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How Much Profit is Enough Profit for Activision Blizzard?

This week we've learned of hundreds of layoffs at the same time as the company revealed record numbers.

It has been rumoured for some time that Activision Blizzard was looking to lay off some staff. And as these things tend to be with huge corporations, the release of a quarterly report meant a pink slip for 8 per cent of the almost 10,000 people employed by the publisher. At the start of the very same quarterly report, Activision Blizzard president Bobby Kotick boasted "record revenue" for the group, but clearly, it wasn't enough as they could be more profitable.

The announcement comes after a period where Activision Blizzard has been put under considerable market pressure. From their highest point in September and October of last year the company had lost half its value at Nasdaq at the time of the announcement. It has rebounded a little, but clearly, the market has not been overly impressed in spite of strong numbers in terms of revenue and the split with Bungie over disappointing sales of Destiny 2: Forsaken has shaken the market confidence in Kotick and the Activision Blizzard leadership that remains.

Perhaps Activision Blizzard were overvalued in October, but the massive drop has no basis in reality as Call of Duty is as strong as ever thanks to Call of Duty: Black Ops 4, Blizzard continues to do well with Hearthstone and Overwatch, and World of Warcraft may not be as strong as it has been, but it still pulls in those monthly subscription fees at a rate that no other MMO can manage. King's Candy Crush titles still have a firm grip on the casual mobile market. To top it off, Crash Bandicoot: Nsane Trilogy is likely the least costly (production-wise) 10 million seller of the generation. The fundamentals are strong, it's difficult to argue otherwise. There's no Guitar Hero-like cataclysm coming as far as we can tell. Even Destiny was profitable, just not profitable enough.

When you think about the almost 10,000 people employed by Activision and compare it to the number of games they release and develop in a year, or consider how many of those employed are actually directly engaged in game development, it's a worrying sign. After all, as gamers, it's the people who directly work on the games that actually add value for us. It's a bit like the music industry, where only a small part of the revenue trickles down to the musician or artists involved in making the music. Having often spoken to people working in various administrative positions at publishers like Activision Blizzard (or EA for that matter), it's clear that most of their days are spent making reports or processing reports. The more reports that are made, the more people are needed, resulting in even more reports. But there's little evidence to say that Activision Blizzard is going to confront this issue with these latest layoffs, but the fact that they've stated they will increase investments in their biggest titles suggests resources are being shifted around, if only slightly.

Call of Duty remains the company's biggest hitter.

There is a human perspective on the layoffs that needs to be communicated. People lose their jobs, and while Blizzard CEO J. Allen Brack likes to point out that the folks affected will get this year's bonus, that's certainly not true for everyone. Like any other mega-corporations, costs are important, and contractors are the cheapest employees to cut loose. There are calls to unionise, and perhaps that's a solution because the rampant use of contract workers in the industry is a source of insecurity and it feels a bit undignified in this day and age. Maybe they ought to employ fewer people and invest in those they do employ - longterm that's a much sounder policy.

The likely scenario here is that Activision Blizzard, at the very top level, came up with a number of employees that needed to be let go to demonstrate to the market that they were serious about becoming more profitable. It then came down to various lower-level executives to decide which parts of their respective business areas weren't essential, meeting expectations, or simply cost little to get rid off. We can only hope that these former employees find positions elsewhere, and the good news is that there are plenty of opportunities for those who have worked on big and successful products (such as the ones Blizzard puts out).

When Activision Blizzard signed the 10-year deal with Bungie for Destiny it was unprecedented. In fact, it was so beneficial that it was cited in the lawsuit between Activision and the Infinity Ward founders as that relationship turned sour. It was a deal that could only really make sense for Activision Blizzard as long as Destiny was a franchise in the same category as Call of Duty (or at least close to it). And it started out well enough, but as time has gone by, it's become clear that Bungie's shared world shooter just isn't attracting new players, and the existing player base gets smaller with each new entry and expansion. The game is in a mature phase, and while efforts were made to increase the player base, it just didn't make sense for Activision anymore.

Destiny 2: Forsaken just didn't make enough to make sense for Activision.

"Our decision was reached with mutual agreement with Bungie to sell back the commercial rights. And for us at least, it was rooted in really our strategy overall. First, as you know, we did not own the underlying Destiny IP, and we do for all of our other major franchises, which we think is not just a differentiator for us in the industry. But also controlling the underlying IP gives us the chance to move in with new experiences and new engagement models which also come with new revenue streams and, structurally, higher economics when you own the IP."

This quote from Activision's Coddy Johnson is telling, and it is likely a clear signal that the company will not sign a similar contract anytime soon. The next time they look externally for a big new game, they are more likely to open the wallet and buy the developer (or publisher) and the game in one fell swoop.

It's no surprise how short-sighted major gaming companies tend to be. The market is their lord, and the almighty dollar is all that matters. Building a sound, healthy company in the long term is not what the market desires, and so it's not what a publicly traded gaming giant provides. Perhaps Activision Blizzard had been putting on a bit too much extra weight in certain departments, but two wrongs don't always make one right. It remains to be seen if Activision Blizzard manages to satisfy the market in the short-term and build strong franchises and a healthy work environment for employees in the long term. It's a delicate balance, but the short-term will always win as the market dictates what's right and wrong.

By the way, the answer to the question in the headline is that there is no such thing as enough profit, it can always be better, and it's all just a question of meeting and exceeding expectations. The question is at what human cost, and how it affects the long term prospects.

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