Engines of Woe | This Week in Business

This Week in Business is our weekly recap column, a collection of stats and quotes from recent stories presented with a dash of opinion (sometimes more than a dash) and intended to shed light on various trends. Check every Friday for a new entry.

Unreal and Unity are the two biggest game development engines on the market, and the companies behind them have a lot more in common than that. For example, they've both had very bad weeks. Let's start with the fresher of the two.

Yesterday Epic laid off 830 people, or roughly 16% of the company.

It also got rid of two of its pandemic-era acquisitions, selling Bandcamp and spinning off SuperAwesome in moves that took another 250 off the payroll, about another 5%.

Epic CEO Tim Sweeney explained the necessity of the cuts in an email to staff.

QUOTE | "For a while now, we've been spending way more money than we earn, investing in the next evolution of Epic and growing Fortnite as a metaverse-inspired ecosystem for creators. I had long been optimistic that we could power through this transition without layoffs, but in retrospect I see that this was unrealistic." – Sweeney offers a bit of a mea culpa in his email early on.

What's weird is that the company's cash cow Fortnite is growing, as Sweeney is quick to point out in his email. But because the growth is driven by user-created content and Epic needs to share revenues with those creators, Sweeney laments that the profit margins aren't as high. But if the fundamentals of the business are improving, surely there are less drastic ways to address the problem than jettisoning 20% of the company through layoffs and divestitures?

QUOTE | "Epic folks around the world have been making ongoing efforts to reduce costs, including moving to net zero hiring and cutting operating spend on things like marketing and events. But we still ended up far short of financial sustainability." – Sweeney says the company's cost-cutting wasn't getting the job done.

Oh, I see. The problem isn't that the business is doing poorly. It's just that there was more money going out than coming in. But that's a little weird, because we know there was a lot of money coming in. In addition to the Fortnite and Unreal revenues, Epic had sold off bits and pieces of the company to vastly inflate that "money coming in" figure.

STAT | $4.78 billion – The amount of money Epic raised from selling chunks of the company in 2020, 2021, and 2022.

As for what that money was used for, a lot of it no doubt went to funding Epic's Embracer-esque years-long shopping spree (including Bandcamp, SuperAwesome, Harmonix, Sketchfab, ArtStation, Capturing Reality, Rad Game Tools, Hyprsense, Aquirius, Tonic Games Group and more just since 2020, plus an actual mall).

Acquisitions are costly and tricky, and even recent history shows that companies on acquisition sprees tend not to be smart about it

But the neat thing about going on a spending spree of other businesses is that if you're smart about it, those businesses are already making money and won't be a drag on your bottom line once they're integrated into the company. But acquisitions are costly and tricky, and even recent history shows that companies on acquisition sprees tend not to be smart about it. I guess something about a "spree" and "carefully considered financial prudence" just doesn't seem to go together.

So Epic had a social phenomenon in Fortnite, an evergreen hit in Psyonix's Rocket League, and an industry-standard engine in Unreal. On top of that, it got almost $5 billion in what we could characterize as "free money" for this exercise (because exactly who owns the business isn't relevant to whether it's sustainable). It used that money to buy some significant and (I assume in many cases) profitable businesses, adding Mediatonic's Fall Guys to the stable of breakout hits along the way.

And then there was the whole once-a-century pandemic thing that took away people's options to do almost anything other than play games and an economic climate where borrowing money was the closest thing to free thanks to low interest rates.

And even with all that going Epic's way, it still wound up "far short of financial sustainability."

They had to know that confluence of circumstances wouldn't last, that investors would not continue lining up to trade billions for ever-smaller fractions of the company, that one way or another people would start leaving the house and doing things again, that inflation would pop up sooner or later and the cost of borrowing money would rise.

I would suggest that the problem here is not that Epic had 830 people too many on staff. The problem is that during the good times, the business was being run in a wildly unsustainable fashion such that even a healthy and growing operation would not be able to justify the expenditures it was making. But doing so essentially committed the company to carnage when the good times ended, as they inevitably must.

So now, when the cost of everything is increasing, interest rates have been rising and investment has been getting tighter, this is the moment when Epic suddenly gets Very Serious about having a sustainable business right now, kicking 800 people to the curb to figure out how to navigate that same difficult economy on their own.

I know the people who are losing their jobs will remember this. But I do wonder if the next time the industry is in rude health, the next time interest from investors is high and interest at banks is low, will Epic remember the importance of sustainability then?

Speaking of which, Epic wasn't the only industry-leading engine maker converting to the Church of Sustainability since our last column.

Impugning Unity with impunity

A week and a half ago, Unity cut a fart called Runtime Fees in the jam-packed elevator of game development on a Tuesday morning.

It was an incredibly inconsiderate move that stunk up the joint all the way until Sunday night, when it offered a meek apology to the rest of the elevator's inhabitants, and said it would have a plan to fix things in "a couple of days."

A couple of days turned into five, as the elevator inhabitants had time to stew in their grievances. Unity finally broke its silence last Friday. It arrived just after the publication of last week's column, but the odor still lingers, so we're talking about it again this week.

The short version of the walkback is that the per-install Runtime Fee will not apply to any developers on the Unity Personal subscription tier, and that developers on the Pro and Enterprise tiers can opt to give the company a 2.5% revenue share instead of the per-install fee. Revenue, like installs, will be self-reported by the developers. Also, it won't be retroactive, so only projects made with 2024 or later versions of the Unity Engine will need to pay.

Of course there is going to be some lingering resentment from developers unhappy with what Unity tried to do

Is Unity's new Runtime Fee plan better than the original? Seems like it. Is it better than the old way of doing things? Not at all.

Of course there is going to be some lingering resentment from developers unhappy with what the company tried to do, and unsatisfied at how much of it remains essentially unchanged. Fortunately, Unity has an ironclad plan to win those developers back over, and it began with Unity's head of Create Marc Whitten answering questions from the community in a YouTube interview last Friday afternoon, several hours after the company announced its new Runtime revisions.

QUOTE | "The most fundamental thing we're trying to do is we're building a sustainable business for Unity. For us, that means we do need to have a model that includes some sort of balance exchange including shared success. That's really, really important for the long-term future of how we think about our business and how we think about the engine." – Whitten answers the interview's first question, which was basically, "Why?"

Whitten hammered home the idea that Unity as it currently exists is unsustainable. And he's right, because Unity as it currently exists has been deeply unprofitable by design. And that's because Unity management has intentionally prioritized growth over profitability, as Unity CEO John Riccitiello told us last year. We can call it "The Biggest Loser" strategy.

In short, much as we're seeing with Epic, Unity management deliberately pursued an unsustainable business strategy for years, and now that the economy has slowed down, it's time for someone else to suffer for it.

STAT | 900 - The number of employees Unity has laid off this year, cutting nearly 300 in January and letting go of 600 more in May, when it also confirmed plans to close half its offices around the world over the coming years.

QUOTE | "It's all about setting ourselves up for higher growth" - Unity CEO John Riccitiello, explaining the May layoffs to the Wall Street Journal.

That quote suggests to me that Riccitiello would embrace the same growth-prioritizing strategy that led Unity to its current predicament again (if only the economy would let him), and regardless of the fallout it might have on Unity's employees and customers.

But Unity underestimated the pushback developers would have to the Runtime Fee – or overestimated its own leverage – and now it's scrambling for a way to make this still-smoldering pile of ashes resemble a bridge once again.

About half an hour into the interview, Whitten was asked how the company is supposed to regain developers' trust.

QUOTE | "That's a great question, and there's only one way to answer it: actions." – Whitten implies that there's no reason to trust anything Unity says right now.

OK, that's probably more "We infer" than "Whitten implies," but either framing is functionally acknowledging the fact that Unity's words (and those of their execs) cannot be taken as a reason to trust the company at this point.

And as for what actions Unity is taking, Whitten pointed to two things: The first is that the company is adding language to the terms of service that will ensure Unity developers don't have retroactive policies like the original Runtime Fee imposed upon them in the future. The second is to bring back a GitHub repository where Unity's past Terms of Service were maintained for all to see what changed and when.

The problem is that until not too long ago, Unity already had language like that in the Terms of Service and a GitHub repository of old terms to help keep the company honest, but it clearly did not do the trick.

QUOTE | "When you obtain a version of Unity, and don't upgrade your project, we think you should be able to stick to that version of the ToS. In practice, that is only possible if you have access to bug fixes. For this reason, we now allow users to continue to use the ToS for the same major (year-based) version number, including Long Term Stable (LTS) builds that you are using in your project." – A Unity blog post from January of 2019 (as spotted by GamingOnLinux) explaining changes it was making to the Terms of Service and announcing the GitHub depository "to give developers full transparency."

But sometime in the past year or so before the Runtime Fee was rolled out, that repository was quietly pulled offline.

Now look, I know the more conspiratorial-minded of you are probably thinking Unity killed the repository and memory-holed its old Terms of Service so people wouldn't realize the original Runtime Fee was a blatant violation of those terms. But I will point out that Unity's old Terms of Service allowed the company to change terms "at any time for any reason and without notice," and it was merely doing so in April when it quietly removed the bit about devs being able to continue using older versions under the prior Terms of Service they had agreed to.

And yes, that would be a bit of dirtbaggery entirely consistent with the sort of company that would sell users on an upfront payment business model and then change it long after the fact to a lifetime of subsequent payments for as long as a game keeps being installed, or the sort of company that would spend years losing billions of dollars to grow its market share to competition-inhibiting levels that would keep its valued clients/suckers locked in no matter what jackassery it got up to.

But if we just put the tinfoil hats away for a minute, I'm sure Unity has a perfectly good and entirely innocent explanation for this.

QUOTE | "Genuinely disappointed at how our removal of the ToS has been framed across the internet. We removed it way before the pricing change was announced because the views were so low, not because we didn't want people to see it." [Emphasis in original.] – Unity last Friday afternoon, posting about the GitHub shenanigans on Twitter.com.

I'm not sure a commitment to full transparency is the sort of thing that comes with an asterisk saying, "unless it does crap numbers"

I don't know Unity, I'm not sure a commitment to full transparency is the sort of thing that comes with an asterisk saying, "unless it does crap numbers." And as for being disappointed that people would assume ill intent on your behalf, how short did you think the statute of limitations on holding this against you would be?

STAT | 3 hours, 7 minutes – The time difference between Unity tweeting its heartfelt apology for trying to screw people over with the Runtime Fee policy and tweeting its dismay that anyone thought it capable of trying to screw people over.

I get why Unity is in a hurry to move past this, of course. But I would imagine others won't be so quick to put it behind them. Especially when the new guardrails Unity has put in place to reassure developers that it won't screw them over are the exact same guardrails that already failed to prevent this once.

Naturally, developers have noticed this.

QUOTE | "In my opinion, Unity hasn't done enough to make me feel like they won't change the rules around this again at some point in the future. The changes to the plans will still result in developers being more open to exploring alternative game engines for their project, especially now that the trust in Unity has been broken, so from that perspective I don't think their changes have addressed enough of the concerns." - Snap Finger Click co-founder Martijn van der Meulen was one of a number of developers who weighed in for us on whether Unity's policy revisions were good enough.

If only there were some way we could know Unity's values, the core principles that guide its every move… If we knew that, then we might be able to better understand what Unity stands for, what it aspires to be, how it will do its job, how it will treat people, and how it will make the right decisions.

Oh hey, speak of the devil!

Circus of Values

I know a lot of you probably don't put much faith in corporate mission statements and things of that nature, but I absolutely love them. Can't get enough of 'em.

It's not because I'm a masochist, or hopelessly gullible, or even a sad (yet synergistic) combination of the two. It's because I find it unreasonably entertaining to take corporate values statements seriously and then act shocked when companies don't live up to them.

Besides, the only ones who benefit when companies aren't expected to follow through on the commitments they make or the things they say are those same companies. So let's frolic through this minefield of disingenuous declarations as if we don't know perfectly well what's coming, shall we?

QUOTE | "This is what we stand for and what we aspire to be. Our values inform how we do our jobs and how we treat each other every day, while also helping us make the right decisions for our customers, partners, and collaborators." – Unity, stating on its website that it has four key values.

Those same key values are also listed in Unity's annual report filed with the Securities and Exchange Commission, and it's generally frowned upon/illegal to make materially false statements in such documents for investors, so we can assume these are things the company is prepared to stand by. Given that, let's grade the Runtime Fee debacle through the lens of those key values, one by one.

QUOTE | "Users first: We put users first… they are rock stars and we are their biggest fans. Our shared dedication to users holds us together, defines and aligns our work and drives us to deliver for them."

Unity execs are developers' biggest fans? It's true that video game fandom is known for abusing and threatening the livelihoods of people they claim to be fans of, but I don't think that's the kind of relationship Unity had in mind here.

Grade: F

QUOTE | "Best ideas win: We believe great ideas can come from anywhere. We have vigorous debates, we listen and learn, and we make sure the best ideas win. We care enough to go through the pain of messy conversations."

The conversation has certainly been messy and painful since the Runtime Fee was announced, so they've got that covered. But there is clearly no universe where the original announcement and the subsequent bullshit misspeaking about how all this was supposed to work could be seen as "the best idea."

Grade: F

QUOTE | "In it together: We are Citizens of Unity. We act like owners. We're activists; we have a voice and use it. We're direct and candid, with good intent. We respect each other's uniqueness and we're in it together."

The citizen analogy might seem like a super-weird way to look at your customers, but I just had a conversation with a developer who told me the Godot Discord is filling up with "refugees" from Unity, so maybe it's not so strange after all. The "We're in it together" part is also somewhat defensible in light of how many developers partway through their projects are shackled to Unity for the time being. But "direct and candid, with good intent"? Not so much.

Grade: F

QUOTE | "Go bold: We do bold things. We go big and when we fail, we learn, get better and go big again. We challenge and elevate each other beyond our limits to do what may seem impossible. We stay curious and hungry."

The Runtime Fee was definitely bold, I will give them that. And as promised, they went big and they failed. I also appreciate that Unity says it's a matter of "when we fail" and not "if."

As for learning, getting better and going big again? That's basically what the revision of the Runtime Fee has been. Unity failed and learned how to do essentially the same thing, but in a slightly less aggressive/incompetent way that not only won't get the same pushback, but has actually been welcomed by some developers.

Grade: B for Bold

Unity failed and learned how to do essentially the same thing, but in a slightly less aggressive/incompetent way that not only won't get the same pushback, but has actually been welcomed by some developers

Boldness aside, this report card is not looking good. But wait! There are three extra bullet points on the site about "How we live our values."

Maybe they just have a different way of living values than we do. After all, there's clearly some cultural disconnect between the way C-suite executives use words and the way everyone else does. Perhaps we can, er, put a pin in our feedback and proactively interface to a more actionable and positive alignment, or something? (Sorry, my Corporate-PR-to-English Translator was bricked by Activision years ago and I never got it replaced.)

QUOTE | "Empathy: Empathy is necessary to validate the perspectives of others. It is the capacity to feel what another person is experiencing by putting yourself in their position."

In announcing the original half-formed and poorly explained Runtime Fee, Unity's executives dropped a bomb in the laps of literally all its developers, and then seemed caught off-guard by both the angry reaction it prompted as well as the logistical questions about how exactly it was going to do this.

An empathetic executive team would have understood ahead of the announcement why this would be such a problem for developers. And even if they felt it absolutely necessary to roll out the plan despite that, an empathetic executive team would not have needed a week and a half to figure out a way to address developers' biggest concerns, because they already would have had a pretty good idea what those were going to be and prepared accordingly.

Grade: F

QUOTE | "Respect: Respect is a recognition of dignity. It is about treating others how they want to be treated, which compels us to ask how they feel most valued."

This one was going to be an uphill battle from the start. We've already established that empathy is not part of the Unity feature set, so how is Unity supposed to put itself in someone else's shoes to know how they want to be treated?

Oh well, Unity is the one who laid out these values for us to judge them by, so our hands are tied here.

Suffice it to say that if Unity execs asked themselves what would make developers feel respected and the answer was "to have all of them hooked up to the massive free-to-play hit milking machine regardless of the size of their operation, what kind of game they were working on, or Unity's prior assurances that it had no intention to make a massive free-to-play hit milking machine or force them to be hooked up to it," they deserve the exact same level of respect in return.

Grade: F

So far Unity is 0-for-2 on how it lives its values. Even if it gets full credit on the last one, that's still topping out with about 33%. That's a failing grade in pretty much any school, but if we're grading on a curve for how other big companies in gaming live up to their own stated values, there's hope yet. And hey, look at this, you literally can't even spell this next one without "unity." That's gotta be a good sign, right?

QUOTE | "Opportunity: Opportunity is a guarantee that individuals are treated equitably, free from artificial barriers, prejudices, or preferences."

Ah, maybe not.

Now you might say that Unity applying the Runtime Fee to everyone was equitable treatment, but indie developers with Unity Personal accounts are set to pay up to 20 times more per install than AAA Unity Enterprise customers with massive hit games. And that's before the discounts the company is offering for those who use its other monetization and ad services, which seem far more likely to be massive Unity Enterprise clients than Unity Personal developers.

Also, the Runtime Fee doesn't apply to developers on film, gambling, or education subscription plans, or to Unity Industry subscribers, so a significant chunk of the company's users are escaping this new burden entirely.

STAT | 40% - The amount of Unity Create revenue that came from companies outside of games (such as Mercedes-Benz and military contractor CACI, which is currently being sued for its role in the torture of inmates at Abu Ghraib) in the second quarter of 2022, back before Unity decided it had to convince game developers it still cared about them, stopped being as loud about this particular statistic, and rejiggered its revenue numbers after the IronSource acquisition in such a way that it could report Unity Create revenues higher than the Unity Grow side of the business (as detailed in its annual report).

To recap, the Runtime Fee isn't treating Unity developers equitably, and it's clearly creating artificial barriers, prejudices, and preferences as to the types of developers that it places a burden on, as well as the size of that burden.

Also, it favors an assortmtent of undesireable things like casinos, torturers, and Avatar sequels. Is this really what we want for society?

Grade: F

I gotta say, this does not look like a passing grade, Unity. And just like you when people question your decision to kill the Terms of Service repository because of poor engagement metrics, developers aren't mad; they're just greatly disappointed.

Correction: We are being told developers are actually mad in addition to being greatly disappointed. Very, very mad. Livid, in fact. Just really, really pissed.

We regret the error.

The rest of the week in review

STAT | 30 – The number of people Roblox laid off from its talent acquisition team this week, citing a desire to stop having its employee salaries growing faster than its sales. The company was founded in 2004, and has never had a profitable quarter. Sustainability!

QUOTE | "In response to lower profitability of the European region, we have reviewed the title portfolio of each development based in Europe and the resulting action will be to cancel Hyenas and some unannounced titles under development." - Sega Sammy takes the axe to a few projects, including Hyenas, which just recently finished a closed beta test. Hyenas developer Creative Assembly has begun a redundancy consultation and job losses are expected.

STAT | 10 – The number of Hearthstone developers laid off this week as Blizzard restructured the team. That's the same Blizzard that saw revenues jump 160% and operating income more than quadruple year-over-year in a record performance last quarter, so I'm going to go ahead and file this one under Activision Blizzard Celebratory Layoffs.

STAT | 30 – The number of years Jim Ryan, who this week announced his pending retirement from Sony Interactive Entertainment, has been at Sony working on PlayStation.

STAT | 29 – The number of years since the original PlayStation launched in Japan.

QUOTE | "With no path to a turnaround and the inevitable migration of physical software sales to digital downloads, we think Mr. Cohen's appointment ensures GameStop's demise." - In a note to investors, Wedbush analyst Michael Pachter says GameStop's appointment of board chairman Ryan Cohen to the position of CEO after months of the role being left vacant is a bad sign.

Given the short tenure and callous treatment of its last CEO, Pachter concludes "the company could not convince any competent replacements to jump onto the sinking ship."

QUOTE | "We strongly believe in the next five to ten years, many games will be streamed and will also be produced in the cloud." – Ubisoft CEO Yves Guillemot believes cloud streaming will change games just like Netflix changed TV and film.

We've had streaming on Game Pass, PlayStation Now, GeForce Now, Stadia, and OnLive over the past decade, so yeah, I think streaming will continue to be an option. As for games being "produced" in the cloud, I don't know if he means people working remotely (which Ubisoft has already done but wants to stop doing) or perhaps game development done primarily by generative AI (which I would expect to go about as well for Ubisoft as its Wolf Enhanced Pants NFTs).

QUOTE | "You became rich by taking these actions in a real-time, frenetic game situation, so it felt a lot like labor. But then we realized that the fantasy of Monopoly was actually that you get richer by having money. You just have lots of capital and these hotels, and then capital multiplies because people pop up in your hotels and you get richer through that." - Scopely's GM of Monopoly Go and VP of product Massimo Maietti explains that the first version of Monopoly Go was scrapped because it had the wrong player fantasy.

It's an interesting parallel to the actual Monopoly, which began as a deeply critical portrayal of the way wealth works in society, but has been received almost as a celebration of it, where the notion of being the one person on top is so delightful as to outweigh the odds against that happening. After all, there can be only one winner in a Monopoly game, and everyone else ends up bankrupt.

STAT | 1,285% - According to AbleGamers COO Steven Spohn, the markup charged by the maker of one accessibility peripheral, because even though it only costs them $35 to make, Medicaid will pay $485 for it. As for those who need it but can't get it covered by Medicaid, the company policy would seem to be "Oh well, sucks for them."

QUOTE | "If you're just doing a retro collection, you have to look for super hot games that are playable today, that everybody already knows about. But as far as an interactive documentary goes, we could license and publish a game that nobody's ever played, that was developed and maybe canceled. At least if it has a really interesting story that we can tell." – Digital Eclipse editorial director Chris Kohler talks about the studio's Gold Master Series and the first release, The Making of Karateka.

STAT – 243,000 – The number of attendees at Tokyo Game Show 2023, nearly double last year's event, which was limited by COVID-19 restrictions.

STAT | 98.32% - The percentage of SAG-AFTRA members casting ballots who voted in favor of authorizing a strike for video game actors and performers this week. The company is in negotiations with a number of publishers to nail down terms of a new deal, including Activision, Electronic Arts, and Epic Games - although this week's talks concluded with no agreement. SAG-AFTRA members are already on strike when it comes to Hollywood film productions.

The Writers Guild of America this week agreed to a new deal with Hollywood studios, ending a five-month strike, winning increased pay, better terms on streaming residuals, and limits on company use of AI, among other things.

QUOTE | "I mean... who hasn't wanted to play… a text… you know, adventure game… with Snoop Dogg?" – Mark Zuckerberg at Meta Connect, visibly laboring through the underwhelming announcement of Meta's new AI chatbots. The Snoop segment is about 30 minutes and 20 seconds in, for those who have more free time than self-preservation instinct.

Meta paid a bizarre grab bag of celebrities (Kendall Jenner, Tom Brady, Paris Hilton, Mr Beast, among others) to serve as the faces of a variety of different chatbots, each with its own "personality." Snoop plays the one called "Dungeon Master." Tom Brady plays an "opinionated sports debater" named Bru. Mr. Beast plays Zach, "the big brother for the jokes the banter and the feels."

You know, I'm glad the WGA got those limits on studios using AI to replace writers, and having Snoop as the show-stopping centerpiece of the chatbot rollout makes me wonder if AI is going to wind up with other Snoop-fronted trends like NFTs, the metaverse, esports, and dedicated GPS systems.