How to: Making licensed IP win in web3 gaming
The baggage and benefits of branded IP
Licensing recognizable IP has been part of game developers’ strategies for decades. Comics, movies, books, celebrities, sports, etc. It’s brought us some of the biggest games around, from the N64’s GoldenEye 007 to Hogwarts Legacy. Having a known face or logo plastered across a game comes with a lot of potential benefits for game devs:
Lowering UA costs by tapping into an existing fandom, capturing word of mouth, and through brand recognition amid saturated app stores
Coming with pre-packaged lore, visuals, and narratives
Co-marketing possibilities to reach core fans
The logo is seen by players as a symbol of trust and polish, and prompts the kind of open-wallet spending that they associate with engaging with the IP in other contexts (e.g. buying tickets or merch). While nearly identical games, there’s a reason why EA’s formally officially-licensed FIFA games always beat out Konami’s generic—but otherwise identically polished—Pro Evolution Soccer, complete with fake club logos and a poor man’s Ronaldo named Ronarid.
Licensed IP can be so powerful that it can be the deciding factor in a game’s success, and forgive a lot of game design sins. Take, for example, Glu’s Kim Kardashian: Hollywood, which made $157M in its first two years and was still rocking ~$8M every quarter four years in. The game started life as Stardom: Hollywood, a so-so casual game that wasn’t crushing it by most measures. But a spiffy re-skinning with Kim turned the lackluster performer into one of the largest mobile titles of its time, and set up a schema that Glu was able to rinse and repeat with other celebrities and IP.
But licensing is a strategy that also comes with a ton of baggage:
Not meeting avid fans’ expectations can kill a game before it hits the storefront
Ceding creative control to the IP holder, who has the final say on look and feel, and whose review timelines can delay development and launch
Considerable upfront licensing costs and margin lost to royalties
Additional accounting and legal requirements, sometimes with invasive due diligence
Potentially decreasing the addressable audience (do more people like high fantasy than like Game of Thrones alone?)
That co-marketing may not be as useful as you’d hope
Here’s how licensing deals are typically structured:
The licensee—in this case, the game developer—agrees to pay the licensor a minimum guarantee (MG)
This is a commitment to pay the licensor an agreed-upon (and normally hefty) bag of money no matter what. Even if the game fails, the licensee is on the hook.
A sizable portion of the MG is normally required up-front, so the licensee needs to have considerable cash on hand
The rest of the MG is paid over time, and is sometimes “recoupable,” meaning that the licensee doesn’t have to start paying royalties until the MG is fully paid off
Those royalties are a percentage of every sale (be it microtransaction or premium download)
Royalties for licensed IPs normally last indefinitely, so as long as there are sales, the licensee is paying the IP holder
The agreement generally covers the approvals process (including how long the IP holder has to review content; though at the end of the day, it’s their yes or nada), and co-marketing support
This requires extra calculations on behalf of the developer to ensure they can come out on top. Not only do they need to anticipate the normal metrics for their game (conversion rate, ARPPU, MAU, user acquisition spend, etc.), but they need to factor in how the IP impacts other KPIs:
Higher MAU and lower CPI?
Lower margin on ARPPU but perhaps higher conversion and average item price?
The final equation being: Does the LTV and overall lifecycle of the game’s existence recoup the MG and net a profit once you’ve subtracted the royalties, dev costs, and UA spend?
And there’s an additional landmine: developers need to be keenly aware of the genre : audience match. I’ve seen NFL players licensed to a match-three style game (like a Candy Crush Saga). I warned them that none of their fans played those types of games. I never heard of the game again.
We’ve already seen web3 game developers capitalize on significant partnerships. Mythical’s recent NFL Rivals game shot to 1M downloads and the top of the app store, pretty stellar placement for a blockchain-backed game. Sorare and Dapper have seen revenue numbers that dwarf most web3 titles through collabs with the NBA and soccer leagues, respectively.
But web3 also complicates the licensing model in some tough ways. Licensing agreements will often impose royalties on secondary market sales, so devs are on the hook for paying those for as long as there are trades, which could be considerably longer than the game itself exists. No one wants to carve out an employee’s time to track and pay royalties on $20 of secondary trades years after the game is dead. And speaking of those web3 transactions, many brands aren’t in a position to accept crypto, so the dev could lose money in the offramp to fiat.
And, while a game developer may be able to get exclusive rights to the IP for a specific kind of game (meaning no one can use the IP to make something similar), it’s likely that the licensor will engage other companies for other kinds of content, including PFPs, collectible cards, etc. This could wreak havoc on a game’s economy, if suddenly fans perceive that there are multiple on-chain items “from” the same brand, and a $3 Puma collectible item sounds more appealing than a similar $10 Puma game cosmetic. (If you need a web3-native example of this, look no further than Azuki’s recent Elementals mint. Obviously the utility of a game changes the perceived value, but you get my point. Dilution is no one’s friend.)
It’s not all doom and gloom. Here’s the good news.
The true promises of web3 require brands to start thinking of on-chain items differently than your average licensed game, t-shirt, lunchbox, whatever. Rather than a one-off engagement in which an IP holder can relatively shrug off a licensed hat that’s too itchy and needs to be pulled from shelves (at the merchandiser’s expense), web3 users typically see branded collections as coming from—and fundamentally representing—the brand. It’s an investment in the brand, and also an item that will live theoretically forever and can’t be swept under the table like a poorly made hat collection.
I’ve already written about this, but the implications for game developers in licensors caring more could be beneficial. As brands start to recognize the power of on-chain items, these creations are increasingly core to their off-chain business across media, retail, and customer loyalty. That’s great. A game developer isn’t creating, at that point, digital lunchboxes (from which the brand expects immediate and fleeting revenue), but rather items that could play a key role in how the brand strategizes around its entire consumer engagement loops and monetization.
If, for example, an owner of a branded game NFT is also incentivized to carry that item to the company’s retail locations, parks, ecommerce site, or streaming platform, it wouldn’t be in the brand’s best interest to make those incredibly hard to get in people’s hands, which means that the financial burden on the developer could be lessened. It becomes more of a partnership: bringing people back into the brand’s world, rather than a sideshow that’s seen as the brand funneling fans to another experience. The game becomes a marketing and onboarding vehicle for the IP, and the IP helps the game acquire and monetize users.
Devs who make money outside of licensed items can also get some of the marketing fairy dust by potentially partnering with IP holders to make use of existing items launched by the brand in their game. It lessens the licensing and development burden and breathes new utility (and potentially market value) into collectibles, loyalty memberships, subscription passes, etc. A win-win for both parties, akin to Fortnite’s continuous rotation of movie, TV, and fashion items which often coincide with a film debut, new season, or fresh drop.
It will take keen eyes on licensing contracts and creativity in partnerships and utility, but web3 could take the good side of IP licensing and open new ways for developers—and the holders—to capitalize on a more intimate and collaborative future with brands.