Embracer: Human cost of restructure is "significant" but "necessary"
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To say it's been a rough year for the games industry's workforce is putting it mildly; thousands of jobs have been lost as companies restructure and downsize following rapid growth during the onset of the pandemic.
Perhaps this is most prominently demonstrated by the ongoing restructure of Embracer Group, where expansion was not limited to the last few years. Since 2017, the company has acquired almost 90 businesses, ranging from smaller developers like Zen Studios, to AAA studios such as Gearbox and Crystal Dynamics, to non-games firms like tabletop leader Asmodee, comics publisher Dark Horse Media, and even Lord of the Rings owner Middle-Earth Enterprises.
The industry has been watching Embracer carefully, waiting to see if its Jenga tower of M&A purchases will eventually topple – and that moment seemed to arrive earlier this year after the group announced a deal expected to be worth at least $2 billion had collapsed due to the last-minute withdrawal of its unknown partner.
The restructuring program, along with plans to reduce the company's net debt of $1.5 billion, began in June and Embracer gave its first significant progress update alongside its financial results last week. That debt had been reduced to $1.4 billion, with the group saying it was on track to bring it down to $757 million by the end of the fiscal year in March 2024.
The restructure has primarily been in the PC/console areas of the business, with Embracer's financial report stating that the stability and predictability of the mobile, tabletop and entertainment segments have bolsetered their results. However, Board Game Wire reports restructuring has now begun at tabletop firm Asmodee. [Embracer has since reached out to claim these comments referred to Embracer as a whole, not specifically Asmodee]
The human cost of Embracer's debt reduction has been steep. 904 people were laid off between July 1 and September 30, with more dismissed since due to redundancies at three more of its studios across October and November. And there's more to come.
In the wake of the results, we speak with Embracer's Phil Rogers, interim chief strategy officer and CEO of the operating group that includes Crystal Dynamics and the other Western studios previously owned by Square Enix, where Rogers worked until last year's acquisition.
Rogers points to the status of the overall restructure, reiterating the financial reports' perspective that Embracer is "making good progress."
Embracer debt reduced to $1.4 billion as restructure continues
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"I think these sort of reporting dates are good times to stand up and sort of say, you know, how do we feel we're doing against it? We feel good," he tells GamesIndustry.biz. "We feel like we're on track against our targets that we've set out. So we feel very positive about that.
"We're in line with our targets on how we bring the debt down, with [operating expenses] savings and the targets for our capital expenditure, which is basically our games pipeline. And obviously we're going to readjust that games pipeline down to the run rate we talk about is SEK 5 billion ($478.4 million) going into next fiscal year. Those adjustments are very, very clear and well understood targets for us. So I think we're making good progress against that."
He goes on to say that restructuring can be introspective for a company, giving great consideration to the business' goals, ambitions and, as Rogers puts it, "how we win."
"We talk about how we improve our efficiency, our cash generation. How do we transform ourselves into a leaner, stronger, more focused and – critically – cash self-sufficient company? And I think these have been really good challenges for the whole business to lean into. It's got a lot of good conversations going across the business."
That said, Rogers recognises the human cost of this process. "There's a lot of it going around the industry at the moment of restructuring, but the downside, obviously, is the impact on people. It's something that really Embracer feels for.
He continues: "It's been an agonising process to see the sort of headcount [reduction], but we know it's a necessary thing for us to hit our new and needed goals. So overall, good progress and we push on."
Rogers echoes Embracer's previous announcement that it would do a complete review of its global pipeline, which is "a big pipeline." That's no understatement: as recently as June 2023, Embracer announced it has over 200 games in development across its various studios.
"Embracer has got one of the broadest and deepest games pipeline in the industry, I think," Rogers says. "It was very interesting [in the review] to get experts and eyes from all across the different operating units and really work together on one project, to look at our pipeline and work out how we assess it all, what we think about it.
"It got a lot of people introduced to one another, people who've been working in different parts of the group to actually build up their networks and whatnot and get a lot of communication going. So I think there's been a lot of positives from that overall programmer.
It's an unusual time to be conducting such a review. 2023 is a year in which the biggest games – Zelda, Hogwarts Legacy, Diablo, Spider-Man, etc – are performing better than ever, while more and more players are pouring the majority of their time into live services. It seems harder than ever to have a hit outside the AAA space, which is where the majority of Embracer's studios operate. Even its biggest release in years, the 2022 revival of Saints Row, failed to meet expectations.
In such a climate, how does a business decide which of its 200+ in-development games are worth continuing?
First and foremost, we look at entertainment values," says Rogers. "It has to be fun to play. I'm never a big fan of the 'fewer bigger, better' [approach]. Bigger games aren't always fun. I know how hard it is to make smaller games and to bring those entertainment values to bear from experience at Crystal when we started working on digital spin-outs of Lara Croft. For Lara Croft and the Temple of Osiris, that was a AAA team trying to make a game with much, much smaller budgets. So many teams are producing games today for much, much smaller budgets.
"Then we do look at how we would assess the commercial outcomes, how we squint and would see those returns. There's the potential for genres as well, where we've got overlap in potential genres or whatnot… That would help us make some decisions. "It also helps us explain decisions with teams. One of the softer but very clear advantages of going through this process I found is it really has got teams to work together to share, to discuss, and that's helped us then with those decisions when we've had to deliver them."
Embracer also has spent much of the past five months reassessing the inefficiencies that brought the business to this point. From the outside in, it's fairly easy to suggest an aggressive M&A strategy of nearly 90 purchases in six years is the primary factor – especially without major hits from the studios it does own to help sustain a group of this size.
For Rogers, that strategy was built on the ambition to position Embracer as an industry leader and the company wants to maintain that leadership position.
"Establishing ourselves within the the industry… [Embracer is] a relatively new player, but then in other aspects, Embracer has been around for a while," he says. "But its emergence amongst the leadership in the industry has been a very fast ascent."
