Sunday, August 29, 2021

The Lonely Financial Zone


Wilhelm
at The Ancient Gaming Noob has an excellent post up about the latest in the seemingly never-ending cavalcade of weirdness that trails along behind Daybreak Games wherever they may go. 

Back in the winter we learned that a company called EG7, of which I feel safe in saying no-one reading this had previously heard, had acquired DBG's entire catalog, including, to no-one's entire surprise, the games formerly believed to be independently owned by Standing Stone and only published by Daybreak. 

Almost before we had time to work out whether we thought this was a good thing or not the new owners released a slew of information about game profitability, income and player numbers such as we'd never seen in almost twenty years. The openness and transparency was refreshing but not as much as the bright, optimistic, confident personality of the EG7's youthful CEO, Robin Flodin

Since then, anyone who reads MassivelyOP can't help but have noticed a marked change in the tone in which news items relating to the Daybreak Games portfolio are reported. The snark, which used to be both extreme and perpetual, has softened to no more than the occasional raised eyebrow and with good reason.

Almost from the moment EG7 took over there appears to have been a loosening of the bonds that held the individual studios within Daybreak Games back. There's been readjustment, alteration and innovation within the games themselves and within their interactions with the players and the press. 


 

Just yesterday I posted on the latest changes to DCUO, a game that seems to be thriving under the recently enhanced authority of Jack Emmert, the man now leading Dimensional Ink. Planetside 2 is restructuring, adding content, looking refreshed. The EverQuest titles appear solid, albeit more so the elder than the younger. New expansions for 2021 have been confirmed.

Everything looked altogether rosy in the EG7 garden. And then this happened:

"The Board of Enad Global 7 AB (publ) and Robin Flodin have agreed that effective immediately Robin will transition away from his current role as CEO of EG7 and will be replaced by the current CEO of Daybreak Game Company, EG7’s largest subsidiary, Ji Ham. During this transition Robin will stay on for six months to assist Ji as he assumes his new role within the EG7 family of companies. Ji will be appointed acting CEO of EG7 as a search for a permanent CEO has been initiated. Ji has an extensive background in both gaming and finance and has for the last six years been the CEO of Daybreak. During his tenure at Daybreak Ji has overseen extensive growth and profitability of the company."

Wilhelm covers the backstory and the event brilliantly and his post led a commenter on the thread to point to the following piece of information, essential to a full understanding of what might be going on:

“The news that Robin Flodin is leaving the CEO position came after an interview with Dagens Industri on Thursday, in which Robin Flodin has difficulty answering questions about the difference between total revenues and net sales during the quarter. The answer is that the company has capitalized development costs for new games of approximately SEK 36 million in the quarter, something that turns into an income in the accounts, something Robin Flodin failed to explain.”

That's Google Translate's version of a paragraph from this Swedish article. The piece states that after the release of EG7's second quarter figures the share price dropped by 25% although in the translated version it's ambiguous whether that happened before or after Flodin's interview. 


 

Either way, having the CEO unable to explain why there appeared to be more money coming in than the sales could account for would not have done anything to help. Precisely the reverse, I'd imagine, since the two logical explanations for the discrepancy would be either that something was going on that shouldn't be or that the CEO didn't understand the finances of the company he was leading.

In that light his sudden departure is not so surprising. It does however, still beg the question why replace him with the ex-CEO of Daybreak Games? Or wait, no! The present CEO of DBG. Because of course, even though EG7 bought the company, Ji Ham retained his place as Daybreak's CEO.

I confess I'd completely forgotten about Ji Ham. It's not hard to do. He never says anything. He never does interviews. He never releases PR statements. I have never even been able to find a photograph of him. If you wanted to throw this hot potato into the safe hands of someone guaranteed not to say something unfortunate to the press, now or ever, you could not hope to find a person better suited for the task than Ji Ham. Potato? What potato?

What does all this mean for the games? If I had to guess, and I'm going to, whether I have to or not, very little. Whatever plan there was, whoever was making it, whoever was implementing it (and we have no real answers to any of those questions) I would bet nothing much has changed. Robin Flodin may have founded the company (and I notice his two co-founders have both cashed out already) but, like one of those over-ambitious, expansionist rulers from the history books, in attempting to assimilate a more powerful neighbor he has himself been assimilated.


 

Daybreak and Standing Stone carry on. Jason Epstein remains on the board at EG7, where he holds a very significant 8.335% of the shares. Another 11.732% is held by the founder of Innova, which, as Wilhelm pointed out to me in an email, is a name that has certain similarities with Columbus Nova and Renova. Remember them? No? Good. That's working as intended, then.

Whatever is going on is most likely not of much concern to any of us as players. As the revelations from the time of the EG7 acquisition told us, these games are making money. Who they're making money for is less important. So long as they continue to be profitable, chances are the servers will remain up and running. Maybe the games will even be given the chance to grow a little. That does seem to be happening.

And I am on record as saying that I've found Daybreak's tenure to be largely favorable as a player. It hasn't seen spectacular growth or innovation but neither has it seen the kind of self-indulgent, self-aggrandizing, borderline crazy behavior SOE turned into some kind of manic trademark in their latter years. I think some of us tend to forget just how derided and despised SOE was for most of its existence.

There is one curious thing (One? Hah!!) that comes out of all of this. The "revenue" Flodin was unable to explain supposedly derives from some arcane accounting procedure regarding the spend of 36 million Swedish Krona in a single quarter on "development costs for new games". That's about $5m.

What, as Tom Waits would say, are they building in there? We have a right to know.

Actually, we don't. But we'd like to all the same.

11 comments:

  1. In Russian it is "Novaya" and has cultural connotations like "new" and "fresh" and "clean" and "young" so it isn't surprising that they use it a lot. Still, after Renova and Columbus Nova, another Russian company ending with "nova" does make you at least go "hmmmm."

    Yeah, the SOE years... that was a roller coaster. So many odd ideas kind of thrown at the wall and left to hit the floor even if they started to stick a bit.

    Daybreak hasn't given us much new, but they have at least kept most of their current catalog online and fed with regular updates. (H1Z1 is kind of the standout in the group both in rapid success and abject failure.)

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    1. I noticed H1Z1 was in the poster display. I can't keep it straight in my mind who's supposed to be in charge there. Which of the Daybreak subheadings does it come under now, if any?

      The naming convention may be a complete red herring but Jason Epstein being on the board isn't. I naively thought that seling a company meant you no longer ran it but apparently not. I guess if you acquire a company that immediately makes up 50% of your earnings going forward, though, you are going to have to come to some kind of accommodation if the former owner still owns more than 10% of your shares and fancies staying around.

      Only why does he want to stay around?

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    2. There are a few possible answers. Maybe he likes the EG7 business model and wants to remain an investor.

      More likely is that the sales agreement for the deal, which was paid for in part with stock in EG7, has some stipulations to keep Jason and friends on the hook until everything is settled. Nobody pays that much cash for a business without some precautions. Daybreak no doubt has metrics they need to meet over the first 1-3 years, during which time Jason might not be allowed to sell his shares, ensuring that his interests continue to align with EG7's. And if he is going to be depending on EG7 for his final payout I have no doubt that he'll want to be involved.

      And then there is who rich people stay rich, which is generally by having their money in lots of different investments. Bezos is worth $190 billion, but that isn't all in his checking account. And if he tried to cash out and get the money tomorrow, he'd lose most of it by crashing the stock prices due to him flooding the market with sell orders. Jason might like to cash out, but if he put 8.3% of the company's shares up on a sell order, the price would plummet and he would be all the poorer.

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    3. I'm really glad I didn't take Economics at school. Actually, I'm not sure you could back then. I did take one year of Economics for Insurance in my first real job but I don't remember any of it and I suspect it would be of limited relevance if I did.

      It's a strange business, business. You sell something but you can't get rid of it or take the money until you do some more work to show it was worth selling in the first place. Imagine if you sold your car and then had to chauffeur the new owner around for a few weeks until they were satisfied it wasn't going to break down on them before you got the rest of your money.

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  2. Oh, and capitalizing development means that they are saying that the work they are doing is creating a company asset that has value, so they aren't spending money, they are investing it and getting an immediate return.

    It is similar to an acquisition where, for accounting purposes, everybody assumes that the company being purchased was worth the amount spend on it. Only later, when things go bad... as they do more times than not... does somebody have to come back and explain that the acquired company was only really worth a 10th of what they paid and then take a one time write off to revalue the asset.

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  3. Despite minimal (general) interest in the wellbeing or lack thereof of Daybreak and its properties, your and Wilhelm's write-ups on this have both been incredibly interesting.

    The mystery games receiving the $5m investment will also be interesting to know. Although if it's ~$5m for games plural and they're really 'new games' as opposed to new capability / enhancements (which could still be capitalised!) then surely this has to be in the mobile space?

    I can't imagine that budget going very far otherwise.

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    1. Yeah, $5m is irrelevant for an AAA game, even in a quarter. They do keep hinting at a new EQ game though and I'd be more than happy to see some kind of mobile game using the IP. If it was even haf-way decent, that is.

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  4. This is all so.. strange. I was reading Roger and Wilhelm's chatter about it on Discord and it just gives me a bad taste in my mouth. Can't even entirely put my finger on it. And I definitely remember Columbus Nova, at least. That whole debacle was weird as heck.

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    1. It's strange, for sure. Strangeness has been a major part of the whole SOE/DBG experience for so very long now, though, that it has to be something spectacularly odd to really worry me. This is just a minor oddity by those standards.

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  5. Didn't Flodin promise a new EG7 developed MMO, based on a popular IP, in a video a while ago or am I misremembering things?

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    1. I think he did, although he didn't give much in the way of detail. There's a constant background hum of "something" new happening with the EverQuest IP, too, but no-one ever says what it might be.

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