As anyone in PR or communications will tell you, the best time to make a catastrophic announcement is when everyone is busy looking elsewhere. You don’t want to hide it, but you want to push it through the news cycle at a time when you’ll only generate half as many articles.
That’s what Embracer did this week. While everyone is busy going gaga over the thousand or so games showcased over the not-E3 past week, Embracer quietly announced a “large-scale restructuring.” That’s a codeword for “We’re sacking a whole lot of people right as the world descends into a recession.”
Embracer, as you’re about to see, is the height of ethical business philosophy (yes, that is sarcasm, Sheldon Cooper).
Gematsu’s got some great coverage of the open letter that Embracer Group CEO, Lars Wingefors, shared publicly, as well as the actions that the company will take. The long and short of it, however, is that there will be a substantial reduction in costs, the closing of studios and the termination of projects “with low projected returns,” new levels of oversight to ensure game developers don’t get too creative to the detriment of sales, and a more “data-driven” approach to game forecasting.
If it were any other game publisher, you might be inclined to be at least a little bit sympathetic to their position. Sometimes business downturns happen. Sometimes the financial outlook looks grim and the executive needs to do something in an effort to preserve the core of the company. It’s never great when these things happen (especially since the executives never seem to be the ones that are held responsible and fired), but sometimes it happens and it is unfortunate.
But no. We should have nothing but anger for Embracer Group. With Embracer Group, its current woes are entirely self-inflicted, and the reason the company is in this position is that the suit-wearing geniuses approached business growth in such an unsustainable way that calling it “unethical” would be generous. Even more than normal, it isn’t the game developers that should be losing their jobs. It should be the entire executive layer, and every single board member should be hauled before the regulators for some serious questioning on why they allowed the company to have such flagrant disregard for the lives of everyone they are now impacting on.
No, I have no sympathy for Embracer Group.
How Embracer Group got into this position
There are several ways that a company can grow. One is organic. A company creates a product, and it sells well. So the company starts hiring more people to sell more of that product. And then they might add some new products. Eventually, the company becomes big enough to attract investment and, possibly even list on the stock exchange.
Another might be via investment from the early stages of a startup. A super clever entrepreneur has an idea for a product that is so good that a bunch of people with a lot of money throw that money at the entrepreneur in exchange for bits of their company. If the company takes off, then the investors get a lot of money back. If it fails, the investors shrug, because most of them have far too much money and it’s all a game to them.
Through this approach, growth is (much) faster than if a company grows organically, but it’s otherwise the same basic idea: the company grows on the strength of what it creates, and then can expand to do more.
And then there’s option three: growth through acquisition. The Embracer Group strategy. This is the scummy, laissez-faire capitalism approach to growth, and if the world’s regulators weren’t so terrible at their jobs, they’d do something about any company’s ability to ever adopt this as a strategy.
When you grow through acquisition, you start out with a big pool of cash, and you use that cash to buy companies. When you buy those companies, the revenue and profit that the company makes gets added to your accounting balance sheets. In other words, when it comes time to report your financial results for the year, you get to report stupidly high percentages of revenue and profit growth. Note: this is exactly what Embracer Group did in February of this year. Revenue was up 128 per cent because it added new game studios and IP that added numbers to the balance sheet.
Yes, that’s right. That was just four months ago.
But there’s a big problem with doing this. Especially if, as Embracer did, the companies and IPs that you’re buying are cheap because they’re in distress.
At some point, you’re going to run out of money to buy new companies that pad out those financial results. And, as acquisitions slow, the weaknesses of the underlying assets start to pull the financial results in the opposite direction. Basically, the year a loss-making company is acquired, it adds to the balance sheet. But, in subsequent years, if you’re not adding more and more companies to hide that loss-making asset, the losses start to show.
When that happens the investors suddenly become nervous since you’re not making them all those extra numbers on their balance sheets, and the next thing you know you’re pretending to shed a tear as you announce mass firings and ruin the lives of the poor plebs that were sold into your conglomerate of companies.
We all liked to laugh at Embracer Group’s acquisition rate because, for a time there, it really was ridiculous. We even allowed ourselves to cheer a little when they were “saving” properties like Tomb Raider and Kingdoms of Amalur, which were clearly so underperforming that the likes of EA and Square Enix wanted nothing more to do with them. I was part of the “we”. For a brief moment there I even let myself think that Embracer was actually doing a good thing and helping to get the kind of creative projects that a AAA publisher wouldn’t touch out there.
But of course, that was all fantasy. Embracer Group has become the latest, and one of the greatest, examples of why capitalism is truly unhinged and unrepentant in the video game industry. The entire industry cheers on consolidation and monopolistic behaviour, and doesn’t, for even a second, stop to look at the behaviour of these companies with a critical lens until it’s too late.
Now, perhaps we should consider that Embracer isn’t the only acquisition-happy company out there, and instead of cheering on the behaviour of Microsoft, Sony, EA, and the rest, we should instead celebrate those rare companies that have managed to grow relatively ethically within a deeply unethical industry. We won’t, of course. It’s much easier to be sycophantic to the companies that create the toys we like to play and get excited by the thought of our favourite company winning the video game wars. But this industry and almost everyone involved in it have become a cynical embarrassment and, collectively, an insult to the incredible art form that video games should have become.
Round of applause, that man.
I agree, and also was predicting this was going to happen several months ago. This model of “growth” isn’t sustainable, and rich holding companies like Embracer exist to play profit games with dozens of companies, to try to get richer. They don’t exist to oversee the production of good things. I never for one minute thought that Embracer ownership was a “new lease on life” for companies they acquired. It was a warning bell: “Get out now”.
Did you miss the angle that the prime mover for this sudden re-structuring was that a $2 billion infusion of cash they were counting on (from an unnamed source that had given Lars a verbal agreement) was cancelled and pulled out at the last minute? Holding companies need money to prosper. When $2 billion they were counting on suddenly disappears, it’s time to cut-cut-cut. Then either dissolve (or sell themselves to a bigger holding company) in a year or two … or recover and try to acquire some more things to make more money in a year or two. Games, game devs, and game players are not served by entities like Embracer … no matter how much of a gamer Lars Wingefors was in decades past.
It is possible that the firings were planned beforehand even if they had those 2 billion. It’s the quickest financial way to make a company look more profitable, by firing people the costs down – and since the income stays the same since the game’s already out – the profits go up. For this year’s financial results, it’s good enough
Another financial scam that’s common on acquisitions is to make the company you are buying saddle the debt of their own purchase. That move has been more widely known due to cases like the American owners who bought soccer club Manchester United. If you buy a company for 5 billion dollars, you then make the company pay 3 billions to the previous owner. From the beginning, the transition alone makes it hard for the company to be sustainable in the future.
Thanks for this Matt. I was already suspicious and not surprised when the news dropped, but this sums up my undeveloped thoughts for certain. Capitalism tends towards monopoly and monopoly capitalism is doomed to collapse