The DeanBeat: Does Big Tech or Hollywood get games better?

Warner Bros. Interactive Entertainment (WBIE) is one of the treasures of the video game industry. Started by Jason Hall in 2004 and run by David Haddad today, WBIE has 11 studios that make triple-A games such as Mortal Kombat, Lego Harry Potter, Middle-earth: Shadow of Mordor, Injustice, and the Batman Arkham series. It makes anywhere from $300 million to $500 million in revenues per quarter, depending on what’s coming out.

But this was peanuts compared to AT&T’s revenue of $44 billion a quarter — and its staggering debt of $169 billion. AT&T had to do something about that debt, and so it is spinning out Warner Media and properties like HBO and WBIE to merge them with Discovery. Although it’s a crown jewel of games, WBIE merited very little attention from the top brass at AT&T.

I’m worried about Warner’s games division.

WBIE is part of Warner Media, which is being sold this week in a $43 billion deal via a Reverse Morris Trust, which is a tax-free deal in which a company spins out a subsidiary that winds up buying itself through debt and other means. Warner Bros. Media will include HBO and be combined with Discovery, owner of Animal Planet, HGTV, and many other entertainment properties. Warner Bros. declined to comment on what will happen with WBIE, but I’ve heard rumors that not all parts of WBIE will go with the Discovery company.

Last year, after first deciding not sell it, AT&T tried to sell WBIE for $4 billion. It got no takers, in part because it’s a complicated beast. It relies on licenses such as Harry Potter and The Lord of the Rings, and in the case of Harry Potter, it’s not clear if the license goes with it if WBIE is sold. Without the licenses, the game company isn’t worth as much, as it wholly owns Mortal Kombat but not licenses like Harry Potter. WBIE clearly fits better within Warner Media, where it has access to Warner Bros. licenses. WBIE’s studios are among the only ones in the world that could really do justice to those licenses. Still, the fact that it doesn’t own them means it’s harder for WBIE to stand on its own as a business and make a profit every single quarter.

Above: David Haddad is president of Warner Bros. Interactive Entertainment in 2018.

Image Credit: Dean Takahashi

Perhaps it will be better off as part of Discovery, where it can be surrounded by rich entertainment properties that could become licenses for games. But my worry is that, particularly with the rumors that it might be separated into parts, WBIE will be in some turmoil again. Perhaps sensing a chance to recruit WBIE employees, Electronic Arts has hired a former Monolith studios executive to run a studio in Seattle.

Let’s hope that the uncertainty ends soon. But it’s a reminder that big conglomerates and Hollywood studios aren’t always the best owners for game companies, which need a lot of attention and investment before they bear fruit. NBCUniversal shut down its game publishing division after growing it to 50 people. And Disney has recognized that its capability to manage games is quite mixed, so it has been licensing its entertainment properties to external companies such as Electronic Arts and Glu.

Neglecting a game business because it is a small part of an empire isn’t the best way to manage a treasure.

What about Big Tech?

Above: Jade Raymond at Stadia launch in March 2019. She is no longer with Google.

Image Credit: Google

I also wonder if the big tech companies might be better managers of game companies. But we don’t have much of a track record there. Microsoft has certainly made had great success over the past two decades with Xbox. Sony has also done a stellar job building its PlayStation business. But Google Stadia’s recent reversals, where it shut down a first-party studio run by game veteran Jade Raymond, are discouraging.

And Amazon has also had a series of misfortunes running its game business. The company launched and then shut down Crucible. It delayed the launch of its massively multiplayer online role-playing game New World. And it also recently shut down a game based on The Lord of the Rings after it failed to get a license cleared with Tencent, which took ownership of a company that was making such a game. That made me sad because I’m a huge fan of J.R.R. Tolkien’s The Lord of the Rings, and I know that Amazon is making a TV series about the Second Age of Tolkien’s Middle-earth lore, a period that takes place before the Third Age and the events of The Lord of the Rings. It would have been nice to see what Jeff Bezos’ money could have done for some real entertainment transmedia of one of the world’s most important intellectual properties. I still think the Tolkien franchise, and transmedia deals as well, are huge opportunities.

But it was not to be. And that’s a lesson. Even if you’re owned by one of the smartest business people in the world, that doesn’t mean much if your business is so small that it doesn’t register as a big deal for the larger company. Big tech companies have shown very little ability to manage complex game businesses in a way that is authentic for the fans. Perhaps Facebook could play a bigger role in games, as it has invested heavily in virtual reality. But VR is still in its infancy and has much to prove.

Apple doesn’t own game businesses, but its App Store and mobile devices have given games the biggest platform for expansion in the past decade. But as we’ve seen in the Apple v. Epic Games trial in the past two weeks and the changes to Apple’s Identifier for Advertisers (IDFA, which has hurt game companies by favoring privacy over targeted advertising) Apple doesn’t exactly have the interests of the game companies in mind when it makes major platform decisions. In the name of dodging Epic’s legal attacks, an Apple executive even went so far as to deny that Roblox’s game platform and user-generated games were actually games. He called them experiences. Lastly, Netflix, which is a hybrid of Hollywood and Big Tech, has taken only baby steps into games.

Given the choice between Hollywood or Big Tech, I’m not sure who is a better steward for a game business.

Independence

Above: Valheim is a big hit.

Image Credit: Iron Gate Studio

Maybe it’s time that the $175 billion game business ran it self. I would probably vote for local governance, authentic management that really cares about games, and financial independence from industries like Hollywood that are in full-scale retreat because of the pandemic or Big Tech companies that are coming under increasing antitrust scrutiny.

This week, the earnings results of Embracer Group, a publicly traded holding company for game studios in Sweden, caught my attention. It had good growth because of the success of the indie game Valheim, which sold 6.8 million copies. And Embracer’s dozens of studios have a total of 160 games in the works, including 90 that are expected to ship in the coming year. Embracer’s CEO Lars Wingefors has held acquisition talks with 150 game companies and is in late-stage talks with 20 of them. And Embracer has $2 billion to make acquisitions.

Wingefors pointedly said in his earnings report that his “determination not to become a ‘corporate machine’” is as strong as ever. At the very least, this is what it takes to run a game business well, or at least avoid running it into the ground. We talk so much about “indies” in the game business. But I truly wish that the indies were big corporate game studios like WBIE that had the independence to make their own financial investments and decisions. People like Kevin Chou, cofounder of Forte (which just raised a ton of money), are busy creating the technologies and the business models that could enable game companies to grow faster and become more financially independent.

I’m under no illusion that a lot of bad managers are indigenous to the games business. Jason Schreier’s new nonfiction book, Press Reset, chronicles why so many game studios have had to be shut down, affecting game developers livelihoods, forcing them to move, scramble to find new jobs, or just escape the game industry. Some had clueless Hollywood management, like Disney trying to be a parent for Warren Spector’s Epic Mickey games.

I’m looking forward to reading this to find some answers, but I fear that the dumb bosses come in all shapes and flavors.