2024 Prediction: new year, new business model trend for games companies
By Krista Hiner · Fri, Jan 26, 2024 4:54 PM
Unprecedented Layoffs
We’re not even a month into 2024 and there have already been 5,900 layoffs in games [author’s note: the number was 5,900 as of the date this article was first published, January 26, 2024]. On January 25, Microsoft reportedly laid off 1,900 employees from its video game division. This was just 3 months after closing its $68.7 billion acquisition of Activision Blizzard, and only 1 day after it was reported that Microsoft crossed the $3 trillion valuation threshold. While running, sustaining, and growing a business is a lot more nuanced than comparing valuations to headcounts, it’s not hard to see a pattern in games (and in many industries) where shareholder value is paramount. Commitments to employees, on the other hand, are not.
Some companies cut staff because they end certain ventures or solely for the purpose of cutting costs, many times leaving the remaining employees stretched far too thin to do quality work. Others cut because they originally over hired, failing to consider the long term ramifications; and while it does not make economic sense to maintain a bloated workforce, the devastation experienced by so many still ultimately stems from a decision-making process that likely failed to adequately consider the personal impact on workers.
The reality is many of these laid off workers will exit games to find new employment. Others may find work at other companies similar to their former employer (both in size and priority). But I suspect we’ll see many entrepreneurial minded people set up their own small studios. And within that group I predict we’ll see a significantly more intentional approach to innovation within the business itself, because they'll want better for their workforce than what they just experienced. For example, we’re seeing games companies like Global Gaming Initiative, attain B. Corporation certification, meaning they’ve been certified by the global nonprofit B Lab for meeting high standards of social (and other) performance, transparency, and accountability. But the focus of this article is another model slowly becoming more common: the worker cooperative legal model. We’ve seen studios adopt this structure in recent years (Motion Twin, Future Club, and KO-OP Mode, to name a few), and I expect that in the fallout of the current storm, we’re likely to see more.
The Worker Cooperative Model
A worker cooperative is a company based on democratic ideals: the cooperative is both owned and controlled by its worker-owners. Worker cooperatives follow a specific legal structure (and in several states, such as California, specific laws govern cooperatives). Worker cooperatives in the context of this article are for-profit entities and are often corporations. States commonly require the filing of certain documentation regarding a worker cooperative’s status as a cooperative, and might further require the cooperative to include the designations “cooperative” or “co-op” or another similar designation in the name. The bylaws of the cooperative will then detail the specific decision making processes and revenue share mechanisms, either explicitly or by specifying mechanisms through which these decisions are made, but always with the spirit of the company being worker owned and controlled.
Many conventional companies (i.e., not worker cooperatives) sell equity to outside investors with a promise that if the company is profitable, those shareholders will significantly profit. Major investors are typically given board seats or other significant input. This is the fundraising process that many companies depend on to survive. Employees may receive the ability to participate in the company’s profit share, whether through sweat equity or stock options or some other structure, but relative to outside investors the employee workforce as a whole typically tends to own very little equity in the company. Meaning, of course, that (i) the workforce’s role within the company is helping the company be profitable so that other shareholders reap most of the benefits, and (ii) workforce has little to no formal control over the company’s direction or decisions.
Equal Ownership and Equal Control
By contrast, in worker cooperatives, worker-owners are entitled to equal votes that dictate how the company operates: a founder who has been with the company for 10 years has the same weight as someone who has been with the company for only 6 months. Accordingly, the governance structure is democratic (although some decisions can be delegated to employee-run committees or other more complex mechanisms, but at its core the company remains controlled by worker-owners with equal votes). In addition to salaries, worker-owners share in the revenues based on a revenue distribution allocation that worker-owners can determine. Worker-owners also determine how compensation is structured (and, yes, different roles and people can be paid different salaries within cooperatives). Simply put, in the worker cooperative model, it’s a lot less likely that workers will feel, or be, exploited and disposable. I suspect that a growing number of recently laid-off workers who choose to start up their own business will be attracted to a model such as this, as they’ll want to establish a work environment that feels more equitable to its staff than whatever company laid them off.
Evidence Suggests Cooperatives Improve Stability
Worker cooperatives have other measurable benefits in addition to feeling more equitable in spirit. Evidence shows that cooperatives tend to protect their workforce better. For example, an economic census surveying 465 worker cooperatives and how they were impacted by the initial 2 years of the COVID-19 pandemic identified that only one-in-five (20%) worker cooperatives lost more than 50% of their revenues, as compared to nearly one-in-three (33%) of their conventional business counterparts. (Further, even in the face of these significant revenue losses, median hours worked during this period fell by only 9% in worker cooperatives, meaning they likely found better ways to hold onto their workforce.) This doesn’t mean that a worker cooperative will always be just as or more successful economically than its conventional business counterpart. But these stories might encourage more founders to seriously explore the worker cooperative model for their new business.
Fundraising Challenges
Of course, the worker cooperative model creates a very specific challenge: it’s a lot harder to generate interest from investors seeking market rate returns and a greater sense of control over the company itself. Conventional investors will likely continue to look to invest in conventional companies and not worker cooperatives. But for investors who are more socially-minded, and looking for an investment with a return comparable to bonds, cooperatives are an excellent opportunity. Equal Exchange, for example, offered investors a non-guaranteed target of 5% and a cap of 8%, and in practice averaged 5.18% across 30 years. Of course, worker cooperatives need to look harder to find these potential investors. But if successfully funded, worker cooperatives can provide substantially more stability for its workforce.
Worker cooperatives have existed in the games space for a while, so this is by no means a new idea. But with the radical shifts we’re seeing with all the layoffs in games right now, we’ll naturally see some of the more entrepreneurial-minded set up their own studios. And within that group, I suspect we’ll see significantly more exploration of more equitable, worker-friendly models. If you’re interested in learning more about setting up your own company, (whether as a solo or a group) or models such as the worker cooperative, feel free to reach out to ESG to chat.