The Dead Canary
by Leo Cookman (@leocookman) on July 15, 2019



In September 2018 video game developer Telltale Games unexpectedly closed their studio in the middle of development for their final Walking Dead season. This resulted in 250 employees losing their jobs overnight. The reason given for the sudden closure of the studio was that it ran out of money: after failing to secure funding when a financial backer pulled out at the last minute, they were left with no choice but to close the studio. There had been a round of layoffs a year previously after a new CEO tried to cut costs, but this didn’t halt the studio’s decline.

Not long after, a discussion of punishing work practices in the industry was sparked when the co-founder of Rockstar Games proudly described the “100-hour working weeks” required to get its applauded Red Dead Redemption 2 out the door despite it having been in development for 9 years. This opened the floodgates to revelations from across the industry, demonstrating “crunch” to be an industry-wide issue.

In the retail sector, Gamestop, the American chain of high street video game shops, reported a 13% loss for 2018 even after closing multiple stores, laying off staff and changing their game return policy. To say nothing of 2017’s ‘Loot Box’ crisis that continues to make waves in 2019, due to the Belgian Justice Minister calling for a European ban on the practice, a ban that is currently being discussed in both the EU and the USA.

These are only a few examples, but in short, the beginning of 2019 was a bumpy one for the video game industry and it has created a huge question mark over how the industry conducts itself going forward. All of the above listed issues show a shocking lack of care and consideration for staff at these companies, as well as borderline disinterest in the customer’s end product. These ongoing problems are indicative of several wider problems of the entertainment industry are now facing, in particular as the complexity of products clashes with the demand expectations within entertainment.

Gaming the System

The video games industry is large and global, comparable in income to the film industry and growing. Revenue in this industry rose 18% from previous years to a new peak of $43.8 billion in 2018. The massive market expansion has gone on alongside substantial price increases, games cost upwards of $60 - $70 at launch in addition to substantial increase of ‘deluxe’ packages for some games including downloadable content and collectables that can reach into the hundreds of dollars, all on top of the infamous ‘loot boxes’ that essentially amount to pure profit.

While revenues may be high, the costs of the triple a quality games are high too: these games require years of intensive R&D, programming, engine-building, motion and performance capture, script-writing, huge render farms and vast amounts of cutting-edge technology, all performed and maintained by teams of hundreds of people. This has driven the markets strategy of lay-offs, studio closures, worker crunch, in its attempts to maintain innovation and profits simultaneously. Like a lot of corporations, video game companies have chosen to reduce worker care, close departments and companies deemed unessential and push up the prices of their products in an effort to maximise profit margins, but as multiple recessions over the last hundred years have shown us, there are flaws in this method.

The video games industry’s rocky start to 2019 was no doubt a product of the previous year’s dire financial projections for the year ahead. The industry had been benefiting from a profit bubble, the result of dubious business models (loot boxes), shifting distribution from physical sales to digital sales (reducing production costs and removing third party retailers), exploitative working practices (production crunch) and a dedicated customer base (people ‘buy-in’ to a video game platform and thus purchase games for that platform to justify the purchase of the console), all of which meant that profit margins were large but very fragile to specific forms of consumer demand.

These revenue streams all took substantial hits in 2018: the proposed legislation against loot boxes, the decline in the retail sector due to financial stress placed upon Gamestop and others, the worldwide condemnation against exploitative working practices that followed the high profile examples in the press, the subsequent calls for better working conditions that, in turn, will mean the cost of games will increase and take longer to make (something the vocal portion of the demographic who play video games do not often take well to), plus the overestimation of customers’ willingness to spend which resulted in overly optimistic revenue figures (Red Dead Redemption 2’s record breaking $1.38 billion sales was considered disappointing by investors).

As a result, the industry - unable to meet its ambitious projected growth targets, and avowing to start 2019 in better financial shape - reacted by implementing mass layoffs, studio closures, and a pivot toward digital subscriptions in a ‘games as a service’ model that replaces the focus on high innovation blockbusters with a focus on ensuring constant sufficient gameplay, emulating the lucrative streaming services in the music and film industries. This has not been popular from a PR perspective but the reason these practices were introduced at all reveals a profound misunderstanding of the systemic problems present in the industry. Namely, the move away from creating original, non-franchise, sequel or reboot, driven stories.

Industrial Entertainment

These problems exist across entertainment. For instance, it was recently revealed that Netflix has $20 billion in debt and liabilities. This was not considered an issue for investors due to its consistent income growth, but betrays a risky over-reliance on creditors. In general though, the cost problem has not vanished for firms which have moved to the subscription model. HBO, under the new management of WarnerMedia thanks to AT&T’s purchase of it in 2018, was also given instructions to produce more content to rival Netflix but on the same subscription-based revenue model. Meaning, they have to make more shows, to the same high standard but for the same money, in the belief that new customers and growth will follow.

The approach here then is a method to maximising output in a more managed demand environment as a way to maximise profit. But it’s not entirely clear where this growth will come from, or if it will match the targets required to make it profitable in the face of competition. Thanks to its dominance in the streaming sector, Netflix only needs its subscriber base to decline with the introduction of new market competitors for stock/growth to drop and the administrators to move in for that $20 billion. HBO’s pivot from low-frequency but high-spend to high-frequency but low-spend output has yet to kick in, but audience retention and critical response will be a deciding factor of HBO’s future (though the audience response to the finale of Game of Thrones may give us some indication). Disney’s imminent introduction of its own streaming service, Disney+, is only just entering an already crowded marketplace and while it has a huge back catalogue of its own TV and film, it won’t have the same size library of productions that the likes of Netflix and Hulu license. Will that be enough for audiences to keep up a monthly subscription which only creates returns over time?

There are also already early signs of ‘franchise fatigue’ after the mixed responses to The Last Jedi and Solo have pushed back a planned additional Star Wars trilogy . While Avengers: Endgame made all the money in the world it seems, Disney’s stock also dropped upon the movie’s release. What all this reveals is the industry’s reliance on the actual creative product they sell which, unfortunately, currently comes with its own set of problems. Namely that of intellectual property.

Intellectual property is the legally defined ownership of intangible objects like a creative idea. This is what makes JK Rowling the intellectual property owner of the Harry Potter characters and stories and therefore if any entity wants to make something with those characters or retell those stories in another medium, they would have to obtain a license to reproduce that IP. If they don’t, Rowling has legal recourse to either order the producer to halt the production or simply sue them for the profits after release. The legal method used to enforce this is ‘Copyright’. This does mean, however, that IP amounts to a monopoly, because the IP owner has sole and exclusive rights to it and the duration of those rights is currently hotly contested because when copyright lapses, the IP enters what’s called the public domain. This means it is free for the public to use and reproduce that IP as they wish. This happened to Sherlock Holmes relatively recently which is why we then had a glut of films, video games and TV shows about him.

Disney are the most prominent company in this discussion as they have sunk millions of dollars into lobbying for extensions to copyright law due to their mascot having been on the cusp of public domain for several decades. Every time the famous mouse approaches the public domain cut-off date, Disney pushes for an extension, so that now copyright extends to seventy years after the death of the creator/IP owner in the US.

This form of control is unknown in other sectors such as manufacturing. However, the totality of ownership this allows had led to substantial problems for growth in the entertainment industry. Part of the reason why all the Netflix Marvel shows were cancelled - were because Disney did not want a competing streaming service using their IP when Disney+ is released - and why Netflix plans to be 50% original content in the next few years.

Where ‘sharing content’ was once standard for most production companies and studios the current trend for buying back licenses and exerting total control over their productions shuts down any creative diversification. This has a homogenising effect that’s not good for growth in an industry that relies on innovative ideas. The entertainment industry is quickly becoming dependent on their IP monopolies to future-proof themselves, but by legislating and being aggressively litigious firms have become more reliant on rapid low cost in house creative innovation amid constant high budget investment in key projects with unclear shelf lives, this sets the industry on course for a crash. Consequently, it would only take a dip in revenue across the next ‘Phase’ of the Marvel franchise for two of Disney’s biggest earners to start costing rather than making money. All of which points to a worrying dependence on growth reliant on low cost, rather than the innovation and substantial marketing required, for new franchises.

Video Games: The Eye of the Storm

If you combine all of these factors; over reliance on fluctuating IP, not incentivising label retention for artists that create new IP, exploitative work practices acted upon employees, projecting growth beyond what is even possible, and you have an industry worth, collectively, trillions, performing a balancing act with culture. With the vagaries of public opinion having a greater impact on all creative output today and with the dramatic lurches in the marketplace described above, this could mean the entertainment industry is on a crash course within the next few years if these things do not change.

The video game industry sits at the nexus of all these points. It makes the most money out of the entire entertainment sphere; it uses artists to code, shoot, write, orchestrate and direct its products in direct competition with the high tech industrial sector; the video games they produce are classified as either original or licensed IP that combines elements of music, film and streaming services and their respective financing models; it relies on technology and expertise not commonly available to the public; it’s prohibitively expensive to start a project or studio without borrowing. The entertainment industry is a huge economic factor in every major developed nation across the globe, and it is currently raking in cash by the billions thanks to these innovative financing models. No one minds while the going is good, but the ripples in the video game sector could be the first in an imminent earthquake across the whole entertainment industry. While everyone has been keeping a close eye on the housing market and finance sector for signs of another economic downturn, the early warning signs could well be coming from video games—the proverbial canary in the mine. While it will take more than a systemic collapse of a bloated and opulent entertainment industry to trigger another global recession, which would probably only come as part of a collapse of other sectors, it is worth keeping an eye on because it is currently the most visibly in distress.

The fact that studioshave been shut down, that many employees have been laid off, that crunch appears systemic and immutable and that the ‘live service’ model is forcing retail entertainment shops to close en masse, shows that the industry knows there is a problem and they are trying to get ahead of it by shifting the numbers around. As David Harvey once said: “Capital never solves its crises, it simply moves them around geographically”.

If these video game companies want more certainty and security for themselves and their industry, they would immediately restructure their operations. People working in the video game industry have an opportunity to actually get ahead of these problems by implementing more responsible policies and institutional processes that would, ideally, be taken up by the entertainment industry as a whole.

A video game developer’s union is being much discussed at the moment given the issues at Riot games and should be a priority at this point, offering legal recourse and protections for rights within the industry, like minimum and maximum working hours, minimum wage entitlement, time off for physical and mental health issues, processes for sexual harassment complaints and so on. There should be regulation and oversight in place to stop these companies and their investors exploiting workers and artists. This would be crucial to ensuring there is actually an ongoing base for creative work.

However, for the sector as a whole it would be most constructive for the creative industries, if there was a repeal of current copyright laws.In the manufacturing and technology industries, you must apply for a patent so as to defend your right to be able to exclusively reproduce your product or invention. This patent lasts for 20 years and must be reapplied for after that, a policy meant to allow progress within the tech and manufacturing sector, because once a patent lapses anyone can recreate, adapt and develop the original design. The intention of this is to balance the costs of innovation by providing a limited monopoly without entirely restricting competition. It equally prompts innovation from others a few years down the line by offering them an invention to build on that has already been in circulation for 20 years, so they must be original with how they use or implement that product.

By demanding IP be exclusive not only to the original creator but to their families for another two generations after their death, the current copyright laws choke any kind of creative development or innovation and were specifically created by companies that directly benefited from referencing, buying or straight up copying IP of the past.

To take just Disney, as they are the main offenders in this case, most of their films are taken from public domain fairy tales (Cinderella, Snow White, Sleeping Beauty, Pinocchio, Frozen, etc) to say nothing of Winnie the Pooh, Mary Poppins, Basil the Great Mouse Detective, Oliver & Company, all IP that would have been unavailable to them if their rules were applied when the original stories they were based on were written. Equally, what could be done by smaller video game developers had they been given the right to republish or reimagine IP from the last century? Regardless of opinion on quality or taste, look what’s been done with Sherlock. Instead of continually extending copyright so that people who never even knew the original creator can continue to profit vast sums of money from it, a shorter-term IP patent could be created so that the originator of a creative work will earn money from their creation but it will equally encourage them to keep creating and developing while it earns them money, so when it lapses they can patent something new. All of which would create a more even keel for a creative industry that relies on innovation, development and creativity just like any other, but does not have the right laws or initiatives to encourage it. Creativity and originality should be moved back to the heart of entertainment by both investing in new IPs and relinquishing the rights to existing ones.

Video games are an early warning sign from the heart of products-as-services, platform capitalism, that this boom era, a decade after the recession that created it, is heading for bust. The large multinational companies that own and invest in this industry would do well to heed these warning signs and get ahead of an imminent crash by instituting protective initiatives that will mitigate the damage because, unlike the banks in 2008, they will not be bailed out. And with no content to utilise, where will that leave the various high value consoles, smart devices, computers and companies that make them? In an increasingly integrated and dependent global economy, tremors like those felt over at Telltale, Take Two, Rockstar, Riot Games, NetherRealms, EA, Bioware and more, should not be ignored.


author

Leo Cookman (@leocookman)

Leo Cookman is a writer and theorist based in Kent. He has written for Wisecrack, the Hong Kong Review of Books, Philosophy Now magazine, among others. His book of cultural theory ‘Time’s Lie’ from Zero Books will be out in 2020.

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