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Jester’s Trek: Burn Rate.

OK.  Let’s talk about those lay-offs.  I’m going to do this in two posts, one today and one tomorrow.  As I do when I write these kinds of posts sometimes, I’m going to write a post from the CCP perspective, and then a second one from the EVE player perspective.

This is the first.  So again, for the cheap seats: this post is written from the CCP perspective.  Come back tomorrow for the EVE player perspective.

Man… this post is going to get me yelled at.  And fair warning, it’s going to be long.  OK, here goes.  Let’s start with some background.

Back in June, when I wrote my Realities of EVE post, I delved into some of the financial issues surrounding a privately-held company answerable to investors.  But really, I didn’t take that post far enough, and I’m going to do that now.

When you own a privately-held company, you own it.  It’s essentially a piece of property, no different from your car.  There are people out there raging right now that someone should “fire Hilmar” or “replace Hilmar”, which is ridiculous.  It would be like me saying that you should be fired as the driver of your car because I don’t like how you drive it.  If you’re not doing something patently illegal, guess what: that ain’t gonna happen.  But maybe the bank owns your car, so to a certain extent, you’re answerable to the bank.

And that’s how privately-held companies work, generally: there are investors.  Here’s a hard truth: the only person to whom Hilmar is accountable is his investors.  Not you, as an EVE player.  You may be a customer, and sure, that’s important… but at the C-suite level(1), it’s a secondary consideration, not a primary one.  On a quarter-to-quarter basis, Hilmar has to do what his investors want, or he doesn’t have a company and how many customers he has doesn’t matter.  No matter how organized EVE players think you are, you’re not as organized as people giving Hilmar 12 million USD for two years.

CCP is a profitable company, and EVE is the source of that profit.  However, EVE does not produce enough of a profit to allow CCP to invest in new products.  Here’s something you know, but you don’t think about: video game development is freakin’ expensive.  That leaves CCP vulnerable to situations that could cause their single and only product… and therefore, their single and only source of income to fail.  And if that happens, 600 families all lose their livelihoods.  As a C-suite level manager, you are being irresponsible if you allow that to happen.  CCP had to expand into a new market to protect those families.  Relying on a single product is business suicide.

That’s why they needed investors, and a loan.  That 12 million USD was an investment in the projects that would allow CCP to have a second product, and a second source of income to support those 600 families.  The loan came with a caveat: it had to be paid off in two years.  This sets up a structure that in business is called your “burn rate”: how fast are you consuming the capital of a loan on your projects, relative to the amount of time before that loan has to be paid off?  In my post in June, I said:

…my first impression is that they’re burning through cash at a slightly faster rate than the 12 million USD two-year loan should allow them to, indicating this pattern is not sustainable even if they got an extension.

A closer examination of the financials in that June statement confirmed it: CCP had a burn rate of between 7 and 8.5 million USD per year.  They needed to be at 6: 12 million USD over two years.  Therefore, they were burning cash higher than the rate supportable by the loan.  Therefore, what they were doing was not sustainable unless that investment started returning a profit before the two years were over.

That, obviously, did not happen.  DUST isn’t out yet.  WoD isn’t out yet.  Therefore, they were going to be in trouble when that loan came due.  Instead of trying to develop a second product, they tried to develop a second and a third product at the same time.

That made what happened yesterday at CCP inevitable.  Hilmar had to show his investors that he was serious about making his business sustainable.  In the longer term, CCP could repay that loan.  But the ability to repay the loan isn’t what this was about.  This was about demonstrating that CCP had a sustainable business model that could fit within their burn rate and maintain liquidity.  DUST still isn’t out, which means that Hilmar needed to have that liquidity loan renewed by his investors.  And that meant that he had to show his investors that he was serious about fitting his business within the burn rate for the next two years.

That meant cutting costs, and the only significant costs CCP has are its work force.  And that’s why you have lay-offs.  They’re not easy and they’re not fun.  I am not a C-suite executive myself, but I’m close enough to that level that I have a lot of sympathy for execs put into this situation.  After yesterday was over, Hilmar tweeted that he’d had a hard day.  Pretty much everyone ignored him, but I did not.

Make no mistake: sometimes, surviving a lay-off is harder than being hit by one. And sometimes, firing hundreds of people is harder than losing a job yourself.

This, incidentally, is why people talking about pay cuts for C-suite executives also don’t get it.  Look, I get the impetus that makes people think this.  But when C-suite execs hear people say such things, they (correctly) dismiss them.  When you’re at that level, you have the responsibility for the well-being of hundreds or thousands of families, collectively making tens or hundreds of millions of dollars per year.  A few tens of thousands of dollars taken from a executive’s salary might be a nice symbolic gesture, but symbolic is all it is.  And such a gesture increases the stress on people who have to keep their eye on the well-being of the hundreds of families that didn’t lose their livelihoods.

So if you’re tempted to write such things, really: don’t waste your time.  You will find your other, valid opinions being dismissed if you introduce this thought among them.

Yeah, you’re probably mad at me.  I’m sorry.  Stay with me.  Because I’m really going to make you mad now.

So, here we are, in a situation where the investors demand a sustainable business model.  You have to cut costs.  Either your investors or you yourself set that number at 20%.  That’s a horribly high number, but it’s necessary: CCP has been burning cash at a non-sustainable rate.  They bit off more than they could chew, and that’s an undeniable management mistake.  But now it’s time to save the business.  By cutting 20%, you save the jobs of the other 80%.  Now, who do you cut?

Say you weigh 220 pounds.  You have to cut 20% of your body weight.  Where do you start?  I’ll even give you a freebie: say your ideal weight is 190.  That’s 30 pounds of fat you get for free.  Still, there’s 14 pounds to go.  Where are you going to cut?  Sure, you can cut things like hair, and that’s easy… but not particularly weighty.  Sooner or later, you’re going to have to start cutting important things… even vital things.

Here’s another horrible truth: when a business starts to cut, the jobs that are probably going to be safe are the ones that bring in money.  Bringing in money a) is what a business is about, and b) will allow the business to survive to bring some of those cut jobs back.  If I am a sorceror and I tell you that I’m going to magically remove 44 pounds from your 220 pound body, but you can have some of them magically back if you can run a mile to pick them up, is that going to change your decisions about what to cut?  I’ll bet it will.  You’re going to make sure you save legs and lungs and heart… and at least one arm.

But you might sacrifice the other arm… hoping to get it back.

Want to survive a lay-off yourself?  Make sure you’re in a job that brings money into the business.  It’s not a guarantee, but it’s a better position to be in than the alternative.

Given that, is it particularly surprising some of the cuts that we’re hearing about within CCP?  Community Managers and DBAs and even security people provide extremely valuable services, this is true.  I am not dismissing the losses of their jobs in the slightest.  Please do not think that I am.

But if you have to cut… if you must cut for the business to survive… these are better choices than game developers and artists.

Yes, even NeX artists.  NeX artists bring in money.

If you’re not completely disgusted with my take on this topic yet, come back tomorrow and I’ll try to make it up to you.  I’ll have more to say about this topic, this time from the EVE player’s perspective.  In particular, I’ll do my best to look at the loss of what looks like virtually the entire Community Management organization.

(1) “C-suite” refers to company executives that usually have a “C” at the front of their title: Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, et cetera.

Ripard Teg

About the Author: Playing EVE Online for more than four years, play under the main Ripard Teg. Currently afflicted with the much maligned “Bitter-Vet” disease, Ripard Teg travels through the New Eden landscape in search of a cure… and hopefuly a good adventure to share with his readers.

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