Trouble with Royalty

Nintendo is not a company which is used to having its business decisions questioned. Hardcore gamers and the specialist press may sulkily accuse the Japanese giant of abandoning its traditional market at every opportunity, but ever since the Wii and the DS began their startling run of success, few have been able to fault the company's actual business sense.

This may explain why the company's response to Gamasutra's recent revelations over its WiiWare royalties scheme has been so abrupt and poorly considered. Stung unexpectedly, the platform holder has declined to comment in any constructive or useful way on the issue - instead pouting and moaning about developer agreements being confidential, a sulky response that's more worthy of the company's myriad fanboy detractors.

The issue in question, according to Gamasutra - and confirmed privately by most developers who have had any dealings with WiiWare - is that Nintendo's system refuses to pay royalties to any game which doesn't reach a certain sales threshold. Once that threshold is passed, the developer gets the full payment for every copy sold to date; come in a few copies below the threshold, however, and you won't get a penny.

The system is, presumably, designed to avoid shovelware from being heaped onto the WiiWare system - giving developers pause for thought before they release anything onto the platform and hopefully keeping the quality bar relatively high.

It's not a bad aim, but a fundamentally flawed and ill-considered way of implementing it - one which demonstrates yet again that digital distribution, despite being unquestionably one of the most important growth areas for the industry, still faces some serious growing pains.

Two huge problems spring to mind immediately with Nintendo's approach. The first is that by sticking an arbitrary sales figure demand on games, you fail to acknowledge the importance of niche titles. I have argued in the past, and continue to believe, that the only way to make a platform mass market is for it to address the widest possible selection of niches - and that means having a platform that accepts the existence of games which will potentially only sell to a few hundred dedicated fans.

Of course, most niche titles go on to find much bigger audiences - but when a developer makes a game like Flower, Lost Winds or Braid, let alone more obscure and audience specific titles, there is always a risk that sales will be tiny regardless of the quality of the game. Nintendo's scheme essentially tells those developers that if they don't reach a certain sales level, they won't get a penny - no matter how much they delight the small audience to which they have sold.

You could argue that that's just commercial reality. However, it's a completely arbitrary "reality" which Nintendo has chosen to impose. Digital distribution means unlimited shelf space. It means never having to make a decision over which titles to stock, and never dropping a title from your inventory. Platform holders still haven't quite got their heads around this model, because by and large, their digital stores are still not up to scratch.

More successful digital distribution models, such as iTunes and Netflix, understand that it's possible to maintain a huge back catalogue of infrequently accessed material without compromising the ability to heavily promote and sell popular items and big new releases. Through a combination of promotion for new launches and allowing quality items to float to the top in sales rankings, they build systems where it doesn't matter if 20 shovelware titles appear one week - those who actually want them can find them, but they don't need to ever trouble users who aren't interested.

The second problem with Nintendo's approach is arguably more insidious, and it's quite simply that the model which the platform holder has adopted heavily favours large publishers at the expense of independent developers. Quite simply, an independent developer can't keep going if it doesn't have income from its games, whereas publishers are structured around the idea of having a few failures compensated for by a single hit title.

The finance model for indie games is radically different to how the boxed game market works - most indie developers depend on the long tail model, with a steady trickle of income from one game gradually ramping up as subsequent games are released, and new fans return to your back catalogue to try out previous work. Indie developers with a handful of well-liked games can score a reasonable monthly income from them - a stark contrast with the standard boxed game model, where expensively developed games are expected to make most of their money in the first month on sale.

It's easy to see how Nintendo's system breaks this model. It could take an indie game months of steady sales to reach Nintendo's threshold - meaning that the developer won't see a penny of income for the first few months of the game's lifespan. It's hardly an ideal situation for small studios which are already trying to develop quality entertainment on a shoestring budget.

Of course, Nintendo isn't the only platform holder which stands accused of favouring publishers over independent developers. Microsoft has been in the line of fire recently over claims (fairly solidly substantiated in private conversations with developers) that it pays better royalties to publishers for XBLA titles than it does to developers who approach it directly. Some developers claim that this actually makes it worthwhile for them to "publish" their titles to XBLA via a third-party firm which essentially does nothing but act as a conduit between Microsoft and the developer - a thoroughly ridiculous situation.

It's unlikely that there's any actual malice towards indie developers reflected in decisions like those made by Nintendo and Microsoft. They simply demonstrate that despite the promise of digital distribution, the balance of power in the industry still belongs with publishers - who own AAA intellectual properties, and can therefore negotiate from stronger positions than indie developers can.

Moreover, they demonstrate that digital distribution services, on consoles at least, are still by no means mature. Both the store interfaces and the business models which underpin them need much more work - but as Apple's frighteningly dominant position in the music retail market demonstrates, there's a vast pot of gold at the end of the rainbow for whichever company gets it right.