasarts also develop and create their own products, but when companies team up like BioWare and Electronic Arts did to fight for the Star Wars franchise, the license went outside of the Lucas world. I'm not sure of the story, about who pursued whom for the project to create The Old Republic, but it was a massive deal nonetheless.
World of Warcraft is a wholly owned Blizzard property. StarCraft and Diablo are also under that wholly owned banner, making the suite of Blizzard universes entirely under Blizzard's control. If you thought that WoW and StarCraft were big brands, Star Wars is the monolith in the room that all other franchises look up to and wish and hope that one day they can even walk the same path as.
As owners of its property, Blizzard has the ability to license out its characters, logos, names, merchandising, and everything else that is derivative of its products. T-shirts, key chains, FigurePrints, the Trading Card Game, board games, books, officially licensed peripherals ... someone bid real money to Blizzard in order to be granted licensing rights to make products bearing the Blizzard name. Blizzard's revenue stream, with respect to the licensing of its original products, is all gravy because it's essentially free money. The costs of intellectual property come from filings, protecting your intellectual property, and developing new, potential revenue streams with that IP.
Bobby Kotick's complete quote was as follows:
"Lucas is going to be the principal beneficiary of the success of Star Wars," he argued. "We've been in business with Lucas for a long time and the economics will always accrue to the benefit of Lucas, so I don't really understand how the economics work for Electronic Arts."What Kotick means by Lucas being the principal beneficiary of the success of The Old Republic is that there are most likely clauses in the license agreement that give percentages, points, or another denomination of revenue out to Lucas and his people just for the Star Wars name, and that amount is presumed to be a great deal of money. Kotick is saying that because the cost of the license is so prohibitive, as he has personally had experience with in his position as CEO of Activision Blizzard, that EA will not be able to be profitable because of the hemorrhaging of money to the licensor.
While owning your own property reaps some of the best benefits -- namely, freedom to do what you want with what you own and little cost associated with just having your property -- licensing a big-name franchise can offset the cost of paying for that franchise. Are we to believe that the cost of the Star Wars license for an MMO that will be run on a subscription model and most likely perform better than any AAA MMO title in recent years will not be able to turn a profit?
Let's pretend World of Warcraft was not owned by Blizzard. Let's pretend, instead, that World of Warcraft -- Thrall, Varian Wyrnn, the whole thing -- was owned by the Hasbro toy company. Now imagine that for every subscription to the game, Hasbro wants $2 from each and every subscription to use the World of Warcraft license. That seems like a ton of money, doesn't it? Your profits are already slashed by a crazy margin, with two-fifteenths of your total revenue going to a company who just lets you use its names and properties. Sounds like a pretty crappy deal for Blizzard, right?
The brand name gamble
Well, maybe. There's also the matter of 10 million subscriptions at $14.99 a month. Shave off the $2 per sub, and that's still about $129 million in just subscription revenue per month. I would guess that World of Warcraft requires far less than $1.5 billion a year to run. Of course, everything from the T-shirts to toys require a licensing contract and payouts to the right people, but you can understand the drive of a big brand to bring in the big bucks. Even with the costs associated with paying for the license, a game with 10 million subscriptions makes money hand over fist, regardless of costs.
How about we engage in some completely speculative math? Let's say that after a year, SW:TOR now has 1.5 million steady subscriptions and has leveled off, with players paying $14.99 a month. For one year at 1.5 million subscriptions, BioWare and EA rake in $22,485,000 in gross income per month. Per year, we're looking at a cool $269 million gross from just the subscription costs. How much would the licensing rights be worth for this kind of cash? If Lucas charged $50 million for the rights to use Star Wars, wouldn't it still be worth it? At $50 million, yes. At the real cost that this deal really transpired at? Oh, I would love to know ...
Betting on the brand name to bring in the playerbase is a risky move, because hundreds of millions of dollars are on the line. I understand what Kotick was saying, because we're talking gross revenue here. After the licensing costs, paying the employees who created and currently run the live team, and everything associated with facilitating a AAA MMO are steep. Development costs have been said to have hit well over $200 million for just the game. Maybe Kotick was right. These costs are piling up...
Was it the right move? Well, yeah, definitely, at this very moment. The Star Wars license is too good to pass up, no matter the cost. Next week, we'll continue the discussion of licensing with relation to WoW and SW:TOR and talk about what is really going on when a company decides to make some merchandise with its characters and IP and how much of the real money made doesn't actually come from the subscriptions (in WoW's case, at least).
See you guys next week.
This column is for entertainment only; if you need legal advice, contact a lawyer. For comments or general questions about law or for The Lawbringer, contact Mat at firstname.lastname@example.org.