Death Watch 2024, Continued -- Embracer Group will cease to exist, and XBox (!) is starting to spiral

About five months ago, Dan Olson AKA @foldablehuman AKA Folding Ideas, posted a two-and-a-half hour video about the meme stock movement with the catchy title, "This Is Financial Advice." I won't try to recap the entire thing (although you should definitely watch it if you haven't), but I do want to draw attention to the portion about Bed Bath and Beyond's desperate last-ditch attempt to stay afloat: a financing arrangement known as "death spiral financing."

Very quickly, the arrangement involves a company with more debt than they can repay, not enough revenue to meet operating expenses, and no fat remaining to trim from their operation. This company, BBBY, accepted a financing deal from a private equity firm, with the understanding that they would release shares to the market in order to raise the funds needed to repay them.

The simple fact of such a deal is enough to drive down share prices on its own, and a flood of new shares will also depress the share value, which means that the number of shares needed to repay their PE financiers keeps increasing, in an ever-increasing spiral of share dilution and devaluation that ultimately failed to repay all of their debts, let alone raise enough money to continue operating.

BBBY was forced to file for bankruptcy, was de-listed from NYSE and NASDAQ, and no longer exists. And this was the model that immediately came to mind when I learned of Embracer Group's latest galaxy-brained plan to save themselves from a very similar situation, using a very similar-sounding financing scheme.

Death Watch 2024, continued: Embracer's Downward Spiral Deepens

Embracer Group, who just last month sold a $550M acquisition for $249M, have done it again, but worse. As reported by Ars Technica:

Embracer Group has been backing away from its all-encompassing position in the games industry lately. The latest divestment is Gearbox Entertainment, the studio behind the Borderlands series it bought in early 2021 for a deal that could have been worth up to $1.37 billion to Gearbox had it stayed inside the Swedish conglomerate's grasp.

The buyer is Take-Two Interactive Software, which had previously partnered with Gearbox on publishing Borderlands and other titles. Take-Two will issue new shares of its common stock to pay $460 million for Gearbox, to be completed before the end of June this year. Embracer paid $363 million in cash and stock for Gearbox in 2021 but promised up to $1 billion more should the developer hit earnings goals over six years.

"Today’s announcement marks the result of the final structured divestment process and is an important step in transforming Embracer into the future with notably lower net debt and improved free cash flow," said Embracer CEO Lars Wingefors in a statement intended to start nobody's imagination running.

A few things leap out at me.

Death Watch 2024: Embracer Group Continues To Spiral

As predicted by me:

• Embracer will not balance their books. There's only so much more that they can cut from the operation, and still have an operation.
• Embracer's next step will be divestment: selling off the assets that they bought, probably for a lot less than they paid for them, since it's a buyers' market right now.

 As reported by PC Gamer:

A Bloomberg report says that Swedish holding company Embracer Group has reached a deal worth as much as $500 million to sell its Saber Interactive division to a group of private investors. The deal will make Saber Interactive a privately owned company, according to the report, with approximately 3,500 employees.

Embracer bought Saber Interactive in 2020 at the height of its acquisition spree. It was made the fifth operating group under Embracer's corporate structure and currently serves as the parent of numerous other studios including 4A Games, Aspyr, Beamdog, New World Interactive, Slipgate Ironworks, and Tripwire.

That's me, two for two, with two to go: only restructuring and liquidation remain. If you shorted Embracer stock two months ago, then good for you. If you doubled down on Embracer stock two months ago, then I'm sorry. I'm so, so sorry.

That $500 million figure, BTW? That's wishful thinking. Embracer paid $150 up front, with $375 million in performance bonuses to follow, and there's no fucking way they're getting all of that back in a fire sale of Saber. 100%, Embracer are losing money on this deal; they're only doing it because they have no other options, and are desperately trying to survive long enough, and reduce their own prince point enough, to be bought by someone more flush.

Just bad luck that the rest of the big players in the industry are also contracting, I guess; there will be few, if any, $70 billion Activision-style deals this year. I give Embracer six more months; nine tops.

UPDATED MAR. 15TH, 2024:

Told you so:

Embracer has sold Saber Interactive for $247 million.

[...]

Embracer originally acquired Saber Interactive for $525 million in 2020.

As expected, sold for less than half what they paid to buy. This will all be going to creditors; there's no way this is going to operating expenses. Selling Saber only bought Embracer a little more time.

I'm calling it now: Embracer isn't going to make it

As reported by The Verge:

Embracer Group, the company attempting to forge one video game publisher to rule them all, has just presided over another round of layoffs. Eidos Montreal is letting go of 97 game developers and support staff, the company announced today on X, shortly after Bloomberg’s Jason Schreier scooped that the studio has canceled an unannounced Deus Ex video game.

This is just the latest in a round of increasingly desperate attempts by Embracer to reduce their burn rate to something they can afford. This is deeply misguided, for several reasons.

1. Layoffs are expensive. A laid off employee still receives several months of pay in severance, and several months of benefits, which can't just be cut off cold because you decided they would be unemployed now, through no fault of their own.
2. Layoffs are destructive. Contrary to the popular beliefs of CEOs, terrified employees don't work harder; they spend work time hunting for better jobs elsewhere, assuming they don't burn out from their suddenly increased stress. Expect turnover and absenteeism to increase, and remain high, even as productivity drops and remains low.
3. Layoffs are short-sighted. Embracer Group does not makes games; they employ people who make games. Or at least, they did; every new round of layoffs mean fewer people to make the games which are their sole source of revenue. And good luck hiring new people to replace the ones you laid off -- nobody wants to get hired at a company that's as badly managed as Embracer.

This is a death spiral. 

Witnessing a moment of clarity... Unity edition

I hadn't spent much time commenting on Unity's attempted self-immolation of last month, mainly because I didn't really have much to add to the conversation.

Unity, for those that still somehow don't know, is the single most-used engine for game development, with something like seventy percent of Steam games being based on Unity, and an overwhelming presence on Android and iOS. Unreal, the second-most-popular game engine, has less than half Unity's presence on Steam, and no presence at all on iOS anymore, thanks to their "Project Liberty" stunt, and the Epic v Apple lawsuit which followed.

Confirmed: Epic's big loss was a much bigger loss than they were letting on

Back in 2021, when I was posting about Epic's big gamble having turned into a big loss for them, I suspected that they could only keep the con running for so long.

Of course, even Epic Games can't sustain this kind of burn rate forever; eventually, they're going to have to make changes in order the stop the bleeding, and put in place some sort of plan to "return to profitability" (corporate code of mass layoffs). Given that their legal battle with Apple has only served to make the industry-standard 30% cut to the platform look more essential than ever, and that Epic has done almost nothing to earn back the trust and good will of the Steam community (which, at this point, includes basically all of the PC gaming community), and also given that efforts to repair their brand and rebuild their business can't even start until the Apple lawsuit, at least, is either dropped or settled, I'm starting to have serious doubts about Epic's long-term prospects. I beginning to wonder if Epic will be able to survive at all, in the medium-to-long term.

Well, it turns out that I was a fucking prophet. Epic are indeed burning through cash faster than even Fortnite can make it, and have now resorted to mass layoffs to cut their burn rate.

As reported in Yahoo! Finance:

Fortnite and Unreal Engine maker Epic Games has confirmed that it is laying off approximately 830 employees, representing roughly 16% of Epic's total workforce.

[...]

The memo sent to employees by Epic CEO Tim Sweeney was later posted on the Epic Games website.

"For a while now, we've been spending way more money than we earn, investing in the next evolution of Epic and growing Fortnite as a metaverse-inspired ecosystem for creators," Sweeney said. "I had long been optimistic that we could power through this transition without layoffs, but in retrospect I see that this was unrealistic.

"While Fortnite is starting to grow again, the growth is driven primarily by creator content with significant revenue sharing, and this is a lower margin business than we had when Fortnite Battle Royale took off and began funding our expansion. Success with the creator ecosystem is a great achievement, but it means a major structural change to our economics. [...] But we still ended up far short of financial sustainability. We concluded that layoffs are the only way, and that doing them now and on this scale will stabilize our finances."

I fucking called it. 

Witnessing a moment of clarity

Jesus. Was it really three years ago that I first posted about Game Pass?

There are users for whom Game Pass is a good fit; heavy users who really will save money using the service, wealthy gamers for whom the cost of the service is essentially irrelevant, and ruthlessly opportunistic gamers who will pay for a single month only, and only when they "need" it, to play exactly one newly-released game and then cancel [...]

Game Pass is not a good deal; its value proposition is not, and never has been, "insane;" it is not a value option at all, really, except for people who semi-professionally play a wide variety of games, or people who may well have burgeoning video game addictions. So, be honest with yourself. 

Do you have a problem? Are video games taking over your life, in ways that are possibly self-destructive and unhealthy? If so, then you don't need Game Pass; you need help, and there's no shame in asking for that help.

For a long time, I thought I was alone, screaming my frustration into the void. Because the deal really was bad, but nobody else seemed to be willing to call it out for the anti-consumer nonsense it was. Even as every multimedia conglomerate on Earth launched their own subscriber-driven Contentᵀᴹ service, only to watch them all beat hasty retreats after those services lost boatloads of money, Game Pass was made of Teflonᵀᴹ. Nothing ever stuck; the narrative never evolved.

That is, until today. From Ethan Gach at Kotaku:

It’s Time To Start Killing Your Subscriptions

The prices are going up and you probably barely use them anyway

I feel so seen right now.

So, you're tweeting a jpeg of an apology...

... here's how not to do it.

[Sigh.]

OK, first things first. 

Hey now, you're an all-star...

Recording this event for posterity, on this 12th day of December, 2022:

Most of the FTX news from the preceding 24 hours had been all about how SBF was going to testify before Congress, and what would he say when testifying before Congress.

SBF will not be testifying before Congress. Because he's too busy. Being in prison.

I want to know what the charges will be. I mean, obviously it will be some species of fraud, but I'm dying to know the specifics. Admit it... you're dying to know, too.

Happy Monday!

FTC vs. ATVI+MSFT, in perspective

It appears that Lina Khan is serious about putting the brakes on tech industry mergers. Much to the surprise of many, many pundits and LawTubers, the FTC is suing to block Microsoft's acquisition of Activision Blizzard King (ABK).

The consensus of opinion seems to be coalescing around the idea that the FTC's case is weak. This consensus essentially takes Microsoft's position at face value:

1. that Microsoft Gaming is a much, much smaller player in the video games industry than either PlayStation (owned by Sony) or Nintendo;
2. that Microsoft have no presence in mobile gaming at all, unlike ABK, or any of ABK's major competitors in the mobile space, like Tencent or NetEase;
3. that Microsoft's control of ABK will have no competitive impact on the industry, since they're going to leave Call of Duty (CoD) available on competing platforms, including both Sony's PlayStation and Nintendo's Switch, for ten years.

If you assume that this argument is 100% true, then Sony appear to be freaked out over the deal for essentially no reason at all, and the FTC's objections to the deal appear to be entirely political. At best, the collective thinking goes, suing to block the deal is effectively a bargaining ploy: the entire process of resolving the suit could prolong the process of getting the deal done for months or years, and cost Microsoft hundreds of millions of additional dollars in penalties (per the deal) and legal fees. Faced with this prospect, Microsoft might be more amenable to the types of concessions the FTC might ask for.

I'm going to be the contrarian in the room, though, and point out that the FTC might be looking at a bigger picture than just this deal between Microsoft Gaming and ABK. Real talk here: taken as an independent entity, Microsoft Gaming, third-place purveyor of money-losing consoles and the games that people can play on them, probably don't have 68.7 billion US dollars to spend buying ABK or anyone else. This deal is only possible because Microsoft Gaming isn't an independent entity; it's only possible because Microsoft Gaming is merely the gaming division of a much, much larger entity.

Microsoft Gaming isn't buying ABK. Microsoft Corporation is buying ABK. And, viewed through that longer lens, the picture looks a lot different.

Predictable, and also predictable

As reported by Reuters:

Nov 19 (Reuters) - Donald Trump on Saturday said he had no interest in returning to Twitter even as a slim majority voted in favor of reinstating the former U.S. President, who was banned from the social media service for inciting violence, in a poll organized by new owner Elon Musk.

Slightly over 15 million Twitter users voted in the poll with 51.8% voting in favor of reinstatement.

"The people have spoken. Trump will be reinstated," Musk tweeted.

[...]

Trump had appeared less than keen earlier in the day.

"I don't see any reason for it," the former president said via video when asked whether he planned to return to Twitter by a panel at the Republican Jewish Coalition's annual leadership meeting.

He said he would stick with his new platform Truth Social, the app developed by his Trump Media & Technology Group (TMTG) startup, which he said had better user engagement than Twitter and was doing "phenomenally well".

Twitter did not respond to a request for comment.

Elon Musk reinstating Trump's Twitter account was the single negative outcome that almost everyone was dreading... except, of course for Trump's supporters.  The potential negative impact on the American electoral process, and political discourse in general, combined with Elon's libertarian tech-bro bloviations, had many people worried that Elon was effectively buying Twitter specifically reinstate Trump's Twitter access, as a sort of Ultimate Shit Post.

Now, just two weeks later, the reality of Musk's stewardship of Twitter have been across-the-board disastrous to such an extent that even Trump doesn't want to be associated with such a lustily-burning garbage fire, preferring his own social media startup even though Truth Social is also a hot mess, and a fraction of Twitter's size.

Ouch, baby. Very ouch.

I don't know what Musk was thinking here, but attempting to embrace Trump, only to be rejected, seems to me like a low-percentage play. A sort of "Hail Mary" play, if you will, except that he's thrown an interception on that play, while his team-mates flee the field. Because it's on fire.

GG, Elon! Nice work.

The fallout keeps falling, and it won't stop falling...

It feels a little weird to keep posting posts from someone else's blog, but I can't stop reading Molly White's "Web 3 is Going Just Fine," and I have to write about it. I've said it before, and I'll say it again - if you're not yet following her blow-by-blow historical documentation of crypto's collapse, then you should remedy that immediately. 

Seriously, Molly, if you see this, please figure out some way to put all of this crypto history into book form -- I'll preorder that shit immediately, in hardcover, just to have it on the shelf.

And now, a quick round-up of today's hits.