Speaking with Game File (users will encounter a paywall) at the Game Developers Choice Awards, Larian director of publishing Michael Douse gave his take on the current state of the industry, including some sharp criticism on the wave after wave of mass layoffs we’ve been seeing.
“They are an avoidable fuck-up,” Douse said. “That’s all they really are. That’s why you see one after the other. Because companies are going: ‘Well, finally. Now we can, too. We’ve wanted to do it for ages. Everyone else is. So why don’t we?’ That’s really kind of sick.”
Though Douse allowed that big publishers are complicated operations that can’t react quickly to new demands or market changes, he argued that better planning and leadership could have prevented the worst of what we’re seeing, and expressed frustration with how the industry continues with its business as usual in glitzy events like the GDC Awards or BAFTAs: “We should be humbled by this period. It doesn’t feel like we’re humbled by this period as an industry.”
He also pointed out that there’s an issue of competing incentives for publicly traded game companies, with concerns over stock price coming at the expense of both players and developers: “None of these companies are at risk of going bankrupt,” Douse said. “They’re just at risk of pissing off the shareholders. And that’s fine. That’s how they work. The function of a public company is to create growth for its shareholders… It’s not to make a happy climate for the employees.”
Douse pointed to Swen Vincke’s leadership, as well as Larian’s ability to make risky moves unbeholden to shareholders, as major reasons for the company’s success in recent years. Bloomberg’s Jason Schreier argued a similar point in an op-ed back around Baldur’s Gate 3’s release.
Though Douse acknowledged that the final decision would always be up to Vincke, he said that going public would likely never be the move for Larian: “Creating the games that we wanted to make, going public might give us more money, but it would be antithetical to the quality part of what we’re trying to do. So it wouldn’t make our games better. It would just make us rushed.”
You can check out the conversation in full by subscribing to Game File, the newsletter of former Kotaku editor in chief Stephen Totilo. Douse and Totilo also discussed how Steam and social media have changed the way games are sold, that consoles are still playing catch-up with PC in that area, and how early access is the way to go for Larian—Douse noted that Larian’s “whatever the next thing will be” will likely follow Original Sin 2 and Baldur’s Gate 3’s release model.
There’s a trendy investment metric making the rounds at the executive and investor level called the “rule of 40.” It came out of the SaaS sector, but it’s spread across all tech stock valuations.
In essence, it’s a single metric that can be used to quickly and reliably determine the value of a stock. You add the Earnings Growth Rate as a percentage and the EBITDA margin, and if it is greater than or equal to 40, the stock goes up. If it is less than 40, the stock goes down.
You might imagine how attractive it is to think you can boil a company’s performance down to the sum of two numbers. It let’s you ignore all of the other market forces, additional performance metrics, and other intangibles that make predicting values so complex. And if enough investors believe in it, the forecast creates the outcome and everyone who uses it pats themselves on the back for being so smart.
This means if a company expects 20% growth, they can operate with an EBITDA of 20%. If their profit margin goes up, say to 35%, they can afford to show slower growth of 5% and still satisfy the rule of 40.
The trouble happens when you don’t hit your growth target. In the past two years, companies panicked about the job market and started hiring like crazy, expecting a boon and significant growth. But when that growth underperformed, the executives panicked again and started slashing human resources to bring their operating expenses down again.
Note that neither the hiring frenzy nor the chaotic markets have taken down any companies. No corportation was in danger of going out of business. They just grew slightly less than anticipated. The profits were slightly less than where they needed to be to reach the rule of 40. Workers were not producing less, and sales weren’t shrinking. Maybe it was a bad strategy, maybe it was a competitor taking some market share, maybe it was a failure to deliver quality products or services, but the average employee has almost no influence on either EBITDA or growth rates.
But, as they say, the spice must flow. Investors cannot tolerate a loss in stock value, and therefore every worker must either go hungry or work twice as hard to make up for their recently unemployed coworkers. That way, executives get to keep their massive bonuses and pat themselves on the back for being so smart.
