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What THQ’s Demise Can Teach About Telltale Games and Other Company Closures

The video game world has lost so many studios over the decades that you’d think that the industry would be desensitized to it. And yet, when it was revealed that Telltale Games was laying off the majority of its 274 employees and beginning a “majority studio closure,” colleagues, journalists, and fans were shocked.

About 250 jobs were lost in the blink of an eye in a month that had seen nearly 1,000 positions eliminated (some suddenly, and some in loping fashion that pundits had seen coming). Layoffs and shutdowns are painful, as conscientious employers seek to soften the blow for the dozens or hundreds of employees whose lives have suddenly been turned upside down.

There are few people as qualified to speak to this better than Jason Rubin. Rubin is currently the vice president for AR/VR content and partnerships at Facebook (a title he earned recently after serving for four and a half years as Facebook-owned Oculus’ vice president of content).  Rubin is also the co-founder and former co-president of “Crash Bandicoot” and “Uncharted” creator Naughty Dog. He was also notably THQ’s last President, from May 2012 through the company’s bankruptcy less than a year later.

In a conversation with Variety, Rubin candidly discussed THQ’s shutdown, including how every job loss disrupts a delicate team balance. The culture is shaken (sometimes catastrophically and definitively), and even if some of those creators come together down the road, the specific team spirit at those studios and in those moments is gone forever.

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“If you look at a team like, for example, a “Grand Theft Auto” team, or a “Call of Duty” team, or a “Halo” team, Vince [Zampella’s] team at Respawn that has moved up and then the greater personnel that builds up those teams, in some ways, it’s like humanity’s treasures,” Rubin says. “If you break them apart, it’s like blowing up a ruin, you can’t bring it back together in its earlier splendor. It just doesn’t work that way. So you lose the muscle and memory of those teams and the ability to do what they’re doing.”

This echoes one of the biggest questions swirling around Skybound’s attempt to finish Telltale’s “The Walking Dead: The Final Season.” The company, which owns “The Walking Dead” franchise and has now taken on the responsibility of finishing the game, sought to bring back as much of the Telltale team as possible. We know that some of those developers did come back, but there were most certainly holes in the roster. Even with some of the creative voices contributing, the specific blend of creative voices that worked on the first two episodes is lost. Skybound may be able to emulate for the remaining two installments, but it won’t be able to replicate the specific recipe.

The risks of leading a company in decline
Jason Rubin is no stranger to risk, having created a number of startups (some which have succeeded and others that have failed). One of the biggest leaps he’s taken in his career was to step in as the President of THQ in May 2012. In December of that year, THQ declared bankruptcy. Rubin began as the last hope for a company suffering from tragic business decisions that ultimately cast the company’s fate in stone. In many ways, his path mirrors that of Telltale CEO Pete Hawley, who was at the company for only a year before it, too, made the decision to liquidate.

There are places where these stories parallel. There are others where Telltale could have done better, learning from those that had walked the last mile proudly, ensuring employees landed as softly as possible.

At E3 2012, Rubin told Polygon that he believed THQ was in a strong position. Despite trading at less than $1 and under threat of NASDAQ delisting, the publisher had released the well-received and strong-selling “Saints Row: The Third” in 2011. With “Darksiders II” just a few months away, the WWE license still primed to generate big revenue, and “South Park: The Stick of Truth” in development, Rubin had every reason to believe that things could be turned around.

He brought to THQ a sense of confidence that with some strategic realignment, reducing operational redundancy, and focusing on the creative teams, that the plane could be brought back to cruising altitude. Rubin started his tenure with a listening tour, visiting as many studios as possible and opening up an email account so THQ employees could voice their concerns.

“Day one was mainly speaking to the employees and opening up my email. It was ThoughtsForJason@THQ.com,” Rubin says. “It was an email I started day one. I had hundreds of emails coming in from everybody all over the world because we had multiple locations. There was no way I could talk to them. I spent the first night or two up all night answering emails the best I could, to keep up with this. The first few days were mostly just hearing problems.”

Unfortunately, it turned out that the challenged company was in worse shape than Rubin and Jason Kay (former THQ chief strategy officer who joined the publisher alongside Rubin) realized.

“THQ is very clearly in distress when Jason Kay and I took over, went in with an investment banking company,” Rubin recalls. “The stock went down, I think it was 98.5% from its high. The total value was $25 million in a company that had a stock worth $2 billion at one point. So nobody was under any illusions that they weren’t in serious trouble. The thesis was that there was a humongous value in the teams and people building product. As we joined THQ and got in, we found very quickly that things were not what we thought they were. The plane was headed towards the ground, as we thought it was, but it was at a significantly lower altitude, heading to the ground faster, with less fuel than we expected.”

Rubin and Kay realized relatively quickly that the damage THQ had suffered from the uDraw tablet (an iPad-like gaming device that led the publisher to take a $100 million loss) couldn’t easily be mitigated. The die had been cast, and it was up to Rubin to bring the plane down as safely as possible.

“As we joined THQ and got in, we found very quickly that things were not what we thought they were. The plane was headed towards the ground, as we thought it was, but it was at a significantly lower altitude, heading to the ground faster, with less fuel than we expected,” he says. “Pulling back on the sticks did not allow us to, as we thought, take the landing gear and take off again. Rather, it looked pretty clear that we were going to auger it in. So we moved from trying to save THQ as it was to move into a bankruptcy, in the most organized way we could.”

Rubin says his day-to-day didn’t change much after the decision was made to shutter the company. He began his tenure by focusing on care of the development teams, and that’s where the focus remained, but he struggled with the situation he’d found himself in.

“I think it was about two weeks in, we realized how much trouble we were in,” he recalls. “I remember thinking to myself, ‘Did I make a mistake?’ I called my father, who’s been my moral compass for my entire life, basically, and I said, ‘What do I do?’ He said, ‘Well you’re the captain, buddy, you’re going down with the ship. So you better do your best by everybody getting lifeboats and that is where you are.’ And I did.”

THQ attempted to find a buyer that would take the company through Chapter 11 bankruptcy, which allows some measure of debt relief and reorganization in hopes of continued operation.

THQ found its savior, but $15 million was the difference between survival and demise. Clearlake offered $60 million in December 2012 as a “stalking horse” bid. If accepted, this would have set the bidding ceiling approximately $35 million higher than the company was worth at the time.

“Had the stalking horse won, in other words, had their bid been accepted by the bondholders, I would’ve worked for that private equity company, in essence. THQ would’ve continued. There were changes we were going to be making, but we would’ve had the capital we needed to go forward.”

As we know, the bid wasn’t accepted. According to Rubin, the bondholders wanted $75 million. Clearlake wouldn’t come up. The bondholders wouldn’t budge. Had the parties compromised, Rubin and Kay might very well have saved THQ and Clearlake and the bondholders would have likely profited.

THQ was instead broken up into its component studios. The auctions set the majority of THQ’s assets at a value of over $100 million. Had Clearlake come up to $75 million, it effectively would have seen return from the moment it signed the paperwork.

“Think about what those companies transact at today,” Rubin says. “The thesis was right, the timing and other things were wrong.”

THQ also had bad luck of the draw when it came to bankruptcy judge assignment. Rubin explains that of the small number of people who could have presided over the matter in Delaware (where Telltale Games is also incorporated, largely due to favorable tax laws), THQ drew the judge who was most likely to push the company to be broken up into component assets for sale. When all was said and done, the publisher was no more. Its studios and IPs had new owners.

“Brian [Farrell, THQ CEO] fired me, then Brian was fired by the board. The board resigned and that was the end of THQ. So I was the last one to go down with the ship.”

Had things gone the other way, another judge may have opted to keep THQ whole and push for a deal. Rubin might never have joined Oculus and Facebook. Vigil Games might still exist.

“I might be the CEO of THQ right now. Brian Farrell’s idea was if we could get through all this, slowly but surely he would retire.”

Standing up for employees in the darkest times
The fall of Telltale Games is a multi-part tragedy that is still unfolding. Employees were dismissed with no severance. Their company-supported health insurance ran out after a mere eight days. Six weeks later, they were informed that they would no longer even be able to pay for their own health insurance via COBRA (a government-mandated program that allows those dismissed from a company to continue paying out of pocket to retain identical coverage).

Telltale was out of money, having pinned its hopes on investments from Smilegate and AMC that simply didn’t emerge. When those fell through, the studio had nothing left. There was no contingency to take care of employees in any way. A lack of foresight left those who had placed their trust in Telltale’s leadership with nothing.

In this situation, a company has little control unless it plans ahead and fights for employees. Still, things could have gone differently.

“You would think why isn’t the company more generous. Why are they being so mean? There are all these things in bankruptcy you have no control over,” Rubin explains. “The courts decide what is going to happen. Laws decide what is going to happen. One of the things that does happen is COBRAs fall apart. My wife was pregnant with my first daughter. She had, therefore, a pre-existing condition in California, and was uninsurable.

“COBRA fell apart. I was faced with, effectively, having to pay for her health insurance. Luckily, I had been successful in life, I could’ve managed that. There was another gentleman in the company who called me, and he said, ‘Listen, my wife is pregnant as well. We’re going into bankruptcy January 29th. We’re due February 6. Should my wife go in and induce because we still will have coverage the day before the bankruptcy proceeding or should I take the risk?’ When you think about how horrible that is, what we ended up doing—this is the right thing for companies to do. Our general counsel got on the phone with the health insurance company and convinced them that if we pre-paid for one additional month—to the end of February—that we would at least give people breathing room. They said, ‘We don’t want the business, we’re not going to take it.’ There were many harsh words that went back and forth in legalese. Ultimately they did take the money upfront, and they did take the insurance. The courts did not block it but they could’ve. It’s the debt’s money. We managed to give everybody enough insurance, that at least they had 30 days to figure out what to do. These are really big things because you don’t have a lot of good options.”

Telltale did have options, though. It could have kept money aside for severance instead of betting everything, including employee safety nets, on financing coming through. Telltale has since sold its debt (potentially at pennies on the dollar) to a liquidation company, Sherwood Partners.

It won’t go through a formal bankruptcy process. Instead, Sherwood Partners will attempt to sell off Telltale’s remaining assets. They will still need to satisfy secured debtholders (those that have collateral), then unsecured debtholders (like credit cards), and then shareholders. Some Telltale employees are equity stakeholders and are in that last group, meaning their investment in the company may not yield any return at the end of the sell-off.

Licensing
One of the biggest challenges THQ dealt with in its last months was transferring its licenses to other companies. At E3 in June 2012, EA announced it had taken over the UFC license previously held by THQ. During the bankruptcy, Obsidian’s “South Park: The Stick of Truth” was picked up by Ubisoft. THQ also had to work closely with Take-Two and WWE to negotiate for the professional wrestling license transfer.

“[It was] very challenging, because some of those licenses, WWE, in particular, was one of the crown jewels of THQ’s business,” Rubin explains. “It was also an extremely powerful brand. You had three-party negotiations, basically. WWE had to be happy with who was getting it. You couldn’t just sell the WWE license to anybody. It had to be somebody they were happy with. So the three-partner negotiations were quite difficult.”

Telltale finds itself in a similar situation. Most of the company’s projects are based on licensed material, making it trickier to navigate. In some cases, we’ve seen games removed entirely from digital storefronts. “Back to the Future” and “Jurassic Park” are no longer available for purchase, suggesting that the contracts include a clause that reverted publication and distribution rights to the license holders.

Other licensed games like HBO’s “Game of Thrones” and DC Comics’ “Batman” are still live and listed as published by Telltale Games. Dealing with the disposition of those rights is likely to be a more cumbersome process that Sherwood Partners will deal with.

Thoughtful hiring can save companies
Telltale Games had reportedly been hiring people a week before it closed up shop. These are developers who picked up from wherever they had been living and moved to the exceptionally expensive San Francisco Bay Area.

This isn’t a problem exclusive to the video game world. Mic.com was acquired by Bustle last week for a mere $5 million (against a previous $100 million valuation). The company laid off a majority of its staff, allegedly including someone who moved to New York and started at the company a mere three days earlier.

Employers have a responsibility when hiring, especially when asking someone to leave a job and/or move across the country or around the globe. Especially in the United States, where health insurance is so tightly interwoven with employment, companies need are asking workers to take a leap of faith.

“You have companies that hire people knowing that they’re going to pare down at the end of the product. I don’t think that’s fair,” Rubin says. “I don’t think you should ever do that to somebody without letting them know that that’s going on. Other companies don’t think. They just keep hiring and hiring and hiring. They don’t ask themselves, ‘When winter comes, do we have enough nuts in our tree?’ They end up in a bad situation. By the time the situation comes around, there’s not that much freedom you have to make decisions. The time the decision needs to be made is when you hire.”

This is something echoed in “The GameDev Business Handbook.” “Make sure that you’ve demonstrated that you need this position for six months before you hire because it’s so easy to let overhead crush you,” says Harebrained Schemes co-founder Jordan Weisman in an interview for that book. “Keep overhead down. It’s all about keeping overhead down.”

While no one wants to think about potential layoffs in the future, hiring through that lens can lead to smarter growth. Being absolutely sure that you need someone on a permanent basis is an ethical consideration that can ultimately save an employee heartache and financial anxiety. It also prevents you from shattering morale with layoffs that could have been avoided.

“Be sure that every time you hire somebody, that’s more work you can do,” Rubin cautions. “The question is, ‘Do we need this for the next five years?’ Be sure. You don’t hire someone because we have something we need this month and next month we don’t know. Are we sure that when we put someone in a seat, that’s their seat, as long as they’re good at what they do, or they get promoted into another seat, that we have the room for it. That’s really something you have to think going in. I think a lot of time companies end up paring down, the mistake was made on the way in, not on the way out. “

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