Just fair warning, unless you’re really into base-level business analysis, this is probably the most boring post I’ve written in a while.
Activision Blizzard just announced that it had a year of record profits. Activision Blizzard just announce that they were laying off 8% of their workforce, close to 775 people.
This has a lot of people angry. After all, that’s near 775 lives that now need to shift gears. 775 careers interrupted. 775 households potentially shaken to the core. All while the company is facing the end of the most profitable year its had, and is compensating its executive team accordingly. The contrast there is galling people. It’s leading to a lot of anger on the interwebs, discussion of unions, attention to executive pay, and calls for CEO Bobby Kotick to be fired. You see this posed as a proletariat vs. bourgeoisie issue all over the place. People hate this, and between the news, the social media, just anywhere you want to look online, it’s not hard to see people expressing it.
To me, and I’d imagine to anyone else with any business experience or education, this is all so, so routine. Nothing going on here that points to any ethical lapse, no abuses of power, nothing that seems to indicate any real wrongdoing. Hell, a lot of the layoffs you’ll see out there are either misguidedly shortsighted or the results of significant mismanagement, and this one doesn’t even seem to be one of those. It’s unfortunate, very much so, but this really does seem to be a normal happening of normal business functions, and really not worth all the vitriol it’s drawing.
It’s been a while since I’ve picked up my business pants for one of these posts. And frankly, the Activision Blizzard layoffs are a function so utterly routine that I wouldn’t find it worth the effort to be typing up a post about it here. But my opinion of this matter is so drastically different from that of the prevailing internet shouting that, well, here I am zipping them up once more.
So hey, from the business perspective, let’s go ahead and unpack what’s happening here with Activision Blizzard’s layoffs.
Just from the ground level, there’s a difference between firings and layoffs. And there’s a difference between layoffs and mass layoffs. We’re talking about mass layoffs here, when a company lets go of large amounts of people all at once. Most of the time, when you see mass layoffs in the news, it’s the result of a company losing money. Hiring people is expensive, and personnel costs are usually the biggest expense on a company’s ledger. So it makes sense that if a company is looking to cut costs, the first place they’d go is cutting people, right? Not so much. You see a lot of companies really jumping the gun on them, going for layoffs purely as a cost-savings measure after a short period in the red. Mass layoffs are horrible. And they’re not just horrible for the people being laid off. It’s easy to lose track of the simple fundamental, but a company’s ability to make money is dependent on its people doing things that make money. If you have less people, you’ll be able to do less things, and therefore make less money. Layoffs can lead to a short-term increase in financial condition, but typically lead to reduced performance in the long term. Mass layoffs cost a business capacity.
But what happens when you don’t need that capacity? That’s the situation I believe Activision is in now. Sure, they’ve made a lot of money last year. But let’s take a look at the broader situation. Last year, following Destiny 2’s disappointing performance, the larger company has divested itself of developer Bungie. They’ve been sunsetting their Guitar Hero properties. Skylanders seems to no longer be on the radar. Call of Duty Black Ops IV has failed to achieve quite the presence they expected. Blizzard has no major new games coming in 2019. Heroes of the Storm is being scaled back. Hell, Blizzard was running an incentive for voluntary quits late last year, in a preliminary cost-cutting measure. Sure, the company posted what was reportedly its biggest profit yet. But it underwent a lot of trouble to get there, and by appearances, that trouble is going to lead to a very slow 2019 for the company.
Activision Blizzard is not laying off the positions that directly impact the company’s production capacity. Rather, they seem to be laying off the support staff, the community managers, the eSports relations, the admin staff, etc. The kinds of jobs that rely on there being production for them to have work in the first place. With Activision Blizzard’s production looking slow for 2019, with these positions reportedly being over-proportioned for current plans, it makes sense that there would not be enough work to maintain these positions. And when the work isn’t there for the job, and the work’s not going to be there for the job for the next year or so, it doesn’t make sense to keep the job around.
That feels a rather cold way of assessing a mass layoff. To be clear, every job removed from a company is a person who just had an earthquake rip through their life. Losing a job is a harsh, harsh thing. Especially so when, on the surface, it’s a profitable company, and therefore they don’t need to cut those positions. I’ve seen arguments that a company should never have layoffs when it’s profitable. But frankly, if there’s not work for a position, that position needs to be transferred out. I would argue it’s irresponsible for a corporation to keep on positions that they’re not going to have work for, as that consumes resources without productivity. When you’re looking at 8% of your staff being in positions where they’re not able to contribute, not able to feed back in to the cash flows of an organization, and won’t be able to in the long term, keeping the costs of maintaining those positions just makes the business as a whole more vulnerable, and prevents it from redirecting those resources towards better growth and the sort of things that make more jobs down the line. Money is blood for an organization, and when it’s going the wrong way, it leads to problems, instabilities, and missed opportunities in the future. A business owes it to its stakeholders; shareholders and employees both, to make sure it’s responsibly growing and building. Anything less can stave off some uncomfortable decisions at the immediate term, but usually at the cost of harder consequences in the long term.
And that’s still the case when the business is doing well. That may be especially the case when the business is doing well, as that can alleviate the pressure to “OMG FIX DIS NAO!” that can lead to decision makers facing confirmation bias towards the simplest and most apparent solution that leads to a lot of stupid layoffs. Moreover, they’re in a better position to offer more than the legally required two months of severance, as Activision claims they are, that way as well.
So, in the end, yes, that’s 775 people who are probably going through some very hard times right now. But no, there’s nothing unethical, immoral, or short-sighted going on here. This is unpleasant. For so many people. And it’s the way it had to be. If it didn’t, they’d likely be looking at worse within the company in the future.
While I’m at it, let’s address some specific capital-I Issues I’ve seen tossed around about this. First up, calling out the senior decision makers for treating people like numbers in the shareholder’s quarterly call in which the layoffs were announced, not expressing any remorse. Now, I haven’t listened to the call, and I really don’t care enough about the matter to track it down and spend the time on it. It’s totally possible they did express a reasonable amount of dismay over the situation, and the pundits would never consider anything they did enough. I’ve seen that happen a fair few times. But let’s take that at face value, and assume that’s accurate. Let’s assume they didn’t express regret for that decision, for this situation.
They should have. Yes, it’s a call for investors, who probably aren’t going to be super concerned about them flagellating themselves in remorse over this, and the public would probably have the same hate either way. But the main audience for the way you’re dealing with layoffs are the continuing employees and your potential future employees, and they need to be able to trust that when you’re laying someone off, you’re doing it with respect and you’re taking that decision very seriously. Given that this call was the public announcement of the layoffs, that should have come through here.
That said, although it was a mistake not to, I could excuse them for it. Common management knowledge is to not express too much emotion about firing or layoffs. You express empathy, and you express respect for them, but, as it’s expressed, too much emotion on the part of the people delivering the layoffs makes it harder for the people being laid off. It makes the situation feel more about the manager than it should be, and can get the layoffee feeling like they have to comfort the manager which is a horrible thing to do to them. Stories about of people trying to make the layoff too gentle and it ends up much worse than it should be.
In any case, you know what’s more important than them expressing regret in the earnings call? Them making sure to inform the effected members of the layoffs in a way that’s empathic and respectful before this ever goes public. Them offering severance, EAPs, and further assistance. Them talking things over with the continuing staff members before they have to hear about things on the news. If they’ve hit all of those, tripping and stumbling in the earnings call is a really minor issue.
As far as the discussion of unions go, they wouldn’t have done anything here. Don’t get me wrong, that discussion needs to be happening among industry workers. I’m pretty anti-union in most situations, but even I agree that a lot of the horrible working conditions you see in the game industry are exactly what unionization is best at addressing. But trying to use this as the rallying flag for it? Horribly misguided. For one, unions cover specific job types, not industry workers in general. The type of staff being let go in this layoff? Really unlikely to be covered by any sort of collective bargaining agreement in the first place. For two, unions aren’t that great at addressing layoffs. And when they try, it’s not typically kind to newer or younger workers. They could change the people getting laid off from one to another. At best they could make the layoffs more expensive. But if the company managers have any competence at all, they wouldn’t be able to stop a necessary layoff.
And then the matter of executive pay. After losing their previous CFO, Activision Blizzard just moved their COO Dennis Durkin to his former CFO position the month before the layoff, and awarded him a $15 million signing bonus for the transfer within the company. How do you square that with a company doing layoffs?! For that matter, how can one man be worth $15 million?
And if Activision Blizzard was laying off those staff purely for budgetary reasons, I’d be right there with you. If a company can’t afford to keep on its staff, its executives shouldn’t be getting giant raises or massive signing bonuses unless doing so is very clearly expected to bring on the staff needed to turn that around. But again, that’s not the situation here. They don’t seem to be dropping staff purely because of a lack of ability to afford them, rather, it seems to be because they are part of a capacity that’s not going to be utilized. The business isn’t struggling now, it’s repositioning to avoid a struggle in the future. If those giant riders weren’t being paid, they’d still be losing the staff. I don’t buy the argument that most are making here. This isn’t a rich vs. poor issue where management is ruining lives to line their own pockets.
And keep in mind that the $15 million signing bonus isn’t that straight-forward. Durkin’s is only $3.75 million in cash sign on bonus. The remainder comes from $11.3 million in preferred stock options, that are only granted if performance targets are hit. And even that, depending on how they’re granting the stock, and what terms are on those option, may not actually cost the company $11.3 million. They could do it without costing them a dime, if they were willing to devalue their current stock for it. And I don’t know that it’s all that unusual. C-suite pay is typically structured so that their salary is only a small proportion of their compensation. They tend to make their money through ownership options like these. So you’ll be seeing more of these out there.
And can one man be worth $15 million? Yes. Absolutely. In fact, that’s the whole reason they’re paying him that much, because they expect him to cause the company to make even more than that. And frankly, for a CFO, I wouldn’t be surprised. They’re not as public as the CEOs. You won’t hear them on the stage at E3, they won’t typically be the face of the company. But they may have power over the success or failure of the company rivalling, possibly exceeding, the CEO. They control the budget. And money is blood for an organization. By making sure they right money gets to the right places, they can have more impact than anyone else on making the CEO’s strategy thrive. And if nearly anyone else screws up, you can reverse course. If the CFO screws up, your organization might well be screwed. The last university I worked for is currently looking at possibly having to sell itself as a whole, because the CFO ten years ago made the wrong call regarding some construction financing. CFOs can make or break an organization. Such a signing bonus seems a little odd for someone who came from an internal transfer, but it seems to me that Activision Blizzard needed someone in the role in a hurry after losing their previous one, and that may have led to those discussions. And, after all, Durkin’s already had some very significant successes in his last stint as Activision CFO.
As for Bobby Kotick, the CEO himself? Probably the wealthiest man in the games industry. He’s one of the top paid CEOs in general, not just in games. Surely there’s a problem there? Not really. I don’t see it. It’s hard to get an argument about executive compensation in general that isn’t based on the thought that “It’s just not faaaaaaaaaaaiiiiiiiiiiir!” The thought that CEOs shouldn’t get increasing paychecks when they have to cut staff to pay for them top the list of the good ones, but that’s not the case here. You could make the argument that there’s money in there that should go towards growing the business, but Activision Blizzard is already about as big and as profitable as it gets in the industry. Then, there’s the interesting thought about CEOs getting entrepreneurial pay without entrepreneurial risks, but that doesn’t apply to Kotick either. Kotick got his start with the company when he and his consortium bought a significant share in Mediagenic, a failing games company. He became CEO of that in 91, turned it into Activision, and built it into the largest games company in the world. Nearly 30 years at the helm, building it from skirting the garbage can to having the most successful quarter ever. Everyone working there now are only able to do so because of Kotick’s success at running this business. And you know what? He and his partners still own about a quarter of the company. He has been right there, taking those risks as a significant shareholder in this business. He gets paid so much because he doesn’t just get CEO pay, he gets entrepreneurial pay as well.
And the calls to fire him? For what? For making the likely difficult but responsible call to release staff that wouldn’t be utilized? There’s a lot of hate out there for this. And for all the complaints about executive pay, one of the reasons it’s so high is that the CEO is the face of the organization for the public that directs such stupid hate at them.
Again, this layoff is something that sucks, and it sucks for a lot of people. But so much of the internet is trying to treat it like it’s rife with ethical problems, when really, it’s just a very unfortunate but routine business thing that seems to me like it was done for about as good a reason as you can get for it.