Legal Opinion: What happens when a studio goes bankrupt?

Bankruptcy

By on April 26, 2013 at 3:32 pm

From the debacle that was 38 Studios, to the sadness of THQ’s closure, studios and publishers go bankrupt all the time. Much-loved gaming franchises linger in limbo as their publishers just… run out of money.

These games face an uncertain future. Homeworld has been in the dark for years, and only recently was picked up by Gearbox. Dawn of War currently lacks a developer, and is at the whims of Games Workshop and Sega working out a deal. Monkey Island is now in the hands of Disney, and frankly I hold no hope for ever seeing the series again.

The only chance these games have is if a new publisher comes along and “buys the IP”. We see these words on gaming websites often. But what does “buying the IP” involve, anyway?

Fire sales in bankruptcy

Once a publisher admits they can’t pay the bills, they’ll file for bankruptcy. This means comparing what they have, to what they owe. 38 Studios ended up with debts of $150 million, compared to $22 million worth of assets and… $336 in petty cash.

Bankrupt publishers are obliged to reduce their debts above all else, so will look around for buyers for the few assets they have left. But publishers must act fast. IP in bankruptcy loses value quickly—as fast as 10% a month. This leads to fire sales where publishers try to sell everything they have, as fast as they can.

The most critical action for a publisher to take here is to value its gaming IP, and thus help find a buyer.

Valuing the IP

IP, of course, stands for intellectual property. In its most generic form, it is the rights to develop and sell a game. These rights mostly consist of the copyright in the game code, and the trademark in the game name. Owning both of these allows a publisher to both develop and sell a game.

Websites usually talk about just the IP as rights to development new games. Like, for example, “We want to see a new Homeworld”. Or, “We want to see another Mass Effect DLC that doesn’t completely shaft Kelly”. However, most of what publishers acquire when they “buy the IP” is the rights to old games. Much of what THQ sold off, for example, were old games that probably only sell for $5 each, if you can find them at all.

If a publisher can manage to sell off its IP, then there is a chance that a game franchise may be resurrected. However, some franchises are forever locked to their creators.

Some IP cannot be sold

EA Sports, Richard Garriot, and Creative Assembly all have something in common: no one would buy their games if made by anyone else. I can’t imagine Total War being made by anyone other than Creative Assembly, nor can I imagine an Ultima without Lord British. I don’t even know the individual games under the EA Sports line, but I mostly assume they’re the same with a different celebrity every single year.

When games are so associated with who created them, then the value of the individual IP can be quite low, as the marketing of these games depends on the name of the original publisher or developer. If another publisher was to pick up the EA Sports line, and brand it, as say, Ubisoft Sports, then I’m not sure if anyone would buy it.

Despite this, the value of these types of gaming franchises is high to the original creators. Lord British has made almost an entire career out of Ultima. But if the games ever get separated from their creator, they can tank quite badly.

Bankruptcy can breathe new life into a franchise

A publisher’s bankruptcy isn’t all bad, however. Sadly, many publishers have a thing for acquiring gaming properties and just doing nothing with them. This is most often caused by competition and conflict between IPs.

Disney bought LucasArts in 2012, and so acquired Monkey Island. However, Disney also owns Pirates of the Caribbean, which is where all its recent piratey-themed gaming efforts have gone. While the original creator of Monkey Island, Ron Gilbert, is looking to license the series from Disney, it’s quite possible that it will stay locked away in a dusty vault.

Homeworld is another example, yet a more hopeful one. In the eyes of many, Homeworld was one of the best RTS’ ever released. Homeworld 2 was released in 2003, but under THQ, saw no real movement since. Relic was, presumably, occupied with another RTS—Dawn of War. And this is of course, despite the fact that Homeworld was a much better game (You’re fired. –Ed). The two were in competition, and due to Games Workshop’s name and clout, Dawn of War was the more profitable game, so Homeworld got left by the wayside.

However, as Gearbox’s recent acquisition of Homeworld  after THQ’s bankruptcy shows, there may be hope yet. Sometimes a bankruptcy is good for shaking up the market and putting IPs in the hands of publishers who might have an incentive to develop them. Let’s just hope Gearbox does something with it.

4 comments (Leave your own)
charliebrownau

Often for the user its bad
They shut down the multiplayer master server
with most games after 2004-2005 now not supporting offline LAN
and not supporting Direct IP unranked hosting it means the game you paided for
has been crippled.

A good example was Flatout 2 . The rights to the series was moved to another game studio (From bugbear to another company) Flatout 2 standard (Not UC edition) uses LAN offline and gamespy for online. Once gamespy removed support. The users got shafted . The only way we can play the game now is via Tungle via LAN over the net. Apprently bugbear cant do anything to fix it .

 

The employees get hit the hardest out of anyone, usually bankruptcy means unpaid redundancy. People will go “hey wait a second isn’t that illegal”… yeah… yeah it is…

There were countless cases of this in the past few years going on in the US, one developer even went to jail for it.

http://www.vg247.com/2012/10/19/licensed-game-dev-boss-jailed-over-unpaid-wages/

But for every 1 of him.. there’s about 10 that aren’t caught, we’re talking thousands of dollars here in unpaid wages. Un-acceptable!

 

The publisher for Pinball Arcade on XBLA has gone bankrupt and Farsight (the developers) have been going through hell to try and find another publisher and get the publishing rights transferred (XBLA doesn’t allow self publishing but that’s a topic for another day). This is why there haven’t been any updates or new tables for the XBLA version (which is a long way behind the PS3 version and even further behind the iOS, OSX and Android versions).

 

You can’t really throw EA sports into a collective grouping and say they couldn’t be sold. FIFA is an enormously valuable IP, although a lot of its value would involve the excellent team that work on it yearly. Madden’s only value is that it holds exclusive rights to team and players names otherwise it is worthless. 2K Sports for one would buy it just to get hold of those very valuable rights (and make a superior product to boot). Tiger Woods has value as a franchise but is almost certainly tied to Tiger’s ability to play at the highest level. NHL is too niche I think to have much value as a worldwide IP in my opinion. And sadly NBA Live (RIP) is dead in the water and worthless at this point.

 
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