Conventional wisdom is that major CD-ROM publishers who fund the entire cost of title development not involving outside licensed properties will pay a base royalty to the developer of only 10 to 15 percent of the title revenue, less certain specified costs. There are certain key areas of negotiation in a standard publishing agreement between the publisher and the developer. Additionally, there are also numerous affiliate label and hybrid or co-publishing arrangements with far different economics and arrangements. Often, smaller publishers with less effective distribution will promise higher royalty rates. To many developers, even a 15 percent royalty seems outrageously low, given that the developer in many cases comes up with the idea and creates a compelling product using its own cutting-edge technology.
Developers can address the meager royalty issue three ways.
Because with CD-ROMs the publisher's inventory risk is substantially less because of the lower cost of goods sold, the royalty should arguably be adjusted to reflect this. Second, well-advised developers try to ensure that the milestone advances from the publisher are sufficient to cover all the developer's costs, including the salary of the principals, plus some amount to cover inevitable cost overruns and delays. Budgeting and planning are absolutely critical. A developer who is late with a product and who comes back to the publisher seeking additional advances because of continuing overhead will meet with enormous resistance. Finally, even where the publisher will not budge on the base royalty, a developer can often obtain a step-up royalty after a certain number of units are sold.