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Digest Comment - Independent Game Developers on the Xbox 360 and iPhone: How Lawyers Can Save Them

Commentary Notes First Amendment

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Video games have evolved from a niche hobby to an important mainstream form of entertainment and artistic expression in the United States. A May 2009 Ars Technica article stated that Americans are more likely to spend time playing video games then going to see a movie. Video games can now be considered a peer of music, movies, and television. As in these other industries, there has been a recent movement outside of big-budget and high-profile games. Small development teams with limited resources have begun producing unique games that push the boundaries of gameplay and story-telling. Current independent developers grew up on the personal computer (PC) and are familiar with its open nature, meaning that with the PC developers can have unfettered control over their products’ creation and distribution.

This open nature is not without flaws, such as piracy. In response to these flaws, developers have begun moving to other platforms, most importantly the Xbox 360 and the iPhone. The popularity of these devices and their ease of use present an enormous opportunity for independent developers. The evolution of these platforms, however, also presents a significant impediment to the growth of independent games. The flawed free and restrictive natures of the Xbox 360 and the iPhone threaten the financial success of independent games. In contrast, Microsoft’s control over the Xbox 360 and Apple’s control over the iPhone enables these two platform holders to achieve their own goals. The interests of the platform holder and independent developers often do not align, which negatively impacts the latter entity. Independent developers are so intent on producing profitable games that they focus on surviving on the platform instead of changing its structure for the betterment of their peers. In order to overcome the harms of these platforms, this Comment will argue that a legal aid organization should guide independent developers in overcoming Microsoft’s and Apple’s status as repeat players in their respective platforms.

The PC provides the most freedom for independent developers to dictate the nature of their product.  In his book The Future of the Internet and How to Stop It, Jonathan Zittrain, a Harvard Law School professor, describes the PC as a generative platform that has promoted innovation and contribution from individuals.[i] Independent developers working with the PC embody this theory. At the far end of the spectrum, developers can host games on their own websites for download. Under this distribution method, developers are free to experiment with content and price structure. For example, Developer 2D Boy allowed customers to buy its game World of Goo on its website in October 2009 for any amount the customer wished, above and including one cent. Such experiments allow video game studios to create publicity for their products and attract customers who would normally be hesitant to buy a game from an unknown entity.

The PC also features digital distribution channels like Valve’s Steam, a program that users can download to their computer and use to purchase games. CEO Dr. Rob Jagnow of Lazy 8 Studios, the team behind Cogs for the PC, asserts that while such portals “enforce a quality threshold for games, the financial barriers to entry are extremely low.”[ii] According to Dr. Jagnow, digital distribution channels offer independent developers seventy percent of the revenue from their sales, as compared to ten percent from comparable sales in retail.[iii] For this financial commitment, these channels provide independent games with a legitimate distributor that reaches a large number of customers. John Gibson of Tripwire Interactive, the developer of the games Red Orchestra and Killing Floor, praised Steam’s fair profit structure and its desire not to interfere with the developer’s control of its intellectual property. Because independent developers do not sacrifice much to put a game on a PC digital distribution service, these services allow developers to retain a high level of freedom.

There is a downside to PC digital distribution services as well.  The generative nature of the PC fosters piracy, which negatively impacts the ability of independent developers to thrive solely on the PC platform. Ninety percent of all users who played World of Goo on the PC within a month of its release acquired the game illegally. 2D Boy released World of Goo without any digital rights management (“DRM”) system. DRM refers to tools utilized by developers to prevent illegal access to their products. However, even those who use DRM are not necessarily protected from piracy. As pirates figure out ways to bypass current DRM systems, developers are often forced to develop more restrictive forms of DRM, such as only allowing users to play a game when connected to the Internet. Generally, video game fans do not like the restrictive nature of DRM and developers’ use of DRM usually creates ill will towards the developer. Legal recourses, such as seeking injunctions or damages against pirates, to forestall piracy are inefficient and expensive, as the responsible parties are too numerous to pursue. Independent developers can survive piracy, but the widespread nature of this problem has limited their ability to fully capitalize on the video game potential of the PC. John Warner of Greener Grass Games voiced a common opinion of independent developers when he stated, “We’re at a point where indies have to consider a new revenue model.”

These new revenue models force developers to accept piracy as an unavoidable cost and to organize their business around this inevitability. One way to do so is for developers to seek additional revenue streams to buttress their earnings. Some independent games charge monthly subscription fees, contain in-game advertising, or utilize microtransactions by selling users access to new content in the game. Developers in countries with significant piracy issues often use these tactics, which produce profit from a game’s popularity regardless of how players acquired the game. Independent developers can effectively eliminate illegal downloads by moving to a free-to-play model in which users download the game for free and the game generates revenue through these nontraditional means. A shift to these models seems inevitable because of the pervasive nature of piracy, yet these models need to be proven effective before they can be adopted on a wide scale. Another way to overcome the flaws of the PC is to move away from its open structure altogether and to embrace a more closed platform, such as the Xbox 360 or the iPhone.

Microsoft’s Xbox 360 and Apple’s iPhone offer independent developers great potential to garner more exposure and increase sales. Each of these electronic devices includes a digital distribution store in which independent developers can sell their games. Independent developers can put their games on Microsoft’s Xbox LIVE (the Xbox 360’s online service) Indie Games Store and Apple’s App Store without waiting to be approached by either company to do so.

The main benefit of these platforms to developers is the customer bases they provide. Both Xbox 360 and the iPhone have become major figures in the entertainment electronics arena. According to USA Today, Microsoft has sold thirty million Xbox 360s since its launch. Gizmodo reports that Apple sold 7.4 million iPhones and its users downloaded a half-billion apps in the 2009 fiscal year fourth quarter alone. By getting on these platforms, independent developers gain access to all of these users and the vast amount of money they are spending in these digital stores. Instead of spending money on advertising, developers can rely on Xbox 360 and iPhone users seeing their game while browsing the Indie Games Store or the App Store. Also, users do not have to travel to individual developers’ websites or download various digital distribution platforms to purchase independent games. The Indie Games Store and the App Store are packaged into the device and are immediately accessible in a centralized location. Microsoft’s and Apple’s control over their respective platforms put them in better positions to combat piracy, either by punishing transgressors or authorizing new ways for developers to avoid piracy. The iPhone and Xbox 360 seem to be ideal platforms for independent developers to avoid the PC’s major flaw and reach a large number of potential customers.

However, Microsoft and Apple have not created a completely hospitable environment for independent developers. The drawback of these devices is that independent developers currently do not have the ability to enact necessary change in the platforms. Law professor Marc Galanter’s seminal article Why the ‘Haves’ Come out Ahead: Speculations on the Limits of Legal Change sheds light on the reasons for the developers’ current disadvantages.[iv] Galanter divides participants in the litigation system into one-shotters, who only engage with the court a limited amount of times, and repeat players, who have been involved with many similar cases over a long period of time. While the one-shotter is often focused on his or her own immediate needs and not any larger purpose, the repeat player is able to frame his or her cases in a way that ensures a more favorable situation.[v]

Although Galanter’s article deals with litigation, his theories are equally applicable to independent developers and the two platforms under discussion. In this analysis, the independent developers are the one-shotters. As small studios with limited resources, they need to get their games to the public as soon as possible in order to quickly turn a profit. This urgency makes them more willing to accept whatever terms Microsoft or Apple imposes on them in order to get into the respective stores quickly. Microsoft and Apple are repeat players who deal with a large number of independent developers. They are also the gatekeepers of the marketplaces and maintain a significant advantage over developers. Therefore, Microsoft and Apple can structure the nature of their platforms and their dealings with these developers as they see fit with little threat of developers subverting their position. The Xbox 360 and iPhone reflect the desires of Microsoft and Apple and were not necessarily designed to benefit independent developers.

Microsoft utilizes their privileged status to create a hybrid platform in the Xbox 360’s Indie Games store. Unlike the PC, the Xbox 360 is an entertainment console that is designed for a limited number of activities, namely playing video games and movies. Professor Zittrain describes the Xbox 360 as “occupying many of the roles of the gamer PC without being generative.”[vi] Yet, this analysis does not completely conform to the console’s treatment of independent developers, who retain freedom in certain areas. The Xbox LIVE Indie Games store allows any developer to sell his or her games on the Xbox 360. Microsoft maintains control over the review and approval process, but relies heavily on peer review to determine which games are allowed to reach the market. Independent developers are allowed to dictate the price of their game, but only among three preset prices ranging from one to five dollars. These factors create a hybrid platform, in which independent developers do not give up full autonomy yet must operate within specific rules set by Microsoft.

Although the open-and-closed nature of the Xbox 360 Indie Games store may seem to help independent developers transition from the PC, the platform’s hybrid status is preventing independent developers from succeeding on the platform. Among independent developers, there is a strong resentment towards the structure of the Xbox LIVE Indie Games store, as many feel that the store is a cluttered and unorganized mess in which the best games do not necessarily rise to the top. Microsoft has recognized that this clutter is not conducive to sales and has recently reorganized the store to promote higher quality games. However, many developers feel that the damage has already been done. Nick Gravelyn, who released Pixel Man on the Indie Games store, stated that he has spoken to many people who choose not to frequent the store. When he asked them why, “a substantial number…respond[ed] with ‘It’s all sex games and stupid apps.’” The numbers seem to support this statement: game developer Jeff Ward recently stated that the average independent game sells approximately five thousand copies, well short of what a normal independent developer needs to sell in order to recuperate costs. Ward attributes these low sales to people ignoring the store due to the difficulty of locating good independent games. By contrast, one individual who made a massage game that inspired Gravelyn’s “sex games” comment has already earned $60,000 from his sales. Unique apps overshadow independent games, leading to poor sales figures and a consumer perception that the store does not offer quality gaming experiences.

The closed nature of the Xbox LIVE Indie Games store comes into play when an independent developer seeks to transcend the Indie Games store and put his or her products on the Xbox LIVE Arcade, where the major publishers sell their games. Transitioning to the Xbox LIVE Arcade eliminates the major problem of reputation that plagues the Xbox LIVE Indie Games store. However, this transition raises the barriers to entry for independent developers. Unlike the Indie Games store, Microsoft maintains complete control over what appears on the Arcade and when it is released. There is no direct pipeline between these two stores in which independent games eventually appear on the Arcade after they are in the Xbox LIVE Indie Games store for some period of time or by any other metric. A post on the XNA Creators Club (a community for independent developers on the Xbox 360) indicates that to get into the LIVE Arcade, independent developers must be accepted into a program separate from anything they have done previously. A game must go through multiple approval processes in which Microsoft decides whether it wants to put the game on the Xbox LIVE Arcade. This is in stark contrast to the Indie Game store, in which the independent developer decides whether to put his game on the platform and the Microsoft approval process exists primarily to ensure a minimum standard of quality for consumers. Microsoft and publishers, companies that fund and distribute video games, likely want to avoid clutter so that their bigger games get more attention and purchases. Putting every independent game on the Arcade would likely create a flood of titles that would confuse the user and make it harder to find certain games. Thus, the freedom that independent developers have on part of the Xbox platform does not extend to the entire platform. The desire to get a game on the Xbox LIVE Arcade enhances the independent developer’s status as a one-shotter, as the developer will be focused solely on reaching its goal and will consider other independent games to be competitors for a limited amount of spots. Independent developers cannot cooperate to promote an easier transition to the Arcade when they are each busy trying to accomplish this goal for themselves.

Apple has created a hybrid platform in the iPhone, similar in some ways to the Xbox 360. Professor Zittrain described the iPhone similarly to the Xbox 360, as a “tethered information appliance.”[vii] Yet, like the Xbox 360, the iPhone’s App Store has turned the iPhone into a hybrid of a closed and an open platform. Any developer can attempt to put his or her game on the App Store and, if approved, can dictate his or her pricing scheme. However, Apple maintains stronger control over the approval process for apps than Microsoft does for games, as it employs its own closed process rather than any peer review method. Game developers have to adapt to both aspects of the platform in order to fully succeed on it.

The closed nature of the approval process divorces the developer from the process and increases the transaction costs of placing a game on the App Store. Unlike the Microsoft peer review process, the Apple version reserves approval power for its own software experts. Professor Zittrain attributes this to Apple’s tendency to create a closed environment around its products. During the approval process, Apple does not always inform the developer of why it rejected a game. Developer Dave Carlile of Willow Ridge Software described this process as “a black box” in which Apple rejects apps for unclear reasons. Another developer’s game remained in the approval stage for three months without any explanation from Apple for the delay. This process raises the costs of development, as the team behind a game must constantly revise the game to fit within Apple’s standards. Apple’s opaque reasoning may force the developer to spend too much time and capital on revising the product or to resubmit a still-flawed product. The approval process delays the game’s arrival in the store, thereby delaying the ability of a developer to recoup his or her production costs. This forces developers to invest a greater amount of time and money in an individual game, and therefore place greater reliance on its success.

Once a game passes the restrictive approval process, the open nature of the App Store inhibits the potential of independent games due to its lack of regulation. Because developers have full control over pricing and can change it at any time, many developers change their app’s price to generate more interest and sales. Changing price has a major effect on the number of sales. For example, PopCap Games dropped the price of Peggle, a critically well-regarded game, on the iPhone from $5 to $1 during a weekend in June 2009, catapulting it from the sixtieth best-selling app to the first. Because such sales are good for Apple, the company has the incentive to foster this pricing environment on its platform. Although every developer can use this technique to their advantage, price changes by one developer can create consumer expectations. An iPhone owner becomes conditioned to expect that all games should be sold for a small amount of money. Quality is not a factor, since games as well-regarded as Peggle engaged in this dramatic price slashing. Price slashing thus creates a situation in which users will refuse to buy games until they go on sale, or will ignore comparatively higher priced games in favor of cheaper alternatives.

Since independent developers, as one-shotters, focus on their individual needs rather than a general good, they will often engage in price slashing on the iPhone in an attempt to keep up with the competition. Developer Jeff Ward states that most games must stay around a dollar in order to be successful, demonstrating the lasting effects of the Peggle-esque price drops. Ward estimates that an independent developer needs to sell approximately 57,000 copies under this pricing structure, a difficult number for an independent developer to reach, in order to adequately support himself or herself. This number can go even higher after factoring in the transaction costs created by Apple’s laborious approval process. Developers’ inability to recognize the need to promote the common good creates a situation in which Apple’s desire to increase overall sales is achieved, but independent developers foster a self-defeating condition in an attempt to stay viable on the platform.

The current legal support available to independent developers does not help solve the problems created by repeat players. As mentioned earlier, independent developers who sell their products through the Xbox 360 and iPhone often struggle to turn a profit. Earnings go towards development of new games or additions to the development team. Therefore, there is little available capital for legal services. Independent developers must utilize generic legal information to deal with contracts, copyrights, and other legal question. According to Dr. Jagnow, many developers utilize legal guides like Nolo, which provide basic information regarding legal issues.[viii] The International Game Developers Association has contract and intellectual property guides that help educate developers on these topics. However, these products and websites are mere guides that steer independent developers through the basics of legal issues. They do not apply specifically to the needs of independent developers as a collective entity. Under these available tools, independent developers will be able to understand some of their own legal issues, but will not recognize the need to promote much-needed change in the platforms they occupy.

Unless the situation for independent developers changes, the current state of the platforms will threaten their potential for growth. Currently, neither the Xbox 360 nor the iPhone presents a completely viable platform for independent gaming. This situation is largely due to the conflict between the platform holders’ goals and maximizing the positives while minimizing the negatives of the platform for independent developers. Yet, independent developers are so focused on turning a profit on each individual game that they do not have the ability to focus on establishing a more viable structure for themselves as a class. As of now, most independent game developers either cannot make enough money to sustain their operations or feel that outside influences are impeding their growth. This could have significant consequences. Instead of pushing the creative envelope, independent game developers may seek to create derivative products in order to capitalize on consumer’s familiarity with works of a specific genre. A greater number of developers will leave this already-tempestuous business due to a lack of profits.

Perhaps the most significant consequence is that developers may shed their independent status and seek the financial stability of a publisher. Doing so provides a grave new threat to independent developers’ ownership of their IP. A publisher that incorporates an independent developer may seek control over the developer’s established or future IP. Should the publisher acquire control over the developer’s IP, the publisher can then jettison the developer within a contractually-defined period. Without its most popular franchises and characters, an independent developer will lose significant bargaining power with publishers and platforms. An example of the importance of IP in the game industry is that ZeniMax Media Inc. justified its recent purchase of Id Software based on Id’s wealth of profitable and critically-acclaimed franchises like Doom. Although Id Software is certainly not a small development studio, its foresight in retaining control over its IP proved to be a significant bargaining chip in seeking a partnership with a publisher. All independent developers may not have this foresight, as they may be desperate to acquire the stability of a publisher after experiencing life on the three aforementioned platforms and may not have the bargaining power to prevent the loss of their creative output.

All of these consequences would have a malignant effect on the video game industry. Independent developers are crucial for pushing video games as artful entertainment by innovating in terms of gameplay, story and design. Such developers are able to pursue these advances through their independent status and freedom from the pressures of publishers and other controlling entities. Their innovations are often adopted by larger developers and help the industry slowly evolve. If independent game development suffers, so could the advance of the video game industry.

Galanter’s article points to a way to improve this situation. In order to offset the power of the repeat players, Professor Galanter imagines a situation in which there is an “organization of ‘have-not’ groups (whose position approximates [one-shotters]) into coherent groups that have the ability to act in a coordinated fashion [and] play long-run strategies.”[ix] He asserts that these developments will create change at a higher level as these unified groups will become repeat-players that can promote different rules that serve their long-term purposes.[x] An ideal group to foster this reorganization is lawyers. Professor Galanter classifies these individual lawyers as repeat players,[xi] and lawyers could use such experience to provide guidance to former one-shotters on how to overcome personal short-term goals to achieve the greater good. Independent game developers should have such advisors to help guide their activities. This role should not be spread among individual small law firms. Unless there is uniform representation, different law firms will seek to maximize their and their clients’ individual interests. This type of advising will only further the fractionalized nature of independent developers and strengthen Microsoft and Apple’s position as repeat players.

Therefore, it is imperative that there be some kind of advocacy or legal aid group that can turn independent developers into a unified repeat player. Lawyers who are familiar with the specifics of the video game industry can advise independent game developers about how much they should sacrifice individual goals to achieve a more favorable situation for all. Independent developers recognize the need for specialized legal advice that helps them interact with these platforms. Dr. Jagnow emphasized this desire by asserting the benefits of legal aid that addresses the “specific needs” of developers and advises them on what contractual questions they should be focusing on when they engage with these platforms.[xii]

This legal aid society should consist of a combination of lawyers that have experience with the video game industry and law students. Law firms who contribute lawyers and resources can benefit from this program by developing relationships with developers that may develop into profitable business relationships as developers reach a certain level of success. These lawyers can set the necessary agenda for independent developers to follow and can train law students to provide individualized support for the developers. Law students will be able to devote more time to the developers. Many current law students have been around video games for their entire lives and will have invaluable knowledge of the industry that older established lawyers may lack. Such aid can be administered under the guidance of organizations that already exist to assist independent developers, such as the International Game Developers Association. This organization will help coordinate the actions of independent developers to make sure they present a unified front and benefit the class as a whole. This legal aid organization can help end self-defeating practices, such as slashing prices on the App Store, and can demand better conditions for independent games, like a pipeline to the Xbox LIVE Arcade.  Also, the organization can pursue a litigation strategy to rectify oppressive situations for independent game developers. Most importantly, independent developers will increase their influence if they act together in pursuit of the singular goal of an improved situation for themselves on the Xbox 360 and iPhone. By creating a unified front that seeks to enact change in the structure of these platforms, independent developers can pressure Microsoft and Apple to adapt their platforms in order to create a more hospitable environment for independent developers.

[i] Jonathan Zittrain, The Future of the Internet and How to Stop It 3 (2008).

[ii] Email Interview with Rob Jagnow, CEO, Lazy 8 Studios in S.F., Cal. (Oct. 16, 2009).

[iii] Id.

[iv] Marc Galanter, Why the ‘Haves’ Come out Ahead: Speculations on the Limits of Legal Change, 9 L. & Soc’y Rev. 95, 97 (1974).

[v] Id. at 98.

[vi] Zittrain, supra, at 58.

[vii] Id. at 101.

[viii] Interview with Rob Jagnow, supra.

[ix] Galanter, Speculations, supra, at 141.

[x] Id., at 150.

[xi] Id., at 114.

[xii] Interview with Rob Jagnow, supra.