The rise and fall of Embracer Group: 25/04/2024
On a Wingesfor and a prayer
This week’s Video Games Industry Memo is sponsored by Into Games
A non-profit creating an equitable pathway for skill & career development in the UK games industry
I take a deep dive into the rise and fall of Embracer Group
Fallout 76 hits a million concurrent players following TV show success
Tales of Kenzera: Zau aims to scratch your Metroidvania itch in the week’s releases
Good morning my fellow VGIM-ers,
It’s been another busy seven days over here at George HQ, as I maintain an utterly relentless pace in April.
Since the last time I popped up in your inbox, I’ve managed to prep for two behind closed doors talks for clients, stick my head in at two industry events, accidentally networked someone into a games industry job at a friend’s birthday party, started work on the first part of *REDACTED* and managed to run another half marathon for charity. Insufferable or insane? You decide!
Anyway, a request for you all this week. I’m creeping close to the 1,500 subscribers mark for VGIM and I crave the validation of hitting another milestone.
If you’ve been enjoying VGIM, think it’s good and want to reward me with a dose of dopamine, please share the newsletter using the button at the bottom of today’s email to encourage others into our not-so-secret little club.
In the meantime though, here’s a big read about a topic that I’ve been wanting to write about for a while and finally have an excuse to dive into. Bon appetit!
The big read - The rise and fall of Embracer Group
Is there a business that better reflects the more tumultuous part of the games industry’s journey over the past half decade than Embracer Group?
The Swedish games conglomerate, helmed by Lars Wingefors, soared to a valuation in excess of $11bn in 2021 following a wild acquisition spree that put it in charge of over 10,000 employees, dozens of businesses and over 900 games IPs including Borderlands, Deus Ex and Tomb Raider.
Fast forward to the present day though and it's clear that the company’s rise and fall has been such a classic of the genre that even Icarus would probably describe it as a little bit on the nose.
After a year of financial turmoil sparked by its failure to secure $2bn of funding from Saudi Arabia’s Savvy Games in its hour of need, the now $3bn valued company has announced it is splitting into three businesses - Asmodee Group, Coffee Stain & Friends and Middle-earth Enterprises & Friends - in an effort to avert chaos that has seen the company lay off over 1,400 employees, shutter more than half a dozen studios and flog the company’s family silver at a knock off price.
But what was behind Embracer’s rapid rise to the top? How did it fall from such heights so quickly? And what is likely to come next as a result of the restructure?
The answer to all of those questions is different but rests upon a single truth: Embracer Group was an exercise in aggressive corporate spread betting rather than an attempt to build a coherent video games company.
And while this approach worked well as cash flowed into the industry during the pandemic highs, the portfolio approach left Embracer at the mercy of the financial markets - forcing it into an undignified retreat that looks likely to lead to its demise in the years ahead.
Embracer the chaos
Embracer Group’s downfall has dominated the industry news over the past year. But I would say it’s fair to say that it has been plagued by problems that were hard coded into its business model from the moment it was announced.
The brand came into being in September 2019, when publicly listed games business THQ Nordic - which had acquired Koch Media and Coffee Stain in 2018 - renamed itself in an attempt to “clarify the group structure and strategy” following confusion amongst investors about the effectiveness of its portfolio approach.
Alongside the rebrand, the business announced a set of strategic priorities in its 2019/2020 annual report that sought to justify its renaming by claiming the business was pursuing a revolutionary “decentralised strategy”.
The company would start by building on the portfolio of IP that THQ Nordic had already acquired, including games actively in the market and historic IP that was ready to be resurrected. It would then buy up more IP and businesses via mergers and acquisitions to turbo charge the development of these prospects. Embracer would then give those acquired companies the freedom to grow in their own way without outside steering. And this would result in the company unlocking long term organic growth for the companies within the group, delivering returns for investors while reducing their exposure to risk in the process.
The on paper pitch for Embracer Group sounded like manna from heaven for games companies and investors alike. For development and publishing businesses, Embracer was offering money and creative freedom to allow them to crack on with making games as they saw fit to. And for investors, the company was suggesting that there was a way to de-risk the notoriously up-and-down world of video games development in a way that could deliver consistent returns.
The rebrand, which occurred just prior to the pandemic rush, resulted in a flow of cash into Embracer and, in turn, the wider global games industry as a whole.
The company raised funds through share issues, alongside investments from the likes of the Canadian Pension Plan Investment Board, to fund a buying spree that saw the company make 27 acquisitions in the course of just 12 months in 2020-2021. This included the $1.3bn acquisition of Gearbox Entertainment, the makers of Borderland, and the $525m purchase of Saber Interactive, the creators of the Space Marine series.
This ambitious investment drive transformed Embracer’s business. It went from being a relatively small company of 600 employees in 2016 to, briefly, the most valuable games company in the European ecosystem with a headcount of over 7,000 people by the end of 2021.
It was an impressive rise. Yet even at Embracer’s July 2021 heights, when its value was up 30 fold compared to THQ Nordic’s 2016 first entry onto the public markets, analysts were questioning whether Embracer’s position in the market was a short term sugar high or something built to last.
And less than two years after those questions were asked, the sceptics were proven right as Embracer came crashing back down to Earth with a thud that reverberated across the global games industry
A message from Into Games: Nurturing the next generation of leaders in your studio should be a priority. Into Games has collaborated with C-suite games leaders and learning designers from IKEA & Accenture to create a powerful games industry-specific training programme for UK studios. Already trusted by giants like Rare, find out how we can accelerate your teams today here.
Growing slain
The problem for Embracer was a simple, yet fundamental one: its commitment to an undisciplined decentralised approach to its acquisitions turned what should have been an exercise in careful spread betting into a chaotic high stakes game of acquisitions Buckaroo.
Of course, many major companies such as Tencent, Savvy Games and Keywords Studios have acquired multiple games businesses and offered them latitude to operate in the way that works for them in a similar manner to Embracer Group. However, each of those businesses have generally made purchases with strategic intent - buying up companies to integrate, or supplement, their existing networks in a targeted manner.
Embracer didn’t do that. Its acquisition of business after business was not guided by an overarching unifying vision. It was instead a continuation of the messy scattergun acquisition of games companies and IP rights seen under THQ Nordic that had forced it to rebrand.
Therefore, access to easy money in the early pandemic years arguably exacerbated the worst tendencies of Embracer’s leadership. In an effort to be everything to every player in the world, and with plenty of cash in the bank to back it, the company took on board more than it could handle.
The acquisition count rose rapidly, accruing chunky purchase costs in the process. Headcount increased enormously, adding significantly to the company’s overheads. And while more games were in development, making games from dormant or underused IP meant swallowing those running costs in the short term because less cash was coming into business until they hit the market.
Embracer’s unbridled growth was getting out of hand. But the company continued betting that its approach would come good on the hope that the games market would remain at its buoyant highs and that investors’ appetite to back the sector would remain undiminished.
Unfortunately, Embracer made a significant error as a result of its insatiable appetite to acquire new properties that ensured its finances went sour at precisely the worst moment possible.
In December 2021, the company grabbed the headlines again by acquiring tabletop giant Asmodee for $3bn as its empire reached its peak. But in April 2024, Matthew Karch, CEO of Saber Interactive, revealed to Games Industry Biz that the deal was only possible as a result of Embracer putting itself into debt for the first time ever.
The company couldn’t have picked a worse moment to do so. In February 2022, Russia invaded Ukraine. Global financial chaos led to hefty inflation and drove up interest rates, increasing the cost of both Embracer’s debt and its swollen headcount. At the same time, the games market levelled out as players headed outdoors as the pandemic receded - tapering the top of the consumer market and reducing appetite for open handed investment into the sector.
This posed a potentially existential problem for Embracer. So it tried its best to ride its problems in the only way it knew how: by buying stuff using funding. It secured $1bn of investment from Savvy Games in June 2022 to help bring its properties to the MENA market, spurring Embracer to make a further wave of acquisitions in August 2022 (including Middle-earth Enterprises).
But by the end of 2022, it was clear that the company needed more money to stay afloat. Faced with the reality of the situation, Embracer returned to Savvy Games to try to secure a further $2bn of investment into the business to keep it going.
Unfortunately, the welcoming mood music around the business had been well and truly turned off. An article by Anna Gross in The Financial Times in March 2023 laid bare the extent of the company’s problems, revealing that four hedge funds were shorting the company for three reasons.
First, its business structure was bloated and messy as a result of acquisitions. Second, accounting complexities caused by acquiring so many international games businesses obscured the risk at the heart of the company’s overall financial position. And third, there was a sense the company had overpaid for mediocre businesses: leaving it poorly placed in a weaker post pandemic games market.
The hedge funds were sceptical that Embracer had the right vision, enough cash and good enough games in its portfolio to succeed. And they were right to be.
By May 2023, Savvy pulled out of the opportunity to invest $2bn into the company. This, in turn, sparked a major restructuring of Embracer in June 2023 that saw it seek to slash its overheads by 10% in a manner that sparked mayhem across the global games industry.
In eight brutal months in 2023 and early 2024, the business laid off 1,400 staff, cancelled at least 29 video games and shuttered seven studios including Volition, the makers of Saint’s Row, and Free Radical, the team behind Timesplitters. The company also sold off a number of its premier assets at a loss, flogging Saber Interactive for $247m and Gearbox to Take-Two for $460m to try to keep its head above water.
And though the company said in March 2024 that its restructure was complete, the damage was done. Embracer’s decline from pandemic darling to industry bête noir - which is blamed by many in the sector for acting as an unhelpful contagion for layoffs, cancellations and studio closures - was complete: forcing it to consider carefully where it goes next.
Structural failings
So is this week’s restructure business as usual? Initially, Embracer looked like it might be trying to suggest so. In an open letter released to coincide with the press announcement on Monday, Wingefors claimed that the division of the business into three may be a “new chapter” for the company but that it remains consistent with its initial vision.
By Wednesday, the message had changed. In an interview with James Batchelor, Wingefors admitted that the Embracer name is flying towards the dustbin of history once the spin out of its constituent parts have reached certain milestones.
This is a sensible decision. Although rationalising all the parts of Embracer into three separate businesses will be necessarily imperfect at times - Coffee Stain & Friends has a particularly wild mix of indie, double A games and *checks notes* free to play Sudoku titles and MMOs - the division of one incomprehensible jumble into tabletop (Asmodee), Triple A (Middle-earth Enterprises) and “indie” (Coffee Stain) businesses clarifies what’s on offer considerably. Losing the Embracer name is both commercially and reputationally sensible.
It also likely spells the beginning of the end for Wingefors at the top of this business. In the press release announcing the restructure, the company stated in its rationale for change that the previous model for the business did not “create optimal conditions for value creation for Embracer Group’s shareholders and other stakeholders.” The statement and restructure is, essentially, an outright repudiation of the governing philosophy behind the business - making it hard to see a role for him in the company in the future.
For now, the plan appears to have approval of the markets. The company’s share price rose significantly upon the news of the restructure and the revelation that Asmodee Group - the most solid part of the business - has been lumbered with the best part of a billion dollars of Embracer debt to help it out of a hole.
But the short term good news won’t help Embracer’s long term reputation. It will struggle to ever be seen as a company that did little more than chew up a vast quantity of the global games business before spitting it back out when things went south: cementing itself as a cautionary tale worthy of the industry annals in the process.
News in brief
Fallout fallout continues: The success of the Fallout TV show has seen a million people log on to play Fallout 76 in a single day, according to figures released by Bethesda. The wider series has also benefitted too, with Bethesda recording a combined 5 million players across all Fallout games on that self-same day.
PEGI Ts & Cs: PEGI has beefed up its Code of Conduct regarding paid random items (read: loot boxes) and online communities. Developers who fail to follow the new rules - which include providing consumers with much clearer information about how paid random items function in games and stricter policies on forbidding and reporting illegal online content - risk a range of sanctions, including significantly tougher fines.
EGXit plan?: EGX and MCM Comic Con are taking place together for the first time ever in October. Is it a natural way to combine two overlapping fanbases in one place to create one great event? Or is it a convenient way for the EGX brand to be slowly sent to the farm where all of our beloved family pets went to? I think you know which one I think it is.
Barnjo-Kazooie: Rare has unveiled its new state of the art game development studio, Barn X, which was unveiled in time for Earth Day 2024. As well as being powered by solar panels and using condensate water to flush the toilets, the building is also Xbox’s first mass timber building - let’s hope it’s not too shivery for the Sea of Thieves development team.
Take-Tattoo: In a banner week for terrible video games puns, Take-Two has won a lawsuit in a court in Ohio against a tattoo artist who claimed that a reproduction of a tat on basketball player LeBron James in NBA 2K violated his copyright. The jury determined that Take-Two had an implied license to include the body art through its deal to recreate player likenesses struck with the NBA and its player Union.
A message from Into Games: Do you have a game that could help raise funds to improve social mobility in the UK games sector? Into Games is launching a games bundle to help support our 2024 Gameplan to create a more equitable pathway into the industry. If you have a title we can include, please get in touch to help ensure the sector is accessible for diverse talent for years to come
On the move
Craig Fletcher has popped up as the COO at Gameye…Amie Wolken is the new CEO at Dinosaur Polo Club…James Law has been appointed as PR Director at Raptor PR…Ann Hurley is now the General Manager at Team 17…And Embracer’s reshuffle means a load of leadership changes all over the place, with Anton Wesbaugh and Phil Rogers most noticeably taking on new roles within Coffee Stain & Friends and Middle-earth Enterprises & Friends respectively…
Jobs, jobs, jobs
King is hiring for a Senior Producer to work on long running mobile hit Candy Crush Saga…Screen Australia is looking for a Games Investment Analyst in Sydney or Melbourne...Big Games Machine has an Account Executive role going for someone climbing the PR ladder…Sports Interactive is recruiting a Licensing Artist to make sure its football simulation is pristinely accurate…And EdTech/games business Brainspark Games has an ad out for a Technical Lead if you fancy it…
Events and conferences
Dubai Game Expo, Dubai - 1st May
Digital Dragons, Krakow - 19th-21st May
Nordic Game, Malmo - 21st-24th May
Games of the week
Tales of Kenzera: Zau - New Metroidvania title from Surgent Studios, published by EA Originals, is out now.
Fallout 4 - Next gen upgrade of 2015 RPG rolls out on PS5 and Xbox Series X|S to capitalise perfectly on the TV show’s popularity.
Eiyuden Chronicle - New JRPG with 100 characters with “vivid” voice acting releases to further stretch my limited understanding and appreciation of the genre.
Before you go…
A League of Legends player has been suspended for two matches and fined $6,000 after engaging in unbecoming behaviour on a live stream.
Video Games Chronicle reports that Le ‘Leyan’ Jue was spotted frolicking with a large teddy bear on social media channel Bilibili, with Jue later claiming that he was just “hugging it and rocking it a bit.”
Truly traumatic stuff all round.