Throughout my entire time within the game development, I had close contact with game publishers. On one hand because I've been working for a publisher (Blue Byte) and on the other hand because I've been lead programmer and independant programmer.
The main target for publishers isn't to publish games. It's to make money. Most of them are quite good in that, others suck.
How does a publisher work ? Actually, the interesting part for the game developer is how the projects to finance are chosen.
For some publishers (mostly those who suck) any half good looking project is good. Send them a demo, have a good business plan and prove that you're worth it.
But if you want to trade with the major players (ie. EA or Ubisoft) you better have a strong portfolio, a very good team, a mainstream project and the lowest cost possible. If you got a major player interested in your game, before any further discussions are held, the publisher counter checks the possible through put of your game. Therefore he asks his local vendors in each country, how many packages possibly could be sold. If the total is less than XXX.XXX, you have no chance. IIRC the minimum number of packages for europe is at 300.000 units for EA. If the vendors estimate that you sell less than that, you have no chance for getting a contract.
Since publishers want to make money, they also want to spent the less money possible. So, before any contract is signed, you have to hand them a business plan detailing every single cost for every single person working on the project. If you're not one of those teams coming from eastern europe, you cost (by definition) are too high. So you have to lower and lower the costs. Until you scratch the amount that would hardly allow the survival of your company.
That's how I did it when I was a project manager at Blue Byte and that's how Blue Byte did it with me when I signed a pre-contract for Settler 5. Although Settlers is a strong IP in europe, the company boss wasn't willed to pay more than 1.200.000EUR for the development of a PC and XBox Version of the game.
Now, imagine you have put you foot into the door and you have signed a contract. You get your money on every milestone (if you hit it) and that's cool. What's not so cool is when you actually have finished the development of the game. Before you see any money, the publisher has to "break even". Means, he has to regain what he has invested into your project. You'll get no money before the payments you got for the milestones aren't back in the pockets of your publisher.
Sounds familiar ? Oh yes, it does. It's the same thing when you buy a house and you ask a credit at your local bank. They give you money, but you have to pay it back.
Why does this disturb me ? Because publishers pay you a percentage on the gain they have for each package sold. If you buy a package at the computer store, you'll pay $50. The publisher actually get's $25 from that. He'll subtract the marketing costs (shelf space, publicity, etc) and his personal costs. What remains is hardly $12. Since you have been paid milestones the publisher had the major part of the risk, you only got 10-15%. So, per package you would actually get $1.8...
Cool... but wait... you have to pay them back what they've paid you. So, they paid you $2.000.000. They get $12 per package. So, before you see any money there have to be sold at least 166.666 packages.
The game sold 300.000 times. You'll get money for 133.334 packages which is ~$240.000. Most small game developers have gone bancrupt before the break even has been reached.
An equitable handling would be to pay you from package 1 on. At least, you would get money from the start on. The publisher would have to wat a bit longer to get the money back they invested but it wouldn't be that much more.
(Actually it's :
$12-$1.8 = $10.2
$2.000.000 / $10.2 = ~196078 packages
a difference of ~29400 packages)
There could be done much more rant about all this stuff but I keep it here. EA and Ubisoft are two examples of publishers I've worked with. Please do understand that I took them as an example. It's not only them who're working in that way but all publishers.
NOTE : I got some message of people saying that I'm quite negativ about what I am saying. Yes... that's true. Call it major burn out or whatever. To compensate, I'll point out what developers can do to increase their chances on the market. It's not as if I'm completely negativ about all this.
The next part will be called "Personal investment and family"