Empirical Analysis of Royalty Compensation in Korea - China Online Game Licensing

This study empirically investigates the royalty compensation in Korea-China online game license agreements. Since 2001, around 60 Korean-developed online games, especially MMORPG (massively multiplayer online role playing games), have been published in China through license contracts. Among them, 15 games were used as samples for this study. Some characteristics of royalty compensations in Korea-China license agreements are derived based on interviews with management of Korean game developing firms who made license contracts with Chinese publishers. First, a typical contract format is an initial fee plus running royalty, and the basis of running royalty is various kinds of sales revenues. Second, past three years, initial fee has increased very rapidly, while royalty rates were relatively stable. Third, royalty bases which need financial audits have been avoided since 2003. It is found that Korean developers prefer a royalty base whose reliability is checked through online. Fourth, it is proved that the royalty rates in online game industry are much higher than those in the other industry. It may result from "winner-takes-all" characteristics of information goods industry. Finally, it is found that developers prefer a larger amount of initial fee to a higher royalty rate. Both parties spend more time to discuss about initial fee than running royalty in negotiation process