As part of the ongoing West/Zampella vs. Activision case, Bungie’s four-game contract with Activision—as well as all incentives, bonuses, and planned release schedules—have been released as part of the court proceedings.
On March 10, 2010, Jason West and Vince Zampella, former President and CEO, respectively, filed a lawsuit against Activision over “substantial” unpaid royalties. Activision filed a countersuit against West and Zampella, claiming that the company’s actions were completely justified because West and Zampella had breached their contract by talking to EA. Shortly after, thirty-eight employees of Infinity Ward filed a suit claiming that between $75-$125 million in royalties were unpaid and between $75 and $500 million in punitive damages.
West and Zampella also used this $125 million number for their suit, but also sought to gain the rights to the Modern Warfare franchise. They also brought two fraud charges against Activision: fraudulent inducement and promissory fraud. The former was dismissed earlier this year, but the latter was allowed to stand. The court date was originally set to take place on May 7, but last month it was rescheduled for May 29 instead.
Furthermore, it has since come to light that the IT director was asked to breach the security guarding West and Zampella’s company devices in an attempt to gain evidence against them for use in court before they were actually fired.
One of the more difficult problems West and Zampella are facing is showing their reasoning for their $125 million unpaid royalties. Since Activision is relatively consistent throughout with their contracts, Bungie’s contract with Activision was submitted as part of the court proceedings. This contract is not only important because it reveals Activision’s methods of royalties and incentives, but also because it reveals the release schedule for a large-budget AAA franchise that has yet to be announced or released.
Bungie’s contract reveals a four-game (and four-expansion) project codenamed “Destiny.” The Destiny project games are “planned to be massively-multiplayer-style client-based mission structures with persistent elements, sci-fantasy, action-shooter games.” The first Destiny game is set to be released in fall of 2013. A new title in the franchise is to be developed and released every two years, with a major DLC expansion titled “Comets” every other year where there’s no new title release. In addition to this, there’s also planned DLCs that are intended to be smaller than the expansions. The franchise is intended to be developed for the 360 or its successor, with possible ports being made only if they are of the same quality without losing any features. In addition, the ports would have to be authorized by Bungie and could not be developed by competing parties, with Valve, Epic, and Gearbox being explicitly named forbidden. There is also a section pertaining to “Key Members” of the project, people who have signed long-term contracts to work solely on the Destiny project:
In the event thirty three percent or more of the then current Key Members leave the employment of Licensor within any consecutive twelve (12) month period prior to the initial release of Comet #4 such event shall be considered a Critical Risk (as such term is defined in Section 8.2) and accordingly Licensor must deliver a mitigation plan therefore in accordance with the terms of Section 8.2, provided that if Activision does not approve the mitigation plan, Licensor must continue to deliver the applicable Product on time and on budget in accordance with the approved Milestone Schedule for the next two (2) applicable quarterly Project Reviews (as such term is defined in Section 8.2) or will otherwise be deemed to be in material breach.
Activision shall have the right of approval (not to be unreasonably withheld) over the replacement for any Key Member who leaves the employment of Licensor or whose employment is otherwise terminated for any reason during the Development Term. Any such replacement for a Key Member will be deemed a Key Member for all purposes under this Agreement, including, without limitation, for purposes of this Section 8.1, and will sign an Employment Agreement.
Finally, the contract details the payments, incentives, and bonuses of the deal. Payments of $2.5 million will be made yearly as long as the studio remains on schedule, with a bonus $2.5 million to be rewarded if the first Destiny game reaches a metascore above 90:
For so long as Licensor is on-time and on-budget and has otherwise delivered applicable Product milestone deliverables in accordance with key milestone definitions mutually agreed by the parties hereto set forth in Exhibit E, Activision shall pay to Licensor an annual development on-time/on-budget bonus (the “Annual Development On-Time/On-Budget Bonus”) in accordance with the following schedule:
2010 through 2013: Two Million Five Hundred Thousand Dollars ($2,500,000) per year (commencing April 1, 2010 and to be payable ninety (90) days following the end of each calendar year, the Annual Development On-Time/On-Budget Bonus for 2010 would be payable by March 31, 2011, if applicable).
Activision shall pay to Licensor a quality bonus (the “Quality Bonus”) in the amount of Two Million Five Hundred Thousand Dollars ($2,500,000) should Destiny Game #1 achieve a rating of at least 90 as determined by gamerankings.com (or equivalent reputable services if gamerankings.com is no longer in service) as of thirty (30) days following the commercial release of Destiny Game #1 on Xbox 360.
Additionally, the contract allows for royalties given as a percentage of the Operating Income: 20% for up to $100 million, 24% for between $100 million and $400 million, and 35% for above $400 million. Additionally a “Threshold Bonus” will be awarded in the amount of $25 million once $750 million operating income has been generated, as well as an additional $25 million at $1 billion Operating income generated. The royalties are retroactive, meaning that once over $100 million is generated, Bungie will receive the additional 4% from the first $100 million that they were not already given.
Analysis: Activision is a huge company with a lot of cash. It follows easily that these sorts of royalty payments and incentives are well within their ability to grant. This contract is almost indubitably included because of the promissory fraud claims. Not only does this establish a frame of reference for the numbers on a large AAA-budget franchise, but it also shows that Activision could have easily committed promissory fraud if they made claims like this and afterwards looked for an excuse to not follow through.
While I’m not sure that West and Zampella are completely in the right, if thirty-eight other employees also filed a suit for similar reasons, then something smells. What bothers me is that it’s been two years so far with no resolution. This is clearly a long and ugly suit, but I’m not sure I see an end to it any time soon. I do find it abhorrent that Activision’s IT director was encouraged to hack their company devices to obtain the means necessary to fire them. That sounds more and more like Activision made some promises they didn’t want to keep.
I am interested in what this four-game contract is going to result in, however. The contract is clearly designed to create a franchise they can milk the shit out of. If it fails, they’ll drop Bungie like a rock. However, I have to wonder if this is related to the “Next Generation MMO” that Blizzard is supposedly working on. Some people have already claimed this rumor to be false, but considering the contract details, I can’t help but wonder. At the same time, the contract clearly names Activision instead of Blizzard and is being developed for the 360, not a PC like MMOs are usually based on.
Ultimately, we’ll find out more about this case on the 29th, and possibly more about this four-game franchise, in the future.