Unity's incredible shrinking growth story | This Week in Business

Earlier this week, Unity announced its third round of layoffs in less than a year.

It was the largest of the three rounds of cuts, hitting 600 employees, or about 8% of the company's headcount.

The company is also looking to shutter half its global offices in the next few years, reducing its current network of 58 locations to fewer than 30.

So why is the company downsizing like this?

QUOTE | "It's all about setting ourselves up for higher growth." – Unity CEO John Riccitiello, speaking to The Wall Street Journal about the cuts.

Now I may be just a simple country lawyer, but laying people off for growth strikes me a lot like the old saying, "Fighting for peace is like screwing for virginity."

(Editor's note: Brendan is neither from the country nor a lawyer.)

Note to editor: I see you didn't weigh in on that third thing…

(Editor's note: [Pointed silence])

Jerk.

So how exactly is laying people off going to grow Unity? It's not going to encourage more creators to use the engine or make their products more successful. It's not going to increase the assortment of development and monetization tools they offer, or make them any more effective.

The cuts are said to flatten the corporate hierarchy and eliminate some "middle managers," a phrase that conjures up do-nothing speedbumps, corporate parasites that exist to waste time by forcing subordinates to fill in useless reports and forcing superiors to read digests of those reports. Why, if we could just get rid of them entirely, the bosses and the employes who actually get things done could talk directly and Unity would instantly be a more nimble organization ready to realize everyone's untapped potential!

That's no doubt the spin Riccitiello would like to see on this news.

QUOTE | "I wouldn't hold any company to the standard that everything that must work and no job must end. That's a bit like the federal government and it ends up with bloatocracy, and I don't want to be a giant behemoth. I want us to be sharp and smart and focused on things that help our customers the best." – Riccitiello, speaking with us last year after the first round of job cuts.

The thing is, middle managers are just people in the company who have bosses and direct reports. Even if some of those positions contribute primarily by managing the logistics of communication between various tiers of the operation, that's still a function that arose at one point out of a need for such a person. Removing that person from the equation doesn't remove the need they filled.

This "shrink to grow" mentality is a turnaround from the growth strategy Riccitiello laid out last year

And while I readily concede any organization of Unity's size (around 7,000 people after the cuts) probably has some employees that are a net negative to the company's value, I also think if you're a CEO that's been running that company in such a way that it is carrying around 600 such people, that raises some questions about your own fitness for the position.

What's really odd about this "shrink to grow" mentality is that it's such a turnaround from the growth strategy Riccitiello laid out for us last year when we asked why the company had never posted a profitable quarter.

QUOTE | "Very few companies are profitable when they report 40% growth, as we did throughout 2021 and 2019. It's because you're hiring to support heavy, heavy growth." – Riccitiello explains that the way to support growth is to hire more people.

At the time, Riccitiello told us Unity would post profits in 2023. And sure enough, in February, Unity reported its first profitable quarter ever. Sort of.

STAT | $13 million – Unity's non-GAAP income for the three months ended December 31, 2022.

(GAAP stands for Generally Accepted Accounting Principles US publicly traded companies are required to report results under; they commonly also report non-GAAP numbers that leave out certain expenses because they feel it provides a more accurate depiction of the health of their business / often makes them look better.)

STAT | $288 million – Unity's GAAP net loss for the same quarter.

It turns out giving employees stock and paying taxes and the like still counts as spending money even if you'd rather investors not pay attention to it. Who knew?

Regardless, profits with an asterisk are a good first step for Riccitiello's plan on transitioning to their asterisk-less counterpart, but I suspect Unity shareholders would like to see some bigger strides following in quick succession.

STAT | $210 – Unity shares' peak trading price, set in November of 2021.

STAT | $25 – Unity's trading price mid-day Wednesday, hours after news of the layoffs broke.

Unity is by no means alone in seeing an absurdly elevated share price in late 2021 followed by an Icarian return to earth, but its fall has been steeper than most of the big players in gaming and tech more broadly.

I suspect there's less appetite on the part of Unity shareholders to swallow continued losses to support heavy growth, and cutting headcount is one way to do that. It obviously saves money in the long run to have 600 fewer mouths to feed, but it comes with its own costs.

STAT | $26 million – Unity expects to report $26 million in charges relating to the restructuring and layoffs, a bill mostly comprised of severance payments, employee transition costs, and employee benefits.

STAT | $43,333 – How much it is costing Unity, on average, to get rid of each of those 600 employees.

That's a significant chunk of change to spend, enough to wipe out two more "profitable" quarters like the one Unity just recently reported. (But only if you care about actual profits, as restructuring costs are excluded from non-GAAP calculations.)

If we're not talking about these layoffs as part of some radical change in direction and function for a company, I don't see how cutting staff like this results in growing Unity's business.

Of course, Riccitiello has to pretend it will anyways, because growth is the only thing a publicly traded company is allowed to care about, even to the detriment of profit. Unity is a good example of this, as it survives despite nearly two decades of nothing but losses.

The costs saved by the layoffs are being passed on to Unity's employees

These layoffs will likely make the existing business a little more profitable (or less unprofitable) after Unity has swallowed the non-trivial costs of paying 600 people to not work for it anymore.

But the costs saved are being passed on to Unity's employees, both the ones who have been turned into ex-employees (whose distress would be so obvious as to go without saying) and the ones still around but now asked to shoulder the additional responsibilities of 600 colleagues.

I imagine anyone who has survived a corporate layoff is familiar with the request to "do more with less." My own experience is that the end result of such cuts is that we do less with less, but at more cost to ourselves.

Beyond being a deeply callous way for management to treat the employees it claims to value, this kind of layoffs-for-growth mentality is not just a rejection of the idea that layoffs are an embarassing sign of mismanagement and a bad thing to be avoided, but an embrace of such cuts as a virtue in and of themselves.

QUOTE | "We didn't cut 1% of jobs because we were trying to make a P&L. We did it because we were focusing our energy. Like with lots of things – your parents when they ask you to eat your vegetables – they're not doing it to punish you. They're doing it to facilitate your better and more nutritious self." – Riccitiello explains Unity's first round of cuts to us last year.

In hindsight, maybe we should have asked Riccitiello if he was going vegan.

The rest of the week in review

QUOTE | "We recently evaluated all ongoing development projects within Phoenix Labs to determine our strongest path in terms of success and sustainability. As a result of that evaluation, we felt the best way forward for the company was to focus on fewer development projects." - Phoenix Labs at least understands layoffs mean it won't be doing as much.

STAT | 62 – The Metacritic average review score for Arkane's Redfall on Xbox Series X, as Microsoft's first-party software lineup struggles continue. Our Critical Consensus round-up of the written reviews offers further detail on what issues critics had with the game.

QUOTE | "We lost the worst generation to lose in the Xbox One generation, where everybody built their digital library of games." - In an uncharacteristically grim interview that also addressed the Redfall reception, Xbox head Phil Spencer acknowledges Microsoft fumbled its opportunity to compete with Sony or Nintendo head-on, and even making great games wouldn't be enough to shift the needle now (hence its focus on Game Pass and streaming).

QUOTE | "Something isn't working as it should, and even if the focus on buying Activision isn't the underlying cause of that problem, it certainly seems to have distracted attention from fixing it." - Our own Rob Fahey notes the uneven track record of Microsoft's acquisitions over the past five years, and suggests that Xbox could wind up better off in the long run if the Activision Blizzard acquisition doesn't go through.

QUOTE | "I console myself with the normal excuse: If I hadn't done it, somebody else would have." – AI research Dr. Geoffrey Hinton, whose work pioneered much of the current wave of generative AI tech, tells The New York Times he regrets his work now seeing how it will be used for misinformation, cutting jobs, and perhaps worse.

It's a really swell trick to use cynicism about other people hypothetically ushering in a dystopian future to give yourself ethical permission to actually usher it in yourself first.

QUOTE | "What was special about Meta was the trust. We drank the Kool-Aid and really felt like it was our company [and] even willingly defended it when everyone said we were evil incarnate. But that's been shattered, so it feels like a betrayal." – Speaking with The Washington Post for that article, a current Meta employee explicitly likens themselves and their co-workers to religious cultists. The hypnotic spell the company had over them was broken not by reports about the genocide, human trafficking, misinformation campaigns, and mental health problems Facebook either actively aided or neglected to combat, but by a couple rounds of layoffs affecting them and their co-workers.

STAT | A few weeks – From that same Washington Post article, the length of time new Meta Quest owners would actually use the headsets before engagement dropped off.

QUOTE | "It's interesting, because when people on the right hear the words 'end-stage capitalism,' they think I'm attacking capitalism. It's like saying my grandma has a terminal disease – it doesn't mean I hate my grandma. It just happens to be the end stage of capitalism, it's an ill creature at the moment. Does it make me a lefty to point that out? Is a doctor trying to heal somebody 'woke' now?" - The Last Worker director Jörg Tittel discusses the inspiration for the dystopian narrative adventure game.

QUOTE | "There is a risk that we talk about 'live service' in generic terms – as if it is a single genre, or even a single business model. PlayStation Studios are making a variety of games that could be referred to as 'live services', targeting different genres, different release schedules, and at different scales." – Discussing the acquisition of multiplayer specialist Firewalk Studios, PlayStation Studios head Hermen Hulst tells us Sony's plan to launch ten live service games doesn't mean they're making ten Fortnite competitors.

QUOTE | A little over a year ago, myself and several other ABK employees organizing to make @ABetterABK met with Daniel Alegre, then Chief Operating Officer of Activision Blizzard, to discuss employee concerns prior to a walkout we were conducting. – Former Activision quality assurance tester Kate Anderson, in a Twitter thread describing a fruitless meeting in which Alegre interrupted them repeatedly and "tried to take over the conversation and keep talking so we wouldn't have any time to present our concerns." Anderson said the employees were only able to express half their concerns by the meeting's end, at which point Alegre promised them another meeting, which never happened.

QUOTE | "We believe that a direct relationship between the company and its team members delivers the strongest workforce opportunities." – In January of 2022, an Activision Blizzard representative explains that unions aren't necessary because of all this wonderful direct communication between management and employees.

It's a real "Our door is always open… and ready to be slammed right in your face if you ever actually try to walk through it" sort of deal.

STAT | ¥3 million (roughly $22,000) – The minimum starting salary for graduates going to work at Xenoblade Chronicles developer Monolith Soft. And that's after the company raised the pay by 22%.

QUOTE | "Sega is a household name on PC and console, which means they can help us bring Angry Birds to new audiences on those platforms." - In discussing the company's acquisition by Sega, Rovio CEO Alexandre Pelletier-Normand hopes nobody remembers that household name Activision already brought the franchise to consoles with Angry Birds Trilogy and Angry Birds Star Wars.

QUOTE | "People think you're Michael Jordan on the team, and I say no, I'm Phil Jackson." - In talking about launching the VR MMO Zenith: The Last City on PlayStation 5, Ramen VR CTO Lauren Frazier explains her role atop the studio's engineering team doesn't involve her being the best engineer.

STAT | $1 billion – The worldwide box office total for the Super Mario Bros. Movie as it approached the end of its first month in theaters.

QUOTE | "The Nintendo Switch version of Marvel's Midnight Suns will no longer be offered as part of updated plans." – 2K Games confirms that it put a stake through the heart of the Switch port of the game.

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