Insomniac breach
The economics of hacking the games business
The SuperJoost Playlist is a weekly take on gaming, tech, and entertainment by business professor and author, Joost van Dreunen.
The Insomniac Games data leak is the dumbest thing I’ve heard all year.
After a hacker collective called Rhysida Ransomware illegitimately obtained 1.7 terabytes of confidential information from Sony’s subsidiary’s Insomniac Games, it offered the firm the option to buy it back for $2 million. When no one did, they released the studio’s roadmap, concept art, a bunch of trailers, and employee information on the internet.
The incident suggests that the business of hacking video game publishers is on the rise. There was also last year’s leak of GTA6 footage (more on that in a minute), and the 2020 Capcom leak.
Hackers, evidently, suck at business fundamentals.
For one, Rhysida's request to be paid in Bitcoin raises an immediate existential strategic concern. It puts the organization squarely in the crosshairs of every major government. The attitude toward digital currencies has certainly soured lately. In a letter sent this week to the CEO of the Blockchain Association, US Senator Elizabeth Warren pushed back by pointing to “the role of cryptocurrency in financing Hamas and other terrorist organizations.” The US government also issued a joint cybersecurity advisory on the ransomware group in November. Clearly, none of these collectives has ever been through an audit from the IRS.
Combined with the karmic payload of pushing people’s private information onto the internet, you’d expect there to be some substantial financial payoff. Or at the very least a committed idealistic agenda. But no. Despite the target’s high profile, the hacker group made no money.
Their ability to properly price their work is also lacking. Instead when Sony refused to pay the ransom, they just gave it away and put all their hard work of slowly infiltrating a massive corporation out for free, like leftover donuts at the end of a shift. And neither did anyone else make an offer on whatever clandestine auction system they use for the trade of hacked data. For all of the hubbub around what should be a massive heist, Rhysida couldn’t even fetch a measly two million bucks.
More so, despite the damage inflicted on Insomniac staff, the downside for Sony is unclear. When an 18-year-old released early gameplay footage of Grand Theft Auto 6 in September last year, devs were gutted and Take-Two’s stock took a dip.
Next, acquiring new customers depends on providing long-term impact. Contrary to what must have been intended to spoil the game for everyone, I’m now even more excited about Insomniac’s upcoming titles. The roadmap, concept art, and dedication are promising, not in the least because it reiterates Sony’s continued investment in gaming. That’s more than some of the other platforms can say for themselves.
Moreover, you can’t hack a video game any more than you can hack a real-life experience. Someone telling me what it’s like to be a parent isn’t nearly the same as having kids myself. Unlike a movie or book, where you can give away the plot, you can’t spoil a video game’s 60-hour experience by showing a few slides of concept art. It only makes me more excited. And judging by the 155 million views of the official GTA 6 trailer, I’m not alone.
As for the 18-year-old, he was just now sentenced to an indefinite hospital order. That’s probably the worst talent retention I’ve seen in any company. According to the judge, his desire to commit cybercrime means he continues to be a high risk to the public and he is to remain at a secure hospital for life unless doctors deem him no longer a danger. What a mess.
It boils down to a venture that offers little payoff relative to its high degree of risk. For all their technical wizardry, these ransomware collectives can’t even hack their own business model.
On to this week’s update.
NEWS
Google faces $700 million fine
After Epic Games booked a landmark victory over Google last week, the afterparty is proving short-lived.
On Tuesday Google agreed to pay $630 million into a settlement fund for consumers and another $70 million going to a fund for a group of US states that had accused the firm of anti-competitive practices. It also agreed to make changes to its app store ecosystem, specifically around allowing app developers to implement alternative payment methods.
Previously Tim Sweeney had previously expressed his concern that Google would “get away” with keeping its high charges in its app ecosystem. Looks like he was right.
Under the settlement, “eligible consumers will receive at least $2 and may get additional payments based on their spending on Google Play between Aug. 16, 2016 and Sept. 30, 2023.”
In 2022, Google reported $279.8 billion U.S. dollars in revenues. That means the fine amounts to 0.3 percent of its annual earnings or the equivalent of a $186 fine for an average US income for the entire six-year period during which Google maintained its anti-competitive practices. Google is the fourth-largest gaming platform by revenues ($11 billion in 2022) and generated a combined total of $58 billion over the period from 2016 through 2022.
Another remarkable aspect is that Google only agreed to allow alternative payment methods “for at least five years.” There’s a whole string of temporary concessions. It’s unclear to me what is supposed to happen after that period, or why there is a time limit at all.
Nevertheless, no time was wasted to call the settlement “unprecedented” and that
“no other US antitrust enforcer has yet been able to secure remedies of this magnitude from Google, or, for that matter, from any of the other major digital platforms."
I mean, I guess.
Kotick departure scheduled for December 29
According to a memo of proud new parent owner Microsoft, its prized asset’s figurehead, Bobby Kotick, is leaving before the end of the year. Taking with him an estimated $375 million in pre-tax compensation, the departure presents an opportunity for team Xbox to turn an important leaf.
When a company is acquired, it is in everyone’s interest that its founders are removed. For Activision Blizzard perhaps doubly so. Kotick’s exit gives Xbox a chance to counteract the bad habits that have characterized the publisher’s company culture.
Despite Activision Blizzard’s broad portfolio, it relies for more than 80 percent of revenues on Candy Crush, Call of Duty, and Warcraft. Such a high dependency on the success of a few franchises has inspired unusual labor practices, uncommon incentive structures, or even turning a blind eye to harmful working conditions in pursuit of profitability at Activision Blizzard.
Kotick is not without accomplishment, however. In 1991 he acquired Activision which was on the brink of insolvency at the time. He managed to get it back on track and oversaw two of the games industry’s notable acquisitions. First, the merger between Activision and Blizzard, and more recently the purchase of King Digital.
Things started to work out well for Kotick by 2008 when he became the firm’s CEO. Compensation was commensurate. From 1998 through 2022, Kotick received a total of $481 million in total compensation (including his board position at Coca-Cola). He did indeed take a 50% salary cut in 2021 but that was after he received $150 million in restricted stock awards.
All eyes are now on Microsoft and how it manages to execute on the integration of its new asset and clean it up. Microsoft gets its prize, and, hopefully, the rest of us can play knowing our games weren’t developed at the expense of others. As for Kotick, I hope he’ll buy a sports team like a proper billionaire and decide against going into outer space.
Preview of 2024 releases
Despite its excruciating number of layoffs, 2023 has been an amazing year for new releases. Considering we’re in the later stage of the current console cycle, publishers put their best foot forward this year. Major launches included: Hogwarts Legacy, The Legend of Zelda: Tears of the Kingdom, Diablo IV, Baldur's Gate 3, Starfield, and Marvel's Spider-Man 2. It means that next year will likely be weaker in terms of breakout successes, even as the larger install base will contribute to steady sales in terms of volume.
Even so, both the developer headcount and R&D expenditure for several of the largest game makers are at record levels. These indicators alone do not point toward any specific releases or upcoming successes, but they provide a pulse on publisher activity. Electronic Arts, for instance, has increased its R&D spending from $1.5 billion in 2021 to $1.9 billion this year, roughly double from 2016. Take-Two Interactive has beefed up R&D from just over $400 million to $1.4 billion since the start of the pandemic. Such investments make sense, but should nonetheless be taken with caution when considering future releases.
For several of the majors, the coming year looks as follows.
Sony continues to bask in the success of Marvel's Spider-Man 2. Disappointingly, a multiplayer version of The Last of Us was canceled and the next expansion for Destiny has been delayed in the wake of recent layoffs. Following this week’s leak, it’s likely that Marvel’s Wolverine will launch later rather than sooner, and mostly likely in late 2025.
Now that Microsoft owns Activision Blizzard it is going to have to deal with the fact that the most recent Call of Duty (Modern Warfare III) was disappointing, Diablo IV didn’t sell as well and may be tapering off in terms of its franchise longevity, and Starfield’s follow-up is not going to drop in 2024. It does have a few notable titles in the pipeline for next year that may yet balance things out, including Microsoft Flight Simulator 2024, World of Warcraft: The War Within, and, my personal favorite, Senua'a Saga: Hellblade II.
Next, Nintendo just had a stellar year that included two major releases: The Legend of Zelda: Tears of the Kingdom and Super Mario Bros. Wonder. The success of the Mario movie further boosted game sales. That leaves 2024 looking a bit weaker, especially as the firm seems to be readying itself for a new hardware system.
After a successful launch of its EA Sports FC, Electronic Arts is hoping to bolster next year with the return of EA Sports College Football 25. But most of its non-sports titles—Battlefield, Dragon Age: Dreadwolf, and the next Star Wars game—are likely to drop in 2025.
CD Projekt has beefed up its R&D expenditure by more than doubling it from the period when it was developing Cyberpunk 2077. However, despite a bevy of activity, it has mostly offered code names, including Project Sirius, Canis Majoris, Polaris (a new Witcher trilogy), Orion (a Cyberpunk sequel), and Hadar. None of these have any dates yet. Finally, CD Projekt is also working on multi-player gameplay across several of its existing titles.
Finally, Take-Two’s activity for next year will stand in the shadow of the now-announced release of GTA6. It has a hefty slate but most of it will launch in 2025. One highlight I’m personally excited about is No Rest for the Wicked.
The high bar set in 2023 will be difficult to replicate next year. But heavier investment and the imminent release of new hardware and premier content will allow the PC and console market to retain its current momentum toward 2025. A great opportunity to catch up on some of those titles you haven’t been playing, or to pick up something new, like The Finals.
PLAY/PASS
Pass. Voice actor James McCaffrey, who voiced Max Payne and Alan Wake, died at age 65 after a battle with cancer.
Play. Yes, The Sims is cool, but have you tried Nuclear Reactor Simulator?