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The appalling Activision-Blizzard layoffs are classic corporate callousness

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In yesterday’s earnings call, Activision-Blizzard announced record profits (then slashed their workforce by 8%).

Yes, you read that correctly. Activision-Blizzard, a company that employs employed around 9,000 people, had what CEO Bobby Kotick described as “the best year” in its history. It then proceeded to lay off – as reported, at the time of writing – around 800 staff, in line with speculation in a report from Kotaku late last year.

The quote from Kotick is as follows:

“While our financial results for 2018 were the best in our history, we didn’t realise our full potential.” – Bobby Kotick, CEO, Activision-Blizzard

There’s a lot to unpack in that single sentence.

First of all, what does a record year in Activision-Blizzard’s history look like?

According to the slide deck that accompanied the earnings call, and the rather larger (and frankly, drier) spreadsheet, 2018 looked like this:

Activision-Blizzard Q4 2018 and 2018 segment results

None of this information is private, by the way. As a publicly listed company, you can check out all of their financial reporting and the earnings call itself on the Activision-Blizzard website.

For the sake of clarity, that’s an operating income of $2.446 billion (US). That’s an average operating margin across all three segments of 35.64%, with the Activision business unit – driven by Call of Duty specifically – with a record operating margin of 40.68%.

That all looks very healthy, doesn’t it? So how could a net income of two and a half billion dollars translate to a company that didn’t realise their “full potential” exactly? The trouble comes when you also bring in the forecasts for 2018, made towards the end of the 2017 financial year.

Activision-Blizzard FY 2018 results vs 2018 predictions

The only universe in which an operating income of $2.446 billion could look disappointing is if arbitrary growth targets are set higher than that.

The important figure above is not the operating income but net bookings. Net bookings, in video game publisher parlance, is the net amount of all products and services sold; not just physical and retail software, but other interests including licensing, merchandising, or any other sources of revenue (such as in-game advertising or publisher incentives).

So if we compare the actual results of 2017 versus 2018, net bookings are up from $7.156 billion to $7.262 billion, or by around 1.5%. But the target for 2018 was to increase net bookings from $7.156 billion to $7.475 billion, an increase of around 4.3%.

A 1.5% increase on $7.156 billion is still a massive, mind-boggling amount of money to any of us. That’s $106 million more than the previous year! How could earning $106 million more than the previous year lead to redundancies? But according to an app voted the best stock trading app available to the public, to a board of executives and group of shareholders who expected a 4.3% increase – around $319 million – it is a failure.

The crucial thing, when you’ve made an error in forecasting, is how you learn from that error. Broadly speaking, you have two options:

  1. Actually learn from the error, forecast a little lower for next year, and try to be more realistic generally, or
  2. Double down on the mistake and try to “fix” your incorrect forecast by cutting costs.

Guess which one Activision-Blizzard has gone for? That’s right, they’re laying off around 8% of their workforce to reduce costs. These are human beings with mortgages and medical costs and families to support, who suddenly find themselves out of work, just because some disconnected executive’s crystal ball was a bit wonky in 2017.

This situation isn’t unique to Activision-Blizzard, though, nor is it unique to video games. Just look at the recent upheaval in publishing media – with major layoffs at Vice, Huffington Post, Buzzfeed, and others including gaming video specialist Machinima – for a similar story.

Buzzfeed is perhaps the most pertinent example here. The online publishing giant – which started in the viral, social space, but expanded into journalism proper following massive venture capitalist investment – reportedly fell short of its $350 million revenue goal in 2017. When the business generated a mere $260-280 million, around 100 staff were let go.

In 2018, Buzzfeed reportedly brought in around $300 million – a 7-13% increase on 2017’s revenues – but this was apparently still short of its target. Buzzfeed cut around 15% of its workforce in January 2019, mostly from its journalistic divisions, to reduce costs.

What Activision-Blizzard and the likes of Buzzfeed have in common is the expectation of unlimited growth, led by the sort of financial backing that expects enormous returns, year on year. Why is this expected? Because this is the model we’ve come to expect in the tech industry. Venture capitalists pour money into tech startups, expecting exponential growth and almost-guaranteed returns because that’s what’s happened with Silicon Valley startups in recent times. This bubble hasn’t entirely burst yet, but in peripheral industries – like video games, or in VC-backed publishing like Buzzfeed – we’re starting to see the holes.

And to give it just a shred of credit for a moment, Activision-Blizzard has at least downgraded the forecasts for 2019, to net bookings target of $6.3 billion.

Activision-Blizzard FY 2019 outlook predictions

That looks far more sensible, with a reduction in expectations for net bookings in the financial year 2019 down $0.96 million, or around 13%. On the face of it, that looks like Activision-Blizzard is learning from its mistakes, and preparing for a potentially leaner 2019.

But there’s one final slide I’d like to show you, which paints the board at Activision-Blizzard in a less positive light: the company’s balance sheet as of the end of 2018.

Activision-Blizzard balance sheet end 2018

The bit of particular interest is the little grey box, the addendum after the main balance sheet, marked “2019 Capital Allocation”. In it, we see that Activision-Blizzard is increasing the 2019 share dividend by 9%.

They’re increasing the share dividend by 9% in the same breath as cutting the workforce by 8%. So in essence, to paraphrase Bobby Kotick’s words, Activision-Blizzard’s shareholders had the best year in its history, but sadly the employees didn’t realise their full potential. Guess who were the ones to lose out in that imbalanced equation.

Kotick, for reference, took a salary of $1.75 million (US) in the financial year 2017, with total compensation over $28 million (according to SEC filings; the filings for the financial year 2018 haven’t been made yet). According to Jason Schreier and Kotaku, that’s over 300 times what the median Activision employee earned at the time.

Which is where this all becomes a little obscene and unseemly.

Activision-Blizzard is a private company. It’s perfectly entitled to set whatever ridiculous targets it wants, and whether or not there is any chance of achieving them is, largely, immaterial. It’s also within its rights to attempt to cut costs by reducing the workforce, and there will no doubt be fans of Activision-Blizzard making that defence on social media right now.

But when they have the financial wherewithal to increase dividends by 9% and pay a single executive in the order of $30 million, that’s where the cost-cutting argument falls down. If Bobby Kotick had wanted to, according to Schreier’s maths, he could’ve saved nearly 300 employees just by not taking his dividend and bonus that year. And remember: he’d still have kept his meagre $1.75 million salary.

We all know that big corporations care very little about the wellbeing of those who make them their riches, however. They sit, like dragons, on great piles of wealth, happy to burn anyone who threatens their desire for accumulation. Nobody would ever expect a CEO to take a pay cut to save the jobs of their staff, right?

Except that one did. Once.

When Nintendo struggled during the Wii U era, the late, great Satoru Iwata took a 50% pay cut and – even more amazingly – convinced Nintendo directors and board members to take pay cuts between 20-30%. He did the same in 2011.

Why did Iwata-san do this? Not to swell the coffers of investors or to balance unrealistic projections, but to sure up the finances of the company and ultimately, to prevent job losses during a difficult period.

I’m not expecting big corporations to develop scruples any time soon. There’s a reason these individuals rise to positions of power, looking almost exclusively after their own interests.

But if you do ever find yourself in that position? Don’t be Bobby Kotick. Be Satoru Iwata.

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