- So, one of the big stories from earlier this week was Kotaku's one on Microsoft apparently 'cutting XBLA royalties in half', and it's one that has caused a lot of controversy, with plenty of predictable name-calling and insistence on the death of XBLA as a viable platform.

One of the problems here, of course, is that Kotaku's report only had one side of the story - and Microsoft isn't really in a position to refute the reports, because it will not discuss original or current royalty rates in public. Which leads us to a problem to be resolved - did Microsoft really cut its XBLA royalty rates in half without _ANY_ changes to the developer package?

The answer is no, of course. How Xbox Live Arcade works is badly understood by many, but let's try to split it up. Firstly, there are two different ways you can publish your game - either via Microsoft's own XBLA producers (let's call that 'first party'), or via an existing retail publishing partner such as Electronic Arts, Sierra, THQ, and so on (let's call that 'third party').

From what I understand, third-party royalty rates - which I believe were already less than 70% - are not affected at all by any of these new royalty changes. (Of course, if you're an indie and you have to go through a third-party, you will be getting a percentage of a percentage, because Microsoft takes a cut, and then your publisher, and then you. But you don't have to worry about testing, localization, getting ratings, and so on - it may be that Microsoft is keen for a greater percentage of games to run through those parties.)

So, it's the 'first-party' rates which are changing. And I didn't really have the specifics of how until an IndieGamer post by XBLA developer Paul Johnson helped fill in some of the blanks. As he explains:

"If you had a 70% deal... for a game, then you'll get your 70% for the life of the product. There is now a sliding scale in place for royalty payouts that is sure enough less than 70% at its best, but I've always thought that 70% to be unsustainably high from the get go, not that I was going to complain about it...

In return for the more realistic but still commercially viable lower rate, you get a variety of services for free that would've cost you plenty and would previously have presented a barrier to entry. Worldwide [game] ratings, localization, etc. It's a good deal. Unless you think saying M$ makes you clever, in which case I'm sure it will suck."

So basically - yes, the rumor is essentially correct, in that some royalty deals on first-party games may now be as low as 35%. But these lower royalty deals will now apparently include a lot of the 'grunt work' in localization that the developer had to pay up front - and sometimes perhaps couldn't afford.

In the N+ postmortem at the Indie Games Summit this week, it was noted that the minimum estimated cost to make an XBLA title was $125,000. It's possible (though it's unclear) that you can reduce that significantly with this new option - so you have to pay less up front, but you'll be making less on the back end.

There are still ramifications for many Xbox Live Arcade developers, of course - which is why I think it's even more important that XBLA pricing be reconsidered. Particularly, the traditional royalty rate if you 'roll your own' localization, etc and pay for it up front is now clearly less than 70% - but above 35%.

Which is a major shame - but paying for Microsoft's producers, game submissions, and so on _has_ to be self-sustaining, otherwise the XBLA ecosystem won't work. Overall, this _is_ a blow and a sign that the initial deals set up weren't at the correct level for sustainability. We'll see how this affects things for the indie going forward.

(As for what Sony and Nintendo are trying for - I'll be writing some pieces on the pros and cons of their approaches very soon, since they're equally interesting in different ways.)

[UPDATE: veteran programmer Jake Simpson also takes on the subject, suggesting "publishers still get the 70/30 split" and that "a rate of 35% going up to 45% based on sales [for first parties] has been put in place", particularly noting:

"MS is obviously attempting to steer indies to publishers, because then their certification requirements are considerably less (in so far as a publisher will do pre-cert to make sure you only need one certification submission, not many), and publishers deal with the indies instead of MS having to."

He also claimed of the changes: "So it's either go to a publisher and have to fight hugely to own your own IP, or take what little MS have and pray to god that you make enough to break even and fund the next game, not something particularly attractive to a small indie.

Whats really going to happen is that anyone who can create a decent product is going to run straight to Sony to do it, and have it released on their PlayStation Network instead. If they self fund they can retain the IP and the royalty rates are higher and best of all there are no publishers involved."]

[UPDATED UPDATE: Some particularly whiny but still smart correspondents of mine are complaining that I didn't run the numbers this time, as I did in my previous Xbox Live Arcade post. Mea culpa - it's true, and because I don't feel I have a full grasp of the facts on what is and isn't included.

Suffice to say - there's a real-world value (which I do not know!) for the 'extra things' Microsoft is doing. If it's $1, then this is a worse deal for XBLA developers. If it's $1 million, then this a great deal. Most correspondents so far - including several current XBLA developers in the comments - seem to think it tends towards a worse deal. Please do the math from there.]