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Developers should be wary of the IPO's siren call | Opinion

As CD Projekt Red's Cyberpunk woes turn legal, developers with an eye on the stock market should think carefully about doing business under that level of scrutiny

In a better reality, this would be a golden moment for CD Projekt Red -- basking in the sales numbers and critical acclaim for its long-awaited follow-up to The Witcher 3, enjoying a bump to its already dramatic stock price as attention turned to the potential of the next-gen versions and, beyond them, the prospect of the studio's next game.

Instead, it's not unreasonable to say that the past weeks have seen the company lurch around in a nightmare. Ever since the ham-fisted efforts to avoid discussion of the awful PS4 / Xbox One versions of Cyberpunk 2077 ahead of launch, and the game's botched and buggy launch itself, nearly every new piece of information has felt like another blow to the company's reputation and the goodwill it once commanded.

Much of this situation is recoverable. The world was ready for Cyberpunk 2077 to be a buggy game at the outset, given its ambition, and a great deal will be forgiven by consumers, at least, if the studio can ultimately give people an experience that lives up to its promise. There will be some hard lessons along the way; CDPR has been a golden boy among gamers for a long time, and some of its senior staff have become accustomed to talking publicly in a way that seems confident from representatives of a beloved studio, but arrogant and out of touch from spokespeople for a company that's firmly in the doghouse. As the game improves and the individuals with a tendency to make things worse figure out when to pipe down, though, gamers will probably, in the end, come to appreciate Cyberpunk on its own merits.

If only gamers were CDPR's main worry. Investors, it seems, may be rather less easily placated

If only gamers were CDPR's main worry. Investors, it seems, may be rather less easily placated.

The company is now the target of two class-action suits being launched on behalf of its own shareholders, each of them essentially based on the same allegation -- that CDPR made misleading statements about the game's condition during development, thus failing to properly disclose information that would have been crucial to shareholders' investment decisions. In some cases, those shareholders may have lost a pretty serious amount of cash; CDPR's stock has tumbled over 40% since its peak last November, and is currently trading at levels lower than it hit when markets briefly crashed as COVID-19 spread last March.

That's just the nature of the stock market, of course. This kind of investing is a gamble and losing money is part of the process -- but that gamble is meant to be an educated one, based on honest and timely statements from the company which allow investors to reasonably assess its prospects and the associated risks. The claim behind the class-action suits -- which, to be absolutely clear, may well turn out to be baseless, or be settled for a token sum -- is that CDPR failed to do this, thus failing to live up to a very fundamental legal duty it has to its shareholders.

A company like CDPR -- or any studio that focuses on one game at a time -- is throwing itself to the sharks with an IPO

In a broader sense, regardless of what actually happens to the specific lawsuits targeting CDPR right now, this provides a really important illustration of just how risky, difficult and problematic a stock exchange listing can be for a business of this kind. There are companies with business models that are a good fit for an exchange listing -- indeed, even many games industry companies fit that bill -- but there are also companies which, regardless of their success, their competence or their track record, just aren't a good fit and are likely to be letting themselves in for a world of hurt by exposing themselves to that sphere.

This is true of a great many developers. The stock market is a minefield for publishers too, to some degree, but a company like CDPR -- or any other studio that essentially focuses on one game at a time -- is throwing itself to the sharks with an IPO. In part, that's just down to the reality of the stock market's quarter-by-quarter view of company performance -- clearly ill-suited to a firm that'll only release a major new product once every few years -- but what CDPR is encountering here isn't that kind of problem. Rather, it's a much thornier issue related to how you balance communicating with fans and communicating with shareholders.

Communications with shareholders are, by nature, public. As anyone who's perused a games news website in the past 20 years knows, anything relevant that's said to investors in financial statements or conference calls is going to be headline news on consumer websites within hours if not minutes. A gap between those statements is going to be a huge problem. If you're lying to consumers, or embellishing the truth, then you risk their trust and goodwill. If you're lying to investors, though, you risk extremely serious financial and legal consequences.

This is to some extent why a lot of publicly listed companies play their cards close to their chest in both both financial and consumer arenas. The less you say, the less risk there is of getting into trouble on either side, so firms like Nintendo become masters of saying as little as possible until the last minute.

The lure of IPO money is a siren call, one that's become all the more alluring since CDPR's own valuation soared into the billions

If you're a big publisher, though, you've still got some leeway here, simply because while investors are of course going to be interested in your major titles, the minutiae of your development process on individual titles is generally not going to be fundamental to your share price movements -- Grand Theft Auto is one of many exceptions, so it's worth noting how little Take-Two talks about development of that franchise in either the consumer or investor arenas. If you're CDPR, though, almost everything you announce, say or imply about your only major game release in several years is going to have a major impact on your share price -- because your share price is pretty much solely predicated on the anticipation for that game.

For a while, that actually worked in CDPR's favour. The Polish firm's share price soared as hype built around Cyberpunk 2077, thanks at least to some degree to the company's super-fans piling in to buy shares on retail investment platforms. Now, though, it finds itself in a situation where it may be forced to defend its public statements about Cyberpunk 2077 in court. That's a reckoning that I imagine would make many developers' (and PR execs') blood run cold -- having potentially serious financial and even legal consequences tied to precise legal readings of statements that were made largely in an attempt to build consumer hype for a game, rather than with a view to being dissected in a court of law.

Courts do, of course, allow for companies to conduct marketing and PR -- but it can be tricky to define where reasonable marketing and hype-building crosses over into being misinformation, which could mislead investors regarding the condition of the company's operations and progress on its most important product.

Many people may think that being faced with this potential dilemma serves the company right for not being entirely honest with consumers about the state of the project, but most developers, at least, will feel a pang of sympathy. Feature slippage and the harsh impact of development realities on blue-sky game concepts are a fact of life; if being forced to scale back the ambitions of an over-hyped title due to technical and budgetary constraints routinely got people dragged into court, no game developer would be able to remain in business at all -- and Peter Molyneux would be on the run, with warrants out for his arrest in dozens of countries.

The court of public opinion is rough enough already, especially when it's backed up by something as blunt and damaging as a platform holder outright removing your much-anticipated game from its store. The lure of IPO money is a siren call, one that's actually become all the more alluring since CDPR's own valuation soared into the billions. But companies would do well to really think about the jagged rocks upon which the sirens perch, and the level of scrutiny they're exposing themselves to -- with all the attendant real-world consequences and liability -- when they decide to try cashing out on their beloved (for now) studio reputation with a stock market listing.

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Latest comments (1)

Bruce Grove CEO and Founder, PolystreamA month ago
Putting Cyberpunk aside, the recent action and a lot of the reporting is taking a very short term view of a company that's been successfully operating as a listed company for a decade, it's not like they're new to shareholder reporting. Given a long term view, even investing two years ago would see a near doubling of your investment. If you've been with them for longer, even with recent drops, you're sitting on a pretty phenomenal return. There's not many investments that would have returned 500% over the last five years, sheesh, a cash ISA would have returned about 0.2%. If anything they may come out of this with a healthy correction and be in a better position.
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