China: Mobile Games Publishing In China: Contractual Relationship

Mobile gaming market in China is becoming more and more attractive every year. According to Statista data, revenue in the mobile games segment is forecast to reach $47.13 billion in 2022, with an annual revenue growth rate (CAGR 2022-2026) of 8.44%, resulting in a forecast market size of $65.18 billion by 2026. The number of potential users (which in China is forecast at 678.3 million by 2026) makes developers and publishers consider this market as a potential direction for their products.

However, the Chinese market has a number of regulatory peculiarities of its own. The first thing that teams planning to enter a new market encounter is the current legal regulation, which does not allow foreign companies to distribute their products on the territory of China independently. Foreign companies (including foreign publishers) must either register their own office in China or look for a local partner (a Chinese publisher) and enter the market through this entity.

As a rule, foreign companies choose the second option, signing contracts to publish mobile games with local publishers. As follows we will consider a number of conditions that are worth paying attention to when signing a contract with a Chinese publisher.

What can a Chinese publisher do with a mobile game?

As a rule, the developer grants permission to use the mobile game on the basis of an exclusive license. An exclusive license implies that only a Chinese publisher can use the mobile game to the extent that it is contractually granted.

In practice, when such contracts are negotiated, it turns out that developers and publishers are not always willing to work under such broad restrictive terms. In this case, it is important to define what the Chinese publisher cannot do with the mobile game. For example, you would like to keep only the ability to localize the game, but without any other changes or modifications. In such a case, it is important to limit the right to change the mobile game solely to the opportunity to localize the game.

If you are a foreign publisher who has obtained the rights to a mobile game under an exclusive license from a developer and is operating in the Chinese market through a Chinese publishing partner, it is important that the ways of using the game from your local partner contract are not wider than what the developer has contractually provided you with.

Where will the partner publish the mobile game?

In the context of entering the Chinese market, it is important to understand that the country has some specific territorial features. In practice, it is possible to encounter such variations in the definition of the territory of publishing the game in a contract:

• People's Republic of China, China. The official name of the state is the People's Republic of China, which includes all of China, as well as the special administrative regions of Hong Kong and Macao (Taiwan, which is a partially recognized state, is a disputed territory). The official name or simply "China" is quite rare in contracts.
• Mainland China or Greater China. The most common variant is Mainland China. This is the mainland of China, which does not include the territories of Hong Kong, Macao and Taiwan, often stated as "... the territory of Mainland China (Hong Kong, Macao and Taiwan are not included) ...". If the distribution territory of the game includes Hong Kong, Macao and Taiwan, the term Greater China may be used.

Defining the territory of publishing is important in terms of where the revenue from the mobile game will come from. If the contract defines the whole territory of China, it is worth discussing with the local publisher their plans for publishing in special administrative regions (in the absence of such plans, explicitly exclude these regions).

For foreign publishers who enter the Chinese market and have obtained the rights to a mobile game from a developer on the basis of a license, you must ensure that the territory to which you allow the Chinese partner to publish the mobile game does not extend beyond the territory specified in the contract with the developer.

Now let's count the money. How will we share it with our partner?

To ensure that the calculation of your share does not come as a surprise to you, we recommend that you pay attention to the following aspects:

• The base for calculating the royalty, i.e. from which base the share of the rights holder is calculated. There are two options possible here:
  1. a royalty percentage is counted on all revenues (rare and applicable if the Chinese publisher has selected this model by themselves),
  2. the royalty percentage is counted on net income (income minus expenses).

In China, income tends to be easiest to generate from advertising. Gross revenue can be generated both from any unrestricted revenue or from only a certain category of revenue. If revenue is generated from advertising only, it is important to discuss with the publisher whether other types of revenue (e.g. in-game purchase revenue) can be included.

• Expenses deducted from gross income. Expenses reduce the basis for calculating the share of the rights holder; accordingly, the more expenses deducted from the gross income, the lower the amount of money received by the developer.

It is worth keeping in mind that the list of expenses can be either closed (with a fixed list) or open (generated each month at the publisher's discretion). In the latter case, the expenses will be unlimited, which may lead to an uncontrolled decrease in the base for calculating royalties.

We recommend either stipulating a specific list of costs that reduce the base for calculating royalties explicitly in the contract, or that the publisher should agree in advance with the rights holder on such costs.

Can I control the financial flows?

To ensure transparency of the publisher's actions, various reporting and monitoring mechanisms can be set forth in the contract, for example:

• Providing access to advertising indicators.Access to advertising and marketing information (various indicators and metrics) enables to make timely conclusions about prospects and, if necessary, to respond and change something. Such information can be communicated either in the form of a report or by granting access to various accounts.
• Providing reports with all information on income and expenditure. Reporting with all information on revenue, expenses incurred and the calculation of net income is the main mechanism for controlling the generation of financial flows. At the same time when describing the publisher's obligation to report, it is also important to establish clear deadlines for reporting and objection, especially if the opportunity to make payment is linked to the time of acceptance of the report. In addition, do not forget about the language of reports, so that you do not have to use machine translation or bring in an interpreter altogether.
• Conducting an audit. Another control mechanism is the opportunity to perform an auditing of the documentation on generating and recording of financial flows. Audits usually involve professional auditors and can be quite costly. When such terms and conditions are agreed, it is recommended to define the frequency of audits as well as the consequences of finding discrepancies (e.g. reimbursement of the discrepancy by the publisher, if it was caused by the publisher).

How long have we been cooperating and can I withdraw from the contract?

In practice, long-term contracts for publishing mobile games in China are quite rare. Publishing can last from 3-6 months to 1 year. It is important when agreeing on the length of a mobile game publication:

• evaluate the readiness to work with a local partner for a specified time. If this is your first interaction with a Chinese publisher, it is best to avoid too long publishing deadline if possible.
• for a foreign publisher to limit the period of publication in the Chinese market in such a way that it does not exceed the period of the license obtained from the developer.

Side by side with the term of the partnership comes the possibility for the parties to withdraw from the contract before the term of the partnership expires.

A case example from practice: the parties stipulated that the publication of the mobile game on the territory of China would continue for 3 years. At the same time, the rights holder had no opportunity to withdraw from the contract before that agreed date, except by upon mutual agreement of the parties. At some point, the rights holder was no longer satisfied with the revenues he/she was receiving from the Chinese market, so he/she proposed to his/her partner to stop publishing and terminate the contract. The Chinese publisher, on the other hand, was unwilling to terminate the contract upon mutual agreement of the parties, forcing the rights holder to enter into difficult negotiations with him/her.

The situation described above might not have arisen if the rights holder had the freedom to withdraw from the contract. In practice, Chinese publishers are reluctant to make concessions in terms of negotiating such terms. One option for a compromise condition is to impose additional objective restrictions on withdrawal from the contract: such as advance notice with a certain deadline, inability to withdraw for the first few months, etc.

In general, when entering the Chinese market, it is important to be careful when choosing a local partner, as it is a highly competitive environment with its own rules and peculiarities. Not every publisher is really ready to compromise on contractual changes, but we recommend trying to negotiate acceptable solutions. If a publisher is unwilling to cooperate, it is necessary to weigh up all pros and cons and decide whether to continue working with such a partner.

Russian original of this article on the portal App2Top.ru.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.