Bungie's lucrative contract with Activision revealed

Actvision's four-game contract with Bungie has been revealed as part of the ongoing court case between Activision and the co-founders of developer Infinity Ward.

The contract, posted on the LA Times web site, reveals details of the products Activision expects from Bungie over the ten year term of the contract. The lucrative agreement could be worth hundreds of millions of dollars to Bungie, depending on the level of sales achieved.

Bungie is listed as developing a series of products under the title "Destiny" or "Destiny property", also referred to as "Tiger". These are planned to be "massively multiplayer style (i.e., client-based mission structures with persistent elements), sci-fantasy, action-shooter games" according to the contract language. Also, major downloadable content expansion packages are required for each of the four games, codenamed "Comet", along with smaller "interstitial" DLC.

The first game ("Destiny #1") in the series is planned for the fall of 2013, with subsequent games ("Destiny #2, Destiny #3, and Destiny #4") being released at two-year intervals, and the major expansion packs ("Comet #1", etc.) in the even-numbered years.

The platform strategy is to begin with the Xbox 360 or its successor (labeled "Xbox 720" in the contract), with ports for the PlayStation 3 if it can be done with "quality and feature parity." Versions for the "PS4" and the PC are also planned if Activision and Bungie agree on the technical and business case for those platforms.

"Licensor hereby expressly disapproves of Valve, Epic and Gearbox as potential third parties for conversions"

Interestingly, while the contract allows Activision to develop their own conversions of the software via their own internal studios or through outside developers, Bungie does have the right of approval over Activision's choice, with the following clause: "it being expressly understood and agreed by the parties that (a) only an AAA-caliber developer that is not a competitive risk to Licensor [Bungie] is reasonable for Licesnor to approve, and (b) Licensor hereby expressly disapproves of Valve, Epic and Gearbox as potential third parties for conversions."

Also of interest are provisions regarding "key members" of the development team, who were required to sign long-term employment agreements with Bungie. Those key members are required to work exclusively on the Destiny project, and if more than 33% of them leave during the term of the agreement then Bungie is in a state of "critical risk" and must deliver a mitigation plan to Activision; Activision also gets to approve the hiring of key member replacements.

The contract provides yearly payments of $2.5 million as long as Bungie remains on schedule, and a bonus of $2.5 million should Destiny Game #1 reach a 90 or better score on gamerankings.com.

Now for the juicy part: The royalties and bonuses. These are based on Activision's "operating income" for the game, which is precisely defined; essentially it's the net revenue less specific expenses associated with the product, such as sales, marketing, packaging, shipping, etc. Bungie receives a 20 percent quarterly royalty on operating income of up to $100 million; a 24 percent royalty for operating income from $100 to $400 million; and a 35 percent royalty for $400 million and above. Those royalty rates get applied retroactively to the first dollar of operating income, too.

"Bungie could be in line for some $400 million in payments from Activision"

In addition, Bungie is eligible for "threshold bonuses" of $25 million at $750 million of operating income, and another $25 million at $1 billion in operating income. All told, if Bungie's Destiny game were to achieve Call of Duty level success, (with $1 billion in revenue in 8 days; obviously a $1 billion operating income level would take much longer to achieve) Bungie could be in line for some $400 million in payments from Activision.

Activision does have the right to reduce the royalty percentages if the product is delayed beyond the shipping date, by 10% of the royalty amount (i.e., 2.4 percent of a 20 percent royalty). Activision also has the right to terminate the agreement if the Destiny Game #1 fails to sell at least 5 million units during the first six months of commercial release. Activision also had the right to cancel the agreement if Halo: Reach (then under development by Bungie for Microsoft) failed to reach an 80 score on gamerankings.com or metacritic.com and sell at least 6 million units in the first six months. (Both of those milestones were met easily.) Finally, Activision has the right to terminate the agreement at any time after the launch of the second expansion.

These levels of royalties and bonuses are why the contract has become part of the West/Zampella lawsuit against Activision; it's being used to show the sort of royalties and bonuses that Activision is prepared to make for a top developer, and perhaps to justify the amounts that West and Zampella say that they are owed by Activision.