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Rewarding profit and nothing else | Opinion

Activision Blizzard's mass layoffs amid record profits fits the company's disregard for optics, but it may be self-defeating in the long run

Jeetil Patel, Deutsche Bank Securities - Analyst

"What do you think the retailers' willingness these days is to hold inventory on the video game side? Are they building positions today or are they still very reluctant and very careful of how they are buying?"

Bobby Kotick, Activision Blizzard, Inc. - President and CEO

"I don't think it is specific to video games. I think that if you look at how much volatility there is in the economy and, dependent upon your view about macroeconomic picture and I think we have a real culture of thrift. And I think the goal that I had in bringing a lot of the packaged goods folks that we brought in to Activision 10 years ago was to take all the fun out of making video games."

"I think we definitely have been able to instill the culture, the skepticism and pessimism and fear that you should have in an economy like we are in today. And so, while generally people talk about the recession, we are pretty good at keeping people focused on the deep depression."

That was an exchange from nine years ago this month, with Kotick in rare form speaking at the Deutsche Bank Securities Technology Conference in San Francisco. It was a bizarre tangent, as the executive dodged a seemingly innocent question to volunteer a deeply incriminating answer. In the same presentation, he talked about how he'd taken creative studio heads who "didn't know the difference between a balance sheet and a bed sheet" and cultivated a laser focus on the bottom line, thanks in part to an employee incentive program that "really rewards profit and nothing else."

This week has made it painfully clear that Activision Blizzard does not reward profit equally

Perhaps he wasn't expecting the games media of the day to be listening in. Perhaps he was making a series of incredibly misjudged jokes built on hyperbole. Or perhaps he was simply honest. Brutally, monstrously honest. About most of it, anyway.

No doubt he wanted the business of Activision to operate more like a traditional business, leaving behind the unstructured and unprofessional practices that had been seemingly baked into game development culture in its earliest years. And naturally, he'd prefer studio heads to be concerned with the financial viability of their operations. But the part about rewarding profit and nothing else? That needs an asterisk.

On the one hand, the company has been tremendously profitable, and it has rewarded Kotick tremendously in turn. Between his salary, stock awards, and incentive plan compensation, he made over $28 million in 2017, and about $33 million the year before that. But as this week has made painfully clear, Activision Blizzard does not reward profit equally.

Activision Blizzard reported record annual results Tuesday, including an all-time high earnings per share of $2.35. The employees whose work brought in those record profits were rewarded by seeing 8% of their ranks--roughly 800 people--laid off. Adding insult to injury, the Activision Blizzard that didn't have enough money to keep these employees on staff announced a cash dividend of $0.37 per share to shareholders, up 9% year-over-year. That is also the largest year-end dividend Activision Blizzard has ever issued.

Risky Business

Every publicly traded company reports a number of "Risk Factors" to investors, things that could throw a wrench into its forecasts and expectations. They're not intended to be a catch-all of every possible thing that could hurt the business, but they can be impressively thorough nonetheless.

Activision Blizzard currently advises investors of 38 such issues, and they run the gamut from "Things investors should absolutely be told before investing in games" to "Is that really worth mentioning?" They cover pricing erosion thanks to digital distribution, the seasonality of sales in the games industry, threats from piracy, reliance on cooperation from platform holders, foreign currency exchange rates, and even the location of its corporate headquarters and primary corporate disaster recovery data center along major earthquake faults.

"Our employees are our greatest asset"

Activision Blizzard SEC filing

Nowhere among the company's risk factors are any mention of unions or collective bargaining. (In fact, some Activision Blizzard employees in France, Germany, Spain, and Italy are already subject to collective bargaining agreements.) However, Activision Blizzard's risk factors do note that its employees--800 of whom were just laid off after a year of record profits--are crucial to the company's well-being.

"If we do not continue to attract and retain skilled personnel, we will be unable to effectively conduct our business," the company explained to shareholders.

"Our employees are our greatest asset. As such, our success depends to a significant extent on our ability to identify, attract, hire, retain, and utilize the abilities of qualified personnel, particularly personnel with the specialized skills needed to create and sell the high-quality, well-received content upon which our business is substantially dependent.

"Our industry is generally characterized by a high level of employee mobility, competitive compensation programs, and aggressive recruiting among competitors for employees with technical, marketing, sales, engineering, product development, creative, and/or management skills. We may have difficulties in attracting and retaining skilled personnel or may incur significant costs in order to do so. If we are unable to attract additional qualified employees or retain and utilize the services of key personnel, it could have a negative impact on our business."

Blind to optics

On one level, I get why Kotick does what he does. For him at least, it seems the company's incentives truly reward profit and nothing else. But beyond any kind of moral scolding one would direct at a multimillionaire many times over who values increasing his own net income over the well-being of hundreds and hundreds of his employees, Kotick's aggressive short-term optimizing looks reckless in the long run.

Activision Blizzard's employees truly are vital to the company, and its future really does rest on the ability to attract and retain talented personnel. So how much of the talent in this industry is willing to endure living under the constant threat of mass layoffs entirely unrelated to their own performance or the company's overall health? As much as employment in this field has been precarious in the best of times, mass layoffs during a time of record-setting performance constitutes an entirely new level of job insecurity. What Activision Blizzard has done this week is not normal, and we shouldn't treat it as such.

"Does anyone else find it strange a company dedicated to rewarding profit and nothing else has an apparent penchant for firing people who bring in the most profit?"

In his exchange at the Deutsche Bank Securities Conference, Kotick essentially copped to emotionally manipulating his employees, to keeping them afraid and depressed and scared to find better employment. He said the quiet part loud. And for the most part, he got away with it. Activision Blizzard continued to attract top talent, growing revenues and profits year after year, delivering Kotick and the company's shareholders a tremendous return on investment.

But that was almost a decade ago, when the economy was still struggling to emerge from a global financial crisis, when Call of Duty: Modern Warfare 2 was the closest thing we had to Fortnite, when Guitar Hero was still in the "riding high" second act of its Behind the Music episode, and Blizzard had unquestioned independence as it prepared to debut StarCraft II and launch what was only the third expansion for a still-thriving World of Warcraft. It was also just ahead of the bitter split with Jason West and Vince Zampella, and years before an Activision IT employee of the time testified that the company's chief legal officer had him dig up dirt on the Infinity Ward co-founders so the publisher could fire them. (Does anyone else find it strange a company dedicated to rewarding profit and nothing else has an apparent penchant for firing the people who bring in so much profit?)

I suspect Activision Blizzard is a less attractive employer these days. The company has pursued a fewer, bigger, better strategy for the past decade-plus, and it only looks to be narrowing its slate further, promising investors the headcount for Call of Duty, Candy Crush, Overwatch, Warcraft, Hearthstone and Diablo franchises would cumulatively jump by 20% even as it shed hundreds from the company-wide payroll. The Blizzard side of things is reportedly losing some of its operational independence as the parent company imposes a cost-consciousness on the division it never had to deal with before. And to top it all off, Kotick is out here sending employees to the unemployment lines as a victory lap for the company's best year ever.

Granted, this is a more nuanced situation than that assessment makes clear. Destiny may not have lived up to the company's expectations, but the franchise's loss puts a significant dent in potential revenues going forward. Hearthstone and Overwatch growth has slowed, and Blizzard hasn't had new major releases to offset that. Activision Blizzard knows 2019 will not be another record year for it, and it would rather right-size the operation sooner than later.

Regardless, the optics of this move are undeniably awful. And for the developers who were just laid off, the developers still with the company but utterly demoralized at seeing what's happened, and the developers who would like to work for a company that values them, the optics of the situation probably matter more than the nuance.

Kotick's callous disregard for optics was enough to push Activision Blizzard's stock price up about 10% in the days after announcing results short of analyst expectations. But it might cost the company far more in the months and years to come.

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Brendan Sinclair avatar

Brendan Sinclair

Managing Editor

Brendan joined in 2012. Based in Toronto, Ontario, he was previously senior news editor at GameSpot in the US.