The video game industry is facing a seemingly never-ending string of layoffs and studio closures: Telltale, ArenaNet, Activision, and now EA. According to industry analysts, companies are facing declining earnings, diminishing product pipelines, and an uncertain future that is almost certain to be driven by new technology.
While the debate over whether games as art is settled, the argument over game industry business practices rages with every new announcement about a storefront exclusive deal, monetization model, or layoff.
Over the past 18 months we have seen the closures of Telltale, Bandai Namco Vancouver, Capcom Vancouver, Visceral Games, Motiga, Gazillion, The Bartlet Jones Supernatural Detective Agency, Boss Key, Wargaming Seattle, and Carbine.
In addition, layoffs hit Harmonix, The Chinese Room, Disney Canada, Failbetter, Volition, Codemasters, Robot Entertainment, ArenaNet, BigFish Games, Jam City, and others. Things reached a fever pitch in February when Activision Blizzard announced layoffs of 8 percent of its workforce (about 800 people out of a total roster of 9,600).
The string of layoffs reignited the debate about whether video game industry employees need a union to protect them and called into question, once again, the massive salary gap between CEOs and the game development employees who work on the games. It’s also exposed the raw underside of the trauma connected with layoffs including uncertainty, emotional strain, a challenge to one’s self-worth and identity, and the uproot of entire families as laid-off employees chase the next opportunity.
These job losses are a direct result of business strategy decisions. Whether that’s investment in the wrong genre, overinvestment in the next “sure thing,” or simply gambling on a location with high property values and cost-of-living, executives are responsible for the livelihoods of those under them.
The results of those decisions are typically measured by a company’s financial performance. One key metric for such a measurement is earnings per share, directly indicating profitability, said Wedbush analyst Michael Pachter. It’s also a prime factor when investors make decisions about buying and selling stock. Profitability also plays a role in internal decision making.
“If companies are profitable, they tend to staff up to drive even higher profits,” he said. “Some things work, and some things don’t. The staffing that isn’t profitable stands out when profits decline, and force companies to rethink their staffing strategy. That is the case with Activision, which delivered $2.60 per share in profits in 2018 but is looking at $2.10 in 2019—a change of nearly $400 million.”
Activision over-invested in esports efforts and was faced with its recent divorce from “Destiny” developer Bungie. That left a number of employees at Activision Publishing with nothing to work on, as the company’s portfolio has contracted so severely. At the same time, Blizzard’s own publishing team was underutilized. The company has no major releases for 2019.
Tuesday, EA laid off 350 (approximately 4 percent of its 9,000 employees). EA’s challenges were markedly different than Activision’s in its most recent quarter. With a lower-than-expected performance from “Battlefield V,” EA missed revenue estimates by about $90 million leading to a sharp fall in share value. There’s a marked difference between Activision’s record quarter and EA’s disappointing performance. Again though, investors look at the earnings per share.
“EA delivered $4.39 last year and is looking at $3.85 this year—a difference of around $150 million,” Pachter explained. “EA’s layoffs are less draconian than Activision’s, and it’s clear from the letter that they are trimming staff where they aren’t getting the anticipated return—Russia and Japan.”
EA also eliminated roles in its marketing and analytics departments. The company says it is working to place as many people who were in those roles in other positions throughout the company.
Layoffs aren’t just about what’s already happened. They are designed to help prepare the company for what’s to come, said Joost van Dreunen, co-founder of SuperData.
“We can identify two drivers of change: first, several of the major firms are at the start of a rather anemic year and have relatively few titles in the pipe,” he said. “For many of them, it is better to stick with what they’ve got than to spend big on something new. The current title line-up reflects that. Second, there is an imminent shift coming among platforms. Historically, this is typical of especially the console games market because it relies heavily on the introduction of new hardware to rejuvenate. And certainly, we are starting to hear more details about the next console generation, but on the short term it makes no sense for big publishers to place any big bets. Especially now that digitalization has persuaded big newcomers like Google and Apple to play a more significant role, there is comparatively more uncertainty. This forces publishers to reduce risk and cut costs.”
With a new console generation due by 2020, an upcoming technology shift due to a growing focus on streaming, and the increased adoption of subscription models, major players are trying to figure out how best to staff for the coming years. What seems clear is that reorganization, a regular and healthy business practice, isn’t just happening in one or two companies.
This is an industry-wide shift that is having a drastic impact on publishers, and workforces, large and small.
“These events are more likely to happen during periods of industry and market transition, and may involve dissolving specific product teams but also on occasion hiring in new skills in new or underdeveloped business processes,” said Piers Harding-Rolls, head of games research at IHS Market. “In that sense, it is not that surprising that a number of announcements have occurred during the last 12 to 18 months, as we approach the start of a new generation of consoles and the AAA landscape is entering a period of disruption, with new market entrants threatening the status quo.”