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This week, we're joined by Jason Schrier. Jason covers the video game industry at Bloomberg and is also the author of several best selling books, most recently, Play Nice, The Rise, Fall, and Future of Blizzard Entertainment. Jason, thank you so much for coming on.

Hey, Emmanuel. Thanks so much for having me. I love what you guys are doing at four zero four, and, yeah, I hope everyone out there is listening and subscribes when you tell them to subscribe.

Yeah. We we really love your work. We read Bloomberg a lot, and we read you specifically. Joe and I especially talk about your your scoops all the time. You're you're a fountain of scoops and and a and a pleasure to read.

So thank you so much. It's a real honor to have you on.

I appreciate that. Yeah. It's a fountain of scoops is why Bloomberg employs me. That's what they like here. They love nothing more than just constant feeding the beast with scoops.

Yeah. So we cover video games occasionally. I before I shifted to covering mostly tech, actually started out in covering video games. These days, in order for us to cover games, which as you know very well is a huge beat, we need to have some sort of unique angle. But I wanted to have you on because I wanted to zoom out and take a look at how the industry is changing, so we can kind of set the table for future stories that we do about games and we're going to talk about a bunch of changes that have been happening for years, but I don't know how you feel, but I feel like in the past two years especially, it feels like we're at the end of an era and a new era is emerging, and I wonder how you feel about it, but personally, it's like, as an elder gamer now, as a millennial, it's a lot of change and it's not very much like the thing I think we grew up with, and I just wanted to talk through some of that.

And I think a really good place to start is what is happening at what I believe now is the biggest video game company in the world after the acquisition of Activision Blizzard, and that's Microsoft. And you reported that Microsoft is now aiming, hoping, expecting 30% profit margins from its Xbox gaming division. We know that businesses want profits. Could you explain why this number at this time is newsworthy?

Yeah. Man, it's it's wild. So a couple of thoughts. First of all, as far as, like, the broader macro changes, maybe we can get into this at some point, but, I think there's some interesting things to be said there about how the industry has changed over the last two years, as you mentioned, but also over the last decade. And I actually think there's some interesting parallels to draw between the games industry and the book publishing industry in that the democratization of the form has just kind of, like, completely changed the way that games are made and sold to people.

But we can let's let's shelf that for now. And to answer your question, yes. So we reported at Bloomberg. My colleague, Dina Bass, and I reported a couple weeks ago that, the kind of the driving force behind all of Microsoft's and Xbox's decisions over the last two years, which for people who haven't been paying attention involves laying off thousands of people, shutting down game studios, canceling games, putting their games on PlayStation, which had never been done at Xbox before, raising prices, raising the price of their subscription service, raising the prices of their consoles and their games. All of this was driven largely by this new target that they are having placed upon them by Microsoft, which is hit 30% profit margins.

And this is happening for a couple reasons. One is that about two years ago, almost exactly two years ago, Microsoft and Xbox closed on the deal to buy Activision Blizzard, the maker of Call of Duty and World of Warcraft, for $69,000,000,000, one of the biggest acquisitions in tech history. And, that kind of coincided with Microsoft looking over and saying, hey. You guys are you guys just spend a lot of money. Let's see some returns.

Let's see some some bigger profits. Because in the past, their profits have been far lower. Their their margins have been far lower than 30%, single digit, maybe maybe low double digit margins. The other thing that happened is that Microsoft turned into an AI company. And since they are doubling down on those investments, they, don't really want to spend as much money in r and d in games.

And r and d is really where, like, if you're if you're trying to boost profit margins, profit margin is essentially like you take the amount of money that you're spending on games and then the amount you're making, and then, you figure out the percent difference, and that needs to be 30%. And so the way to get to that is either to boost the revenue, make more money from the games, or to lower the cost or both, which is what Microsoft is trying to do. And so lowering the costs in can also involve just slashing r and d, getting rid of experimental projects, or, like, new franchises that might take years to develop because a lot of that r and d money that Microsoft has is getting thrown at the AI division. So all of those things are just kind of like there's this confluence of factors that is leading now the Xbox division to get a whole lot of pressure, which has all sorts of ripple effects for the broader Xbox organization.

Have you heard anything from rank and file employees about how they're perceiving this goal?

Most most rank and file employees don't know about this goal. In fact, I got some messages and heard about some some conversations going on at Xbox where people being like, oh, this makes a lot of sense. This explains a lot behind what we've been doing. On a kind of on a the way to think of Xbox is that it's this humongous organization. It's got tens of I believe 20,000 people, if not more.

It has and now in in includes Activision, that whole division includes Bethesda, which is a big publisher behind Elder Scrolls and Fallout. That got purchased by the Xbox org, in 2020. So those are kind of different divisions, and each of those has different subsidiaries below that. And then even within Xbox, there's, like, Xbox Publishing, which is its own thing. There's, like, platforms and services, the hardware teams, the, Game Pass team.

Game Pass is their version of, like, Netflix, which is a subscription service for games. And then also their game studios, ones that it is bought, ones that it is cultivated. And so there's a lot of different hands, a lot of tentacles in the Xbox octopus. And so a lot of people don't have access to this information. It's really kind of on a if you're in finance at one of these studios or, like, if you maybe are in the publisher sphere and you you know because you've had conversations with the higher ups, they're they're it's it's it's a little bit more limited than kinda rank and file.

But I think rank and file are looking at that and being like, well, that makes a lot of sense. Ultimately, what this is going to mean is it's gonna mean a few things. First and foremost, it's gonna mean that Xbox needs to prioritize profitability. And I think what they could do before another factor, by the way, I didn't mention is that, like, we used to live in a world where Xbox was competing with PlayStation and Nintendo in the console space. The console space aka selling video game machines that you buy for 400, 500, $600.

You plop it in your living room, and then you buy games for it. And Xbox used to be as big as PlayStation. But over the last ten years, they've completely lost all market share. Estimates are that PlayStation is now selling outselling them more than two to one, and I think it's gotten even more dire in recent years. And when Xbox was releasing consoles, the math was a little bit different than it is at a traditional game studio.

If you're a traditional game studio, you make a game, you spend x amount of money to to make it, and then you sell it, and you hope that you make way more money, than it costs to make by through you you hope the revenue is way greater than the cost. Right? Ideally, a profit margin of 30% or higher. But when you're a hardware company, the math is different because you are, every game you make is kind of is helping sell your console to people, and that helps get them in your ecosystem, which allows you to make money in a bunch of different ways. For example, on Xbox, if you buy if I, the customer, if I buy a game from the Xbox game store, Xbox like online through my Xbox, Xbox will take a 30% cut of that sale.

So if I'm buying the new Assassin's Creed game or the new Borderlands game or games that are made by other companies, not Xbox, Xbox still makes money off of those sales if you buy it within their ecosystem. So the math was much different. And then so the other factor here that I should have mentioned earlier that is contributing to this demand for new profit for higher profit margins is that Xbox is no longer selling consoles, and so there isn't as much of a benefit to, bringing people into the ecosystem. It's just not happening anymore. So the math is very, very different.

So, yeah, what all this means essentially for the rank and file is that, a lot more focus on games that they know can be profitable. It's not like I mean, not every single game in the Xbox work is going to be, like, is going to have to deal with this margin. There's some games that they know are not gonna be able to sell enough to be able to make up for that. But maybe those games will have to get a little cheaper. And so there there are all sorts of things that they could mean.

But, ultimately, I mean, it just means cut costs, boost revenue. That's fundamentally the baseline of what this means.

I guess what I'm getting at is I've definitely had the experience of working at a company in in corporate media and a manager or a CEO announcing that there's some new goal and taking that in as being set up to fail, and everybody knowing that the goals are not realistic, and

that In digital media, hard Right. To

Yeah. I know things are going well at Bloomberg, but I'm sure you're familiar with that dynamic where it's just like the the it's not really a goal that is achievable, it's a pretext for further cuts down the road, you know, on a micro level, you know, when you work at a corporate job and a manager wants to fire you, they put you in a performance improvement plan, and like a lot of the time, the plan is not really to improve your performance, it's to set the pretext for for laying you off the Yeah. And I'm wondering, like, and I'm going ask you a bunch of questions, by the way, and if you don't want to, like, commit to an opinion, just say so, that's fine. But I'm wondering if, like, if you look at this and you're like, okay, well, there's AI and there's this huge acquisition, all these things are happening, and, well, they got to make the money and this a place where it makes sense to demand more revenue, or they're like, enough of this bullshit, we've ran the Xbox experiment for decades now, I believe, and, you know, like, this is the pip for Xbox and and then when it's over, we'll decide what to do with it.

Yes. So there's a lot to unpack there. I mean, I I don't think that's what's happening, to to I I mean, I don't know. Who knows what's going on inside me, Nadella, and Amy Hood's heads? That's the CEO and CFO of Microsoft.

But I don't think that this is what's happening. And I think they think it's a realistic goal because they're looking at their other products, which are mostly software service software like Azure and and Windows, and they're seeing much higher margins. So it it isn't it isn't like a super unrealistic goal. I think that and I and I also think that, like, 30 in a vacuum just isn't a totally unreasonable target for a lot of games. You just have to, like, figure out how to lower cost and boost revenue and and hope hopefully, you hit it.

And it's not like it's also not like x Microsoft is telling Xbox or Xbox is telling their studios, if you don't hit this, we're gonna shut you down. It's just like this is our target. To your point, maybe they don't have to say that because maybe it's just gonna hang over their heads regardless and like a pip. I don't know. I don't think that's what's happening.

I think it's more that that they're well, actually, so putting putting aside what they're trying to do, one important factor here that I should mention is that, like, in in a vacuum, a game let's say a game cost if a game costs a $100,000,000 to make, it should be able to get to a $130,000,000 in revenue. Like, that is not an unreasonable goal. It's just what really complicates things for Xbox specifically is Xbox Game Pass, a service I mentioned earlier, which is their Netflix for games. And when these games are also put on NetFlow Game Pass, that means they're not selling as much because people can just subscribe to Game Pass to get them for much cheaper than they would just buying them. So that that complicates the math a little bit for some of these studios.

And, a lot of game studios are actually really thrilled that they now get to release their games on PlayStation, which is a recent phenomenon. That's only been happening in the last year or so that Xbox has become a fully multiplatform publisher as opposed to the past when they were really, just published games on their own platforms on Xbox and then personal computers. So that that complicates the math a little bit. But, yeah, it's really it's not like an unrealistic target. It's just that, like, for a lot of games and companies, it's not something they had to think about before, and it's not something that they had really planned out for.

For example, a game, one of Xbox's more recent games, most recent games is called Keeper from Double Fine, and it is not something that is ever going to sell a million copies. It is a very artsy kind of like almost a walking simulator sort of game. It's like interactive art, basically, and it's made by a studio that is pretty niche and known for making these artsy games. And when Microsoft bought Double Fine, was in 2019, they told them, hey. Just make great games.

And the idea was that Double Fine making their kind of weird artsy games, they might not make millions of dollars off of those products, but they can add value to the Xbox ecosystem. They can put those games on Xbox Game Pass, and maybe they'll add value to the subscriptions of players who are paying for this, this Netflix like service. So there was a good rationale behind that. And then to suddenly turn around and be like, actually, now you need to hit 30% profit margin. Caveat here is, I don't know if Double Fine specifically has been told this.

I know it's kind of like a universal group, but again, I don't know how many like, if some studios, it hasn't really trickled down to you or, like, it looks a little bit different because their prior their goals are a little different. I don't know. But putting that aside, just as just as an example of, like, a studio that might be affected by this, if you're looking at a double finder you're saying, hey. Now you need to plan out your next game. Oh, and let's think about hitting 30% profit margin.

It completely changes the nature of that studio. That wasn't a studio that was trying to make games with with big margins in the past. So, in that way, it could really impact the types of games that we see from some of these companies moving forward. And a lot of these companies that are looking at this margin and this goal, I think, are are hoping that something changes with Game Pass because that will make the goal a little more feasible. But, yeah, I mean, get at your original question, no.

I don't think it's totally unrealistic. It's it's higher than average video game company profit margins. That's for sure. So it's an ambitious goal, but absolutely an ambitious goal. And, again, I think if you're looking a lot of times, these game companies have a whole portfolio, and so, like, it's okay for some of their games to not hit crazy margins because some of their games are hitting crazy margins.

And so if Xbox is going to look at it through that lens, then that could be one thing. But I think having that goal for the overall organization is what's led to a ton of cost cutting and and, especially r and d costs. And r and d is one of the big things here. Right? Like, in game development, especially when you're trying to make new things, new franchises, new intellectual properties, new genres, new types of games, that can be really expensive, and that can take a lot of time.

And I think a company that really sacrifices that is doing itself a disservice and kind of looking at the short term instead of the long term because it's r and d that leads to you creating halo, you creating the next billion dollar franchise. It's just you need to be willing to put in that time and that money in order to make that possible. And sometimes it doesn't work, and sometimes it won't get you 30% profit margins, but sometimes it'll get you 400% profit margins, and it'll be worth it in the long run. And I think that what this is going to lead to is some very shortsighted moves. We're already seeing a lot of that.

A lot of the games that have been canceled, especially this year, were games that were in development for a long time and maybe had some sort of, like, if you look at the long term horizon, could be profitable in the long run, but, like, short term, we're never gonna be profitable, and so they had to go. For example, Zenimax Online Studios, the company behind the Elder Scrolls Online, which is a very popular online role playing game. They were making this new IP called Blackbird that was canceled. It had been in development for a really long time, but it was really promising and really cool. There's a game called Perfect Dark that had been in development for a long time and was kind of disaster in various stages, but had had been getting back on track a little bit, and that was canceled in part because, it would never be profitable.

But, like, if you're thinking long term, you may be like, okay. Well, this first game isn't gonna be profitable, but once we have that team together and they have their tech and they have their pipelines and their tools and their chemistry and they have this baseline of the first game, maybe they could then make a quicker turnaround sequel that itself is wildly popular and profitable and sells really well because it's so much better than the first game. But, like, when you are in a position where you have to think about the the near term, the next one to two years instead of the next five to ten years, then that leads you to make more shortsighted decisions. And I say that as I I I don't mean to say, like, maybe Perfect Dark should have been canceled. I don't know.

But this is the type of mandate that makes you think in the short term as opposed to the long term.

Yeah. That's that's fascinating. I I'm trying to decide if we should go into this now or come back to it later, but I guess, I back when Gears of War four, I think, was coming out, I I wrote like a like a behind the scenes of the weeks leading up to them going gold and just like being at the studio and spending time there, I got the feeling for this thing you're describing, at the high end of game development, like really big budget, it almost feels like a research lab. It's like, obviously, it's a business and the business needs to make back its money, but there's also this sense of like, hey, we're kind of like on the cutting edge, this is like our Enterprise or like Blue Sky program, and we're like doing science, like, are actually, like, there's scientific papers that come out of game development and new technologies that come out of game development and things spin out where it's like, think in Gears of War, they did some like three d audio positioning stuff for the game that like just became a thing that Microsoft used later on. And it's like, do you think overall, that type of work, like, work on that high end, there is less of it happening across the board?

Like, do you think that's fair to say or it just feels that way because there are so many other types of games of different scales?

It's hard to say. I don't know. Tech, r and d, and iteration is certainly a big part of this whole conversation of like how much time you can actually have. And then the the kind of the other end of the extreme is that a lot of times you'll have a game company that just spends years like working on something and then has nothing to show by four years, and it's just like, yeah. I don't who knows what we spent the last four years doing.

So this can this can go in in the opposite direction too. Yeah. I mean, as far as the technological end, that's what makes games so fascinating is that, like, you never know what's gonna come out of, like, the r and d process and the iteration, and you're working with a lot of these companies make their own technology for these games, and that takes a lot of time and and a lot of resources. And and yeah. And it's like you might be working on something with kind of a hypothesis in mind only to find after two years of game development that, oh, actually, it's not very fun and it's not working, we have to completely pivot in another direction, which maybe is inefficient, but at least for some game studios seems to be a normal part of the process.

And I think when you're a tech company like Microsoft, you're not used to that. Even after twenty five years, I think some of the the people who are at Microsoft who are executive level are just not used to the way the games are made in comparison to their more predictable software divisions. You don't have the Azure people giving them the same kinds of headaches and low profit margins and whatnot. So that's one part of it. And then the other thing is that, like, I think Microsoft is just so all in on AI that that is where all of their thinking and and resources are going when it comes to r r and d and tech.

And I'm sure they're doing a lot of r and d on AI stuff in the gaming space as well. But, yeah, that's a big part of the equation too.

So while we've been talking, you've identified what I think are kind of the two primary prongs related strategies for Xbox, which is, one is Game Pass and building a subscription business. And then complementary to that is the acquisition wave over the last couple of years, which the the acquisition of of Activision kind of being the the capstone for that spree. I am wondering, is that do you think that is still the strategy? Do you think Game Pass is still the strategy?

That's a good question. I don't know. They recently raised the price of Game Pass to $30 a month, which I imagine will turn some people off. But they also said this year that Game Pass is making I believe they said $5,000,000,000 in revenue it it made in the most recent fiscal year, which is not an insignificant amount of money. I think the belief they stopped sharing subscriber numbers, but I think the belief is that it's somewhere between thirty and thirty five million subscribers that they have on KBA.

So that is that is not nothing. Remains to be seen if that'll happen. I mean, I think the big question and the big tipping point for a lot of the game companies is are they still going to release their biggest games day one on Game Pass? Because that is the thing that really made a big difference. Right?

So Game Pass, I think when it was first announced and first envisioned, a lot of people talked about it as a tool for the back catalog. Right? So you sign up for Game Pass. You pay whatever it started at, $10 a month. I think there was, like, a sale for $1, $1 a month at one point, which is pretty crazy.

You get access to hundreds of games, and most of them are older games. So this is like an opportunity to essentially play a bunch of games you haven't played before at a really big discount, sort of like how on Steam, the PC platform, there are sales all the time on older games, and you can games for very cheap and rack up a backlog. This is the equivalent of that. But at some point, Xbox decided, hey, to make this service more appealing and get get that growth up, we're not just gonna have older games on there, we're also gonna have new games on there. And in fact, every single game published by Xbox is going to be day one on Game Pass, which means that you are saying bye bye to all of that revenue of selling a brand new game for 60 or $70 on the Xbox platform because instead customers can just pay the $10, $15, whatever it wound up being a month and get that game and play it and then just have a huge discount on it.

So that I think was the turning point. And then I think what I'm very curious to see if Xbox pivots on that strategy and is like, you know what? Starting in 2027 or whatever, we're actually not gonna put our games day one on Game Pass because we don't think that works anymore. And so we're gonna say bye to that strategy. That's that's what I'm very curious to see.

I haven't heard any inklings one way or another that that's going to be the move, so we'll have to wait and see. But that, I think, is is what I'm looking out for is if they pivot in that direction.

Regarding the wave of acquisitions, obviously, and I think this is especially true about Activision, things continue to work as always. I think this is also true about Bethesda. Right? Like, the the Doom games are coming out, Bethesda put out Starfield. It seems like they're on their normal schedule.

But overall, given the number of studios that they acquired, it doesn't feel like that has resulted in a huge boon of of exclusive games for for Microsoft, or not even exclusive because it seems like they're shifting away from that, do you is that is that a fair read of it? Or or, again, does it just does it just feel that way because of how long it takes these acquisitions to to be fruitful in terms of games actually coming out?

That's a great question. Yeah. I mean, I think I was gonna say yes, but then also your your latter point is also true. It definitely takes a while. And, like, you buy a company like Bethesda, or Zenimax is is the parent company of all that.

Because it's not just Bethesda, like the the Fallout and Elder Scrolls and Starfield makers. It's also like Arkane and id and, some of these other studios. Arkane made Dishonored and Deathloop and id makes Doom and Quake and stuff. So, these other studios are part of that umbrella as well. And, yeah, I mean, games take so long to make now.

These days, the big biggest games are taking between five and seven years to develop that, yeah, it's definitely a long term play. That said, yeah, considering how big Xbox Game Studios is, we've definitely seen a pretty paltry lineup of big releases over the last few years and certainly haven't seen a ton of huge hits from them other than Minecraft, which is maybe their smartest investment. They bought that ten, eleven years ago and it's still making a a great deal of money to this day. And of course, Call of Duty, which is still breaking records every single year. That game is is just kind of, like clockwork every single year.

It's it's as reliable as it's like death, taxes, and Call of Duty coming out every every fall. So that that also turned out to be, well, I mean, $69,000,000. Who knows what the math looks like there? But from a portfolio standpoint, having Call of Duty in there is is pretty lucrative. So, yeah, I mean, Starfield certainly wasn't I don't know about commercial success, but critically, certainly was not what they wanted it to be.

And we'll see what happens with the next Fallout game or the next Elder Scrolls game and see if that that turns out to be worth it. But, yeah, to your point, I mean, some of these things like Activision that close two years ago, there's really it's really still way too soon to tell if that was a good deal for them and what the long term effects of that were. Bethesda, Xenomax was five years ago, and I think it's also pretty pretty early to tell long term what that what that means for them and, like, what their studios are gonna come out with. But we have seen Microsoft shut down a couple of studios within the Xenomax umbrella. They've released some flops.

Redfall, couple years ago, was a big flop from them. So yeah, man. I don't know. I think I think it'll still be a few years before we can really go back and evaluate some of these moves.

It also only takes because the projects are so big and the lead time is so long, it only takes a couple of things to fall through for it to feel like it's falling apart. Right? So you mentioned Perfect Dark, I don't know how long that was in the works in one form of another, but that that's is that an IDOS?

That was it was a company called The Initiative that was started in 2018 to make it, and then they wound up codeveloping with this company called Crystal Dynamics that was was part of iDOS at one point. Now they're part of Embracer. But, yeah, Crystal Dynamics was was a big part of that as well.

Right. So it's like you lose a couple of those and suddenly it seems like nothing is happening, but in reality, it's just like a couple of of misses.

Yeah. That's true. Because, like, if you're a game studio, chances that most game studios are just working on a single game. And, yeah, if that game is canceled or that game flops, then that's potentially five or more years of of that studio's history that has just evaporated.

So you you we talked a little bit about exclusivity. We learned recently that Halo is coming to PlayStation. Crazy, man. Cats and dogs living together, madness. But I mean, that seems to that seems to be the old like, there's no bigger franchise for them to to allow to go multiplatform.

So again, going back to strategy, do you think that they're just giving up on they're just bowing out of of of of the competition with PlayStation? Is that is that it?

Yeah. A 100%. I mean, I think they were forced to. Like, it's just they just lost that war. And I think they're saying, look, if we need the if we want these games to make hit that I mean, the them starting to put games PlayStation lines up with them being told you'd need to hit 30% profit margins.

And I think they rightly recognize that the profits that you're getting by releasing other consoles because that that is like a lever you can pull that boosts your revenue in a significant way without much in the way of costs. Like, there might be long term costs in terms of Xbox console sales and the brand damage and whatnot. But, like, if you are saying, hey. We're gonna put all all of our Xbox games on PlayStation from now on, that is a a nominal cost because, like, porting a game to another you're still making the same game. You're not paying for a new game to be released.

Porting it is is a very insignificant amount of money, and then you are just seeing sales increase a great deal because you're suddenly on a new platform that is released reaching tens of millions of players. So that is lever you can pull to really cut costs or not cut costs, but, like, at a very cheap cost, boost revenue at a very cheap cost. So, of course, if you're trying to get those margin percentages up, that's that's one way to do it. And so, yeah, this is definitely I mean, they've said that essentially that this is their future. Like, they are going third party.

They've also signaled very strongly that the next Xbox console is essentially gonna be like a PC. So I think the the era of Xbox as a kind of first party console maker that is making exclusive games for its consoles, that era is gone.

So the other I wouldn't call it an earthquake. I wonder if you think it's that big of news, but the other huge piece of news recently in the video game industry is that Electronic Arts, which publishes Madden, FIFA, The Sims, like, another huge, huge publisher is going private via what's called a leveraged buyout. I was wondering if first you explain what that is?

Absolutely seismic. Yeah. One of the one of the biggest pieces of news of the year for sure. Yeah. So and I'll be oh, I mean, this is kind of one of those finance mechanisms that, like, when you explain it to people, they're just like, what?

How is that legal? Most notably, captured by the iconic nonfiction book, Barbarians at the Gate, about one of, I believe, one of the first LBOs or one of the first high profile LBOs, RJR and Nabisco. And so, especially, what this means is you, usually a private equity company or like a group of firms, are saying, are going to buy this company and we to do so, we are going to take out a loan from the bank. We're gonna say, hey, JPMorgan. We wanna buy this company.

We're gonna put up x percentage in in our own cash, but we also wanna buy it with y percentage of debt. And so we're gonna take out a loan from you, and then we are going to put that debt on the books of the company that we just bought. And so in this case, you have a purchase that is about $55,000,000, and they are taking out $20,000,000,000 in debt. I believe 18,000,000,000 or so is going on the company's books, and then there's some 2,000,000,000 in in kind of other other kind of assorted debt mechanisms. It's a very complicated financial transaction.

But something like 18,000,000 is gonna be on the company's 18,000,000,000 is gonna be on the company's books. So what that means is that this new privately owned EA, is suddenly going to be responsible for paying the interest on that insane amount of debt, which could come out to a billion dollars a year. And so certainly a large part of EA's revenue is going to paying off debt, which, again, just like with Microsoft, means a whole lot of cost cutting. And it is almost certain because every single LBO leads to layoffs, it is almost certain that next year when this deal closes, EA will shed a lot of jobs, and the carnage will continue in the games industry, which has really seen tens of thousands of jobs be lost over the last three years.

Yeah. I was gonna ask if how would you compare the the 30% profit margin goal to this burden of the debt that EA is carrying now? Like, are they pressuring the companies in similar ways?

Yeah, kind of. Yeah. I mean, at the end of the day, it's just like more pressure on you to, like, do things cheaper, cut costs, and make more money in in whatever way you can. And, yeah, I mean, we'll see those manifest in different ways. I think the pressure on EA is going to be a little bit different because now they're a privately owned company, and so they first of all, they don't have to be transparent, like they did before.

We're not gonna see earnings calls from them anymore. We're not gonna see transparent bookings, revenues, revenue numbers from them anymore. And also, I mean, who knows what Saudi with Saudi Saudi Arabia, which is the largest well, which will be the largest shareholder in this new EA, is such an x factor because they have a trillion dollars in their sovereign wealth fund. Like, if they really wanted, they could also swoop in and be like, oh, actually, we're gonna just, like, pay for this and swoop in with our own money. So who knows what they have in mind here or what they want to do with EA.

I don't know. I don't know if this is, a purely profit play or a cultural play. I have no idea. So that's a big x factor. But, like, traditionally, what we've seen in cases like this is just a whole lot of cost cutting, whole lot of job shedding.

I I certainly would be worried if I were an EA employee when this deal closes, which I believe they are they had said at the beginning of the next fiscal year, which is June or July of next year, something like that.

You mentioned in your piece about this that you think that this is a signal for trouble in the video game business more broadly. Can you explain why that is?

Yeah. If you are EA, which had been looking for some sort of merger or deal for the last couple of years, if you are EA, you don't do a deal like this unless you believe that $55,000,000,000 is your peak valuation, that you're not gonna get higher than that in the next couple of years, which means that most likely you are looking at the market and saying, hey. This is a mature market. We are not going to see the kind of double digit growth rates that maybe we saw a few years ago when when it seemed like the games industry was just exploding and and finding all these new markets like mobile was such a huge boon to the games industry's revenue because suddenly people could reach like, people could sell games to, bill a billion new players who just, like, play games on their phone, and EA took advantage of that. All the all the big companies took advantage of that.

So we're not seeing that growth return anymore, at least in EA's mind. And so they're saying, yep. We want out of here. That's that's a big part of this. Another big part of it, I mean, of course, is that consolidation is always bad for for these industries.

It always leads to layoffs and, like, worse prices. And I don't know. This this week, I don't know if you're a football fan, but I was trying to watch Monday Night Football on YouTube TV and couldn't because YouTube and Disney are having a dispute, and so Disney's channels are no longer available on YouTube TV. And I was just thinking, this is like millions of people cannot just turn on the TV and watch football because these two, like, companies that are each worth many, many hundreds of billions of dollars cannot agree on something. And, like, this is what media consolidation looks like.

It looks like millions of people not being able to watch Monday Night Football. So that's the type of thing I think about, or, like, you look at what's been happening with Warner and Discovery and AT and T over the last decade and how miserable that was for everybody involved. This this consolidation always leads to bad bad things. And so, yeah, I mean, I think that, like, the games industry, if you are a big company or if you are someone trying to like pursue a career at big companies in the games industry, a professional career in the games industry, this is all pretty scary stuff. All this this m and a, all this consolidation.

Xbox buying everything. EA now getting going private. I mean, it used to be that, like, you had a bunch of publicly traded game companies that were all competing and all fighting for talent and all reporting in earnings calls and being transparent about what they were doing. And now it's just one. Like, Take Two is the last one standing out of all the old, like, kind of traditional gaming giants.

It's really crazy. EA's gone. Activision's gone. THQ, Throwback is is long gone. Ubisoft is in its own kind of misery world.

Yeah. It's really crazy.

Yeah. First of all, not a football fan, but you're not allowed to be apathetic about football in Philly, so go birds.

Nice. And Yeah. It was it your your hated cowboys who were playing on Monday night, so maybe maybe it's good news that Philly couldn't watch that.

Yeah. The that was gonna be my next thing. I was gonna say when when when I reported on video games more closely, it was like if you were to imagine a pyramid of the biggest players in the space, it's like, maybe you have the console manufacturers at the top and there is a lot of trouble there as we've discussed with with Microsoft. And then under them, you have these gigantic publishers, Activision I would say the big three, it's like Activision, Ubisoft, EA. Mhmm.

Right? Or like the giant

one Two. And Take Two. Right.

So and out of all of those, it's like Take Two is sort of like Last Man Standing. Yep. And it just like it's it's unrecognizable as as an industry.

What Yeah. Well, so let me actually let me tie this back to the thing I mentioned at the beginning of this show, which is that I I see games moving a lot toward a lot more like book publishing, and there are a lot of parallels there. Book publishing is really interesting. Right? Like, you have, just like games, a very small group of big companies, and two of them tried to emerge or have merged.

Penguin Random House was a merger. So I believe it's four left four or five massive book houses, and those are the ones that are responsible for most of the books you see in Barnes and Noble at your local bookstore or whatever because they control most of the market, the big guys. And those book publishers are releasing a lot of books every single year. Most of them flop. Most of them don't sell a lot of copies.

And then there are a few humongous hits that help subsidize everything else. The kind of the Court of what is it? Court of Roses and Thorns or whatever, the or Fifth Fifth Dragon, all these all these, like, big romanticy. Like, books like that, like, the Humongous hits. Right?

The Housemaid is is a good example. Freedom McFadden's The Housemaid. Those are the books that just subsidize it for everything else, kind of the Call of Duties and Grand Theft Auto's of the world. And then you have the self publishing world, which is what a lot of, like, the games world looks like too, where because anyone can just write a book and put it up on Amazon, there are more books released every week than anyone could possibly read. And we're seeing a similar effect in games where because Steam, the largest gaming platform, the PC gaming platform, has become this platform where anyone can release a game.

And because the tools have gotten so good and so accessible and approachable that, like, anyone can just download Unity or GameMaker and just make a game on their own if they have the talent and the wherewithal and then put it up on Steam, it's kinda like the self publishing market where, like, you probably won't get noticed, but you can put your your thing out there and see if people like it. And occasionally, there's a big viral hit that nobody saw coming. And you could even point to Roblox as an even more democratized example of that because Roblox is this tool that a lot of people, many millions of people, mostly children, use to make games and then release them and play them. Right? So that's that's kind of a similar thing to what we're seeing.

And then what we see in the book world is that, like, it's very hard to make a living writing books unless you are the author of one of these million unit sellers or unless you're, I don't know, married to a doctor or something like that, it's very hard to, like, sustain yourself writing books. And I think we're gonna see a similar phenomena happen with games where it's like, you wanna make games? Sure. Have a good time. And you you might even be able to reach people.

But like trying to make the next hit game is kinda like trying to win the lottery in the same way that trying to write the next hit book is trying to win the lottery. So I think that's the model that we're moving more towards where maybe it's a little bit it's a little bit harder to actually have a sustainable career. Maybe not. I mean, games, to be fair, make still make a lot more money than the books business does. But but but, like, the oversaturation of video games is just so reminiscent of what has happened in the book world that it's hard not to draw the parallels there.

I can definitely see the parallels when it comes to, like, the quantity and, like, what we sometimes call the discoverability problem, which is definitely true for books. But I think it gets complicated because I suppose, as a reader, I can't tell the difference when I am reading a book if it came from someone if I'm reading it on an e reader, whether it came from somebody who self published on Amazon or it came from Random House. And with video games, which I think they're more like movies in this way, where it's like, yeah, it's like, could pick up an iPhone and shoot an indie movie, but if you want to bring like the vision of Oppenheimer to life, right, it's like somebody needs to get behind it with like a giant check, right? It's like, if you want to make Lawrence of Arabia, right, it's like, somebody has to like accept your crazy vision and fund it and the video games that I love indie games, I love all kinds of games, right, but it's like the thing I think we grew up with is like a lot of that, right? It's like the we and that's what made it so exciting, I think, the period that like we grew up along with games, where it's like there's this feeling that it's being pushed forward, it's like, every year, it's like, oh my god, it's like, I can't believe that this is possible now, right?

And what was driving that is companies investing millions of dollars into these giant bets and being like, let's take a swing with like a halo, let's take a swing with a half, like, let's make like let's take these huge expensive bets and in the process, like we've said, we will discover new technologies and so on, and I feel like there's less of that happening and it's like, I don't know, it's like, eventually, somebody it's like, it feels unless we kind of stagnate and level off in a way, or the industry does, it's like, if somebody is not if people are not taking those huge bets, we're just gonna we are gonna stagnate, right? It's like, we're gonna it's gonna become a less exciting space, in my opinion. Right?

It's funny you say that because when I play the big budget games, I feel like this is so stagnant. This is like everything else I've played before. And when I play the indie games, I'm like, holy crap. This is blowing my mind. Because the the big budget games, because their budgets have gotten so humongous, they have to, like, hit the checklist and appeal to as many people as possible.

Because if you're making a $200,000,000 game, you have to reach tens of millions of people to make a profit or hit that 30% profit margin. And you can't do that unless you or or you think you can't do that if you're a big publisher unless you do endless focus testing and market research and make sure that this appeals to all people possible. That's where we're seeing a lot of the kind of the the, I think, in my opinion as someone who plays a lot of a lot of new games. And to your point also, I mean, I think that, like, we're seeing a lot of high end looking games from the indie space. One of this year's best rated games is a game called Claire Obscure Expedition 33, which, I mean, if you looked at that compared to, like, some high end game from EA or whatever, I don't think you'd be able to tell, much of a difference at least from a graphical perspective, maybe from a scope perspective.

Maybe those games are much much bigger, have a huge open world or something, but graphically, it's harder to tell. And then also, I mean, you have a lot of indie games that despite the fact that they're, just made by a couple people and maybe they look two d or they're not super fancy graphically, they're still selling many millions of copies. One of the most popular games of this year was, Silksong, which is a two d animated two d game that looks like a cartoon. So, yeah. I mean, I think it's a different world.

I think to your point, one one important role that the big companies play in the same way that the book publishers do is as a bar for quality. And so, like, I think the

Yeah.

The thing that you're often worried about if you are, like, interested in checking out self published books is like, well, I mean, this could just be crap. And, like, there's no one no one kind of reading this. There's nobody editing this and and deciding, okay, this is good enough, which also, I mean, the the kind of the flip side of that is that it's also people gatekeeping other people's creativity. So there is kind of like a a dual double edged sword there. But, yes, let's say that, like, the the quality bar is there.

Big companies have, over the last few years, have lost so much trust with their players by releasing games that are, like, full of bugs and broken and, like, flawed in so many ways that you can't even trust EA or Activision or take to to have that kind of that quality bar the way that maybe they did in the past. And so that, I think, has had a huge impact too. Like, you're you're gambling just as much when you buy the latest EA game that it's gonna be, like, high quality and not full of glitches as you are when you buy a new indie game made by two people on Steam. So, like, why not check out the indie game, especially when the indie game is gonna be five dollars and that big game is gonna be $70. So, yeah, there's a lot of factors here.

I think the the tools I mentioned earlier, like Unity and and, GameMaker and all these other tools that are out there, I think really have democratized game making to the point where, like, a lot of these smaller companies really can get in, like, high end graphics despite the fact that they're they're really small teams. It's easier than it ever has been to make a game that looks just as good as anything on the market even if you're not a humongous team. It's just that the bigger companies, I think, are filling their games with more things, checklists and open worlds and four hundred hours of gameplay, and I'm not even sure if that's what people want. I don't know. There's still gonna be major hits.

Don't get me wrong. Battlefield, the new Battlefield was a massive hit. Grand Theft Auto next year is gonna be probably the biggest entertainment launch in history. But in the same way that, like, I don't know, the new Dan Brown book is always gonna be a hit. New Stephen King book is always gonna be a hit.

It's like you have your heavy hitters, but a lot of the stuff below that is not quite where it was, where, like, you you your your options are limited. You go to GameStop and you just buy whatever new, game EA has just released because there aren't a lot of other things to get, and they're the gatekeepers, and they have decided that this is what we're gonna put in stores. Nowadays, you can go on Steam and find dozens of new games every single week, all of which look really cool. So yeah. I mean, it's it's from from a player's point of view, think we're like, things are better than they've ever been.

Like, there are more cool games released. I I've been playing more cool games, more interesting games, more unique games, more innovative games. To your point about r and d, more like like technologically interesting or gameplay wise, like mechanically interesting, than ever before. Like, 2025 is one of the best years for games themselves of all time. It's just the problem is if you want a career in the video game industry working on bigger projects, getting health insurance, getting a paycheck, it is harder than it's ever been to make that feasible.

I definitely agree that it's been a fantastic year, especially like the the past couple of months have been really fun. I want to make a hard pivot to talk about AI because it's all we talk about, it's all everybody talks about, and it's something that is working its way through the industry, and it's working its way through all industries. I really something I really appreciate about your reporting is that it really gets down in the trenches with game developers and by reading your articles over the years, you get a real feeling for what is difficult about the job and what kind of challenges people face, like, in pretty technical details, like, I learned a lot about workflows in certain developers by reading your stories, and naturally, a lot of what you covered is about crunch culture and video games and the amount of work that it takes to ship a game and how that can really break people and break companies in some cases. And when companies, especially in tech, started to adopt generative AI, that reporting often came to mind where I was like, well, I'm very critical of AI, I see all the problems with it, I wouldn't want to use AI to, like, generate my articles or anything, but as an outsider, it seems to me like, I don't know, like, if you need to generate a ton of three d assets for a background of a video game, it's like, maybe this is something that could really help with game development and maybe help with crunch and help with all these logistical problems of just like, how do we produce the massive amount of labor that it takes to ship these games, but not only have I not seen anyone in the industry talk about it in that fashion, other than, like, executives that are very high up and are not in the trenches.

There was a story that came out in Business Insider recently about how EA is very aggressively pushing its employees to use it and not everybody being thrilled about it and not working perfectly. And I guess all of that is in order to ask you as somebody who is, like, very familiar with development and the and the issue with Crunch. It's like, do you think this is applicable or helpful at all to developers? Are you seeing or hearing any of that?

So when when AI started popping up and everyone started talking about AI, I have tried I tried to keep an open mind, and I still to this day try to keep an open mind despite, like, a lot of the the vitriol that is online on Blue Sky on podcasts and stuff about AI. And so, therefore, I wanted to experiment with it, and I've played around with ChatGPT. We have tools of Bloomberg. Bloomberg encourages reporters to to use ChatGPT not to write things, but like to help them in whatever way possible. And I would never use it to write anything for myself, but I decided, okay.

You know what? Maybe I can use it for like, I don't know, something as simple as creating a budget. And so the other day I was like, hey, chat GPT. I wanna put together some financial planning. I'm gonna plug in some numbers for you.

Help me piece this together. And it started doing it and I was like, wow. Great. This is awesome. It's saving me a lot of work.

Like, it's making like this database for me. I don't need to go to Excel and spend an hour plugging at numbers. And then

I

realized that it had just, like, flubbed the math so badly that it just, like, made up an extra $30,000, like, in my budgeting. And I was like, wait a minute. Like, you just fucked that up. Like, what's what's going on here? And it made me realize that, like, not only is this just completely filling, like, Google search results and all sorts of other, like, new AI tools with just complete hallucinations and made up nonsense, it is also incapable of getting just basic functions right without filling them with incorrect things, without getting things wrong.

It can't even do math without getting things wrong. At one point, was really curious. There's a test in the NFL, not to get bring up sports again, but, like, there's a test called the Wonderlic test. And I was like, hey, ChatJPT. Generate the Wonderlic test for me.

And it's like 50 questions, like, trying to measure your football IQ or whatever or, like, your IQ in general, basic math questions or whatever. And at a certain point, I was doing this test through to HashiPT. It would start being like I would hit I would type in a as the the answer because it was correct, and it would be like, no. A wasn't the correct answer. The correct answer was b.

And then it would say the value that a was except pretend that it was in b and just, like, get that completely wrong. It would be like, if I were to say the answer is a, 60, it would be like, no. The answer was b, 60. So, like, I have found in my own use that AI is just completely useless because it gets so much wrong all the time. And no matter how many versions of ChatGPT have been released, like, it still just keeps getting things wrong.

If you're trying to make a video game, which is one of the most complicated possible pieces of software, whether you're trying to generate art or, like, write code or do design or whatever else. To use this generative AI that is just so flawed seems like it would cause a lot more problems than it fixes. It seems like it would create it would be like a time loss for you in the net. Like so I'm a parent. I have two small kids.

And a lot one of the things about parenting that's really interesting is that, like, a lot of times, you'll be watching your kid do something, and you'll wanna step in and do it yourself because you can do it so much quicker and more efficiently than they can, like emptying the dishwasher or cleaning up their toys. But as a parent, you have to find a balance, and maybe sometimes you can do that, but a lot of times you have to let them do it because the only way they learn is by learning. You're not gonna be coming behind them and, like, making things faster. They they have to do it themselves. And AI kinda reminds me of that where you're, like, watching something slower and worse and less efficiently doing something, and you know you're gonna have to do a better job afterwards.

You know you're gonna have to clean up after that toddler tries to clean up that spill, but you let them do it anyway because they're learning. Except the difference is that you don't need to teach the AI. The a is AI is not a child that you are raising and trying to trying to teach how to live in this world. It's just a useless, like, tool. It's just like a a something that is like doing a worse job than anybody could.

And, again, like, I don't wanna go all full Ed Zitron here because I really have tried to be open minded and will continue to. Like, I'm still open to. Just the other day, I got a pitch from someone who was like, here's how I'm using AI in this really positive way in game development. And I was like, sure. Tell me about it.

I wanna hear more. I want as a reporter, I believe very much in just, like, listening to people and trying to be as open minded as possible even about things that are controversial. But in my experience and the experience of the people that I've talked to about this, it seems like it causes more problems than it solves.

Yeah. I'm I'm really fascinated by how hard the video game industry is gonna try to adopt this, and I I I look forward

to Well, every industry. Right? It's not like, I I haven't seen a single industry that isn't talking about their AI plan on earnings calls. That's the latest fad. That's how I mean, that's that's what's propping up the entire US stock market.

Entire economy is propped up by this.

Yeah. So, yeah, looking forward to to your exposes about about that happening in various video game companies. Jason, thank you so much for coming on. I'm gonna leave that there. As a reminder, four four Media is a journalist founded and supported by subscribers.

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