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Press X to Kill: an IP-competition conversation on Microsoft’s game studio closures (part 1)

Posted on    by CREATe Team
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Press X to Kill: an IP-competition conversation on Microsoft’s game studio closures (part 1)

By 4 June 2024June 21st, 2024No Comments

This is part 1 of a cross-disciplinary conversation about the recent, and controversial, mass closure of Microsoft-owned game development studios. The conversation shares perspectives from competition (Magali Eben and Dave Reader) and IP (Amy Thomas) lawyers, all of whom share a common interest in the creative economy. This is the latest addition to our CREATe project which encourages a multidisciplinary approach to studying developing legal issues in the games industry.

Context

It’s ‘Game Over’ for yet more studios in the game industry. Following a period of widespread acquisitions and mergers, including the much discussed Microsoft-Activision Blizzard merger, Microsoft has since announced the abrupt closure of four of its (previously independent) game development studios in early-May 2024. Whilst the commercial success of the games developed by these studios has been debatable, much attention has been paid to the closure of Tango Gameworks, developers of critically acclaimed Hi-Fi Rush. Microsoft’s ostensible reason for these closures (in a leaked email from Matt Booty, head of Xbox Game Studios) is based on a ‘reprioritization of titles and resources’ with a view to ‘prioritising high-impact titles and further investing in Bethesda’s portfolio of blockbuster games’. The full extent of staff redundancies caused by these closures is—as of yet—unknown.


Q (Magali and Dave): Gaming is an IP-intensive industry, building on much creative intellectual work (as well as borrowing or inspiring creative works in other industries such as TV or film). What does ownership of IP look like in the game industry? And what happens to IP rights when studios are acquired and again when they are closed?

A (Amy): IP is a good collective term for the bundle of different property rights in a game title, including copyrights, trade marks and patents. Importantly, due to the scale of game development and lengthy lead times, these IP rights may have been generated through the collaboration of hundreds of people, across multiple jurisdictions and time periods. On the face of it, this could lead to a tricky rights management situation – but as most games are completed by employees of the game studios developing a game, IP law has a pragmatic solution for this through the ‘work for hire doctrine’. This doctrine usually means any rights generated in the course of a developer’s employment automatically vest in the employer, who can then make decisions about how the resulting IP is distributed, sold, etc.

Likewise, in the case of a relationship between a (parent) game publisher and their subsidiary studios, we would expect that IP generated by these studios would flow upwards to their employer (Microsoft). So, whilst people have been concerned that the IP for these games has ‘disappeared’ when these studios have been closed, this is not the case – it’s been consolidated and moved elsewhere in Microsoft’s holdings. I would stress this is not necessarily a ‘good’ thing that the IP is still retrievable in theory – as the IP owners, it’s also Microsoft’s right to never work on any retained IP for e.g., sequels or unfinished projects, if it so chooses. This, to my mind, is the significance of closing these studios rather than selling them on to another competitor.

Q (Magali and Dave): It seems that closures and lay-offs have been sweeping the games industry, and yet the industry is very lucrative. Could you tell us a little about what has been happening more broadly?

A (Amy): It’s true that games are now a leading entertainment industry, and among the most profitable. I think it would also be fair to say that they are the most expensive and time consuming in terms of cost of development – the need for a sizable return on investment is very high.

But as games are experiential in nature it’s difficult to anticipate how they will perform in the market. This is true of all cultural goods – books, music, etc. – but games are especially risky for investment because they are increasingly relying on business models which anticipate returns in the long-term (online multiplayers, microtransactions and DLC) rather than at immediate release. In short, people have to want to play games, and for a long time and with other people, to make a return with these new models. With high costs and high risks, the commercial failure of a single game title can be enough to sink an entire studio. And indeed, this seems to be the case for at least two of Microsoft’s closed studios with hyped titles that ultimately failed to deliver a commercial success (namely Redfall and Prey).

Members of CREATe surveying the current state of the game industry. Img source.

More fundamentally, as games have become larger and more complex, lead (development) times are becoming difficult to sustainably accommodate (and indeed, this was implied in Booty’s reference to ‘shortening the release window’ between games in his leaked email). One thing we can learn from these closures is that there is a big difference between buying a game title at its completion (or close to it), and the resources needed to support a studio during lead time. I don’t think it would be controversial to say that it’s possible a saturation point has been reached in game development unless we have a significant change in investment and/or breakthroughs in new technologies.  If it’s a fact of life that a game of x size needs x amount of time to develop, then games of x size may not be feasible, sustainable or desirable in the face of the very real human cost of mass redundancies and ‘crunch‘ culture.

Q (Magali and Dave): Although it may surprise people who do not play many games to see how long it has really taken for the ‘Netflix’ model to enter the gaming industry, these closures seem to be taking place in the wider context of Microsoft and other companies’ investment in subscription and streaming models in gaming. What changes does this new model bring for IP and creative production in the gaming industry? 

A (Amy): Of all the game companies exploring new business models, Microsoft are certainly notable for heavy investment in their ‘Game Pass’, which is indeed touted as the ‘Netflix of gaming’. In the context of debates around the cost-per-unit of games, the Game Pass has a compelling offer of access to multiple game IP for a low cost monthly subscription. Microsoft’s acquisition of established franchises from e.g., Activision-Blizzard and Bethesda have been significant in beefing up the portfolio of IP they can offer in Game Pass.

However, the other promise of Game Pass – and one that shouldn’t be forgotten – was to also allow for diversity and discoverability of smaller titles that don’t necessarily have the same broad commercial appeal of these established franchises. Read: precisely the kind of IP that these (now closed) studios would have delivered. So, it’s not clear to me how smaller, more innovative independent studios can actually access and benefit from the Game Pass model whilst retaining their IP, and without the risks associated with being outright bought (and perhaps thereafter closed) by Microsoft (a technique previously known as embrace-extend-extinguish).

Developers of the critically acclaimed Hi-Fi Rush (Tango Gameworks) were among the closed studios. Img source.

What we can learn from these closures is that Game Pass must be more difficult and expensive to develop than we previously anticipated. It’s possible that, especially due to the logistics of game development times, not being able to offer a diverse portfolio of games at a reasonable rate of release is causing problems in retaining and attracting new customers.

Q (Magali and Dave): Have you seen much discussion of these or other closures in the gaming community? There are, I think, various types of gamers – the ‘consumers’ in this industry – with different preferences, but are there any discussions about the merits of prioritising high-impact titles over less popular, perhaps riskier games? Did these smaller studios provide a different type of gaming product or experience than the bigger studios?

A (Amy): The reference to Bethesda in Booty’s leaked email is telling – especially on the back of the success of the new Fallout TV series on Amazon Prime, which is itself an adaptation of their existing game franchise. I can see that this would be at the forefront of executive decisions about games to prioritise in terms of development resource given the forward-looking nature of game development (Fallout 76, the latest in the franchise, was released in 2018 – an eternity in gamer terms).

However, I think the claim that Microsoft are focussing on ‘high-impact’ titles is pretty misguided. As I note above, smaller titles – like the now defunct Hi-Fi Rush – were beloved by critics and audiences both – by Microsoft’s own admission, precisely the kind of “smaller game that attracts prestige and awards”. Instead, I think the more accurate take on this is that Microsoft wants ‘high return’ on IP that can be adapted into other mediums like film and TV, allowing for re-investment in established franchises to new audiences. This seems to me the inevitable result of an old problem Microsoft has always had in the game industry in fostering new IP internally. Sony and Nintendo, as their nearest competitors, have comparatively managed much better with their exclusivity models.

The risk is that the smaller, independent studios, who tend to be the innovators in the industry pushing riskier, genre defying IP, are not being prioritised or supported. This could ultimately be harmful for the diversity of game titles on offer in the market, especially if – as I assume the plan is in the long term – Microsoft will eventually licence out Game Pass at scale to other competitors.


We’ll be releasing part 2 of this blog next week – stay tuned!