Looks like Mattrick brought his well-tread "why retrain when you can swap out people" practices with him from EA.
> On November 9, 2009, EA announced its acquisition of social casual games developer Playfish for US$275 million. On the same day, the company announced layoffs of 1500 employees, representing 17% of its workforce, across a number of studios including EA Tiburon, Visceral Games, Mythic and EA Black Box.
I was at Tiburon when that happened. Not a fun day. :(
Its not that weird. They had 200M in revenue last quarter[1] with about 2000 employees. That is about $100K/employee, since employees probably cost more than that at the median, its not really a sustainable strategy. Swap out employees who are making more $/employee to boost the average and maybe you have a going concern.
Interesting, so its $100K in revenue per employee per quarter, that is annualized out to $400K/employee/quarter.
Note that it isn't that people are being paid $100K per quarter, it is that the business generates $100K in revenue per quarter per employee. When you manage a business one generally has a model, generally that model starts with revenue - cost of goods or "gross margin", in an info business like this I tend to model the Operational expense of "operations" (the folks who run the server, the cost of IP transit service, co-location fees, etc) as the "cost of goods" (basically the amount of money you're spending to make the product available for the customer).
So you start with that Gross Margin and your business model is the formulae you use to "spend" it. In old school tech companies you'll spend x% of your gross margin on "R&D", y% on sales, z% on customer acquisition etc. And at the end of the trough is your "net profit" which some folks report as free cash flow. So lets say Zynga spends 10% of their gross margin on R&D, then the money available for R&D would be $100K * GM * R&D margin. To work an example lets say Zynga's margins are 80%, 100K * .8 * .1 is $8k/quarter available for our R&D employee during the quarter. That is not even $3k/month or $36K/year loaded cost (meaning their salary, benefits and office space).
That is why it is a useful sanity check to see what the revenue per employee is. That helps you understand how healthy (or unhealthy) the business is. In comparison Apple has 80,000 employees and a quarterly revenue of 57B for a revenue per employee of 720K (about 7x Zynga).
I know boring stuff but sometimes it helps when trying to figure out if you're making progress or not.
Its not really a fairness question, its just math. Given revenue x, gross margin g, and employees y determine the "quality" of the business. It also can give insights into what might make the business more sustainable.
Yes, but on a $100 Facebook tranaction, Zynga nets probably $95 or so after fees. Apple may net $2000 on an iMac, but if they're immediatly shipping $1500 off to Taiwan to play supplers, that needed to factor in.
Ok, I see where you are coming from, if you are defining "fair" as similar they are not similar. Its a reasoning tool not a comparison tool. But the question you pose is a good one to think about.
So let's start with Zynga, and take for our example that they "net" $95 on a $100 Facebook transaction. How often does the customer do that? Once a month? Twice? every day? So every 24 hrs you clock out a chunk of cash to power servers, cooling, operators, maybe a security guard etc. So your "factory" is this data center with a bunch of machines in it. If you turn off the data center, money stops coming in. So if you model out the transactions that data center did in a month, you have the cost of running the data center, and you have the money it generated. You take the difference and that is the money that you got to keep and that is your gross margin. So customer pays $100 facebook transaction, $5 goes to Facebook (leaving Zynga with $95) and if they happen once a month and the cost of keeping the data center up and running for a month per transaction is $55, then Zynga gets to "keep" $40 of that $100. Their gross margin is 40%, if the cost to keep that data center up for a month per transaction is only $15, they keep $80 and their gross margin is 80%.)
Now lets look at the Apple case, Apple has a factory in China making iMacs. It takes a certain amount of time, and labor, and parts to make the iMac. When someone buys an iMac the money first is used to pay off the parts suppliers and the labor and the lease on the floor space and what other costs it took to make. And that what is left over they keep as gross margin. So if they sell it for $2000, spend $1000 on parts, and $100 worth of factory time to make it, they keep $900 and have a 40% gross margin)
So at a very high level, you've got employees of Zynga in a "studio" which design a game, draw the assets, and plan the flow, and you've got a data center "factory" which ships that game to customers. None of the customers pay for the game studio directly, instead they pay for access to the game and in game tokens, and that money, once it covers the cost of the data center goes toward paying their salary and benefits.
In Apple's case you have a bunch of engineers who design a cool laptop, and an OS to run on it, and design its shape and asthetics, they are not paid directly by customers, instead they transfer that design to the factory which manufactures them and ships them to customers. The revenue from that first pays the suppliers and factory and then the salaries and costs of the design staff.
In this way the information businesses are "similar" to the goods businesses. They differ however in their ability to respond to demand. A data center can go from idle to full utilization in milliseconds, it can take weeks to have a factory go from idle for its maximum production capacity.
But in both cases, the work output of all the employees, whether they are soldering boards, being an on call sysadmin, writing an OS, or drawing attractive cartoon characters, is financed by the amount of revenue that work generates for the company.
That's $100k revenue per employee in Q3 but employee expense is much lower than that[1]. Probably a median annual salary+bonuses of $100k + 15% in taxes & benefits, we're still looking at maybe $30k/employee/quarter.
You're severely overestimating... unless your expectations are way out of whack compared to mine. At my company, which employees about 48,000 people worldwide and about 14,000 in the US, the burden rates are roughly as follows:
US: 30%
Brazil: 98%
Mexico: 102%
Most of western Europe: 30-50%
China: 40%
India: 20%
Mexico & Brazil are far higher due in part to unionization and their respective CBAs, which guarantee such things as time-and-a-half pay for vacation, an extra month's pay as annual bonus (separate from any merit based bonus), and generous employer retirement/pension contributions. The US is really low because 1) group health insurance is actually fairly affordable, especially when a wellness program provides healthy lifestyle incentives, 2) we have been going about 3 years between salary increases for the past 7 years, and 3) equity grants and discretionary bonuses typically aren't funded below the manager level.
I think this is pretty typical of large enterprises, though generosity will depend on profitability and culture. Some obviously do a far better job of treating employees well than others.
So, I've never run my own company - but I have always been suspicious of this.
I was working as a consultant for small firms I have a salary of X - my billable rate was ~3X.
The company had shitty insurance of which I was paying a large % of my check each month to cover my end.
I absolutely refuse to believe it "costs" a small consulting company several hundred thousand dollars per year to employ a person making 100K per year.
Here's the math. I'm going to arbitrarily assign a typical intermediate Rubyist's salary for your X, to make it feel concrete for people.
Employee thinks: "I make $8,000 per month. My chargeout rate is $6,000 per week. What gives?"
Consultancy thinks:
Gross revenue of this employee is $18,000 per month, not $24,000. We only count on sustaining a 75% utilization rate. We can burst to higher numbers for short periods of time, but overhead, scheduling issues, breaks/vacation/etc, and productivity counsels us to shoot for 75%.
A salary of $8,000 per month costs us +/- $12,000 for direct costs of employment. This includes healthcare, our portion of payroll taxes, 401k contribution, and the usual perk suite.
We further incur overhead, which we estimate as approximately 20% of our gross revenue. This includes rent, capital expenses (laptops/etc), professional services (accountants/lawyers/etc), marketing and sales, the fully-loaded cost of non-billable employees like our office manager, recruiting fees, etc etc. Allocating this overhead on a dollar-per-dollar basis to the gross revenue you're producing, we come up with $3,600.
This means that our anticipated profit, pre-tax, on your services is approximately $2,400 per month. The economic justification for this is that it is a premium you essentially pay for insulating you from scheduling risk, non-paymen risk, market risk, and all the other forms of risk which we absorb on your behalf. [+]
If you would like to capture the risk premium for yourself, you have a simple option to do so: quit. Hang out your own shingle. Start charging $6k per week, or more, for your services. Many former consultants have done this, and many will in the future. It's probably how we got started, too. You may find after starting the firm that the math was very different from what you had anticipated. It probably happened to us, too.
[+] Weird thing about starting consultancies: the type of people who can successfully manage a consultancy take a pay cut when starting a multi-member consultancy, since it cuts into their billing efficiency. You can model an employed consultant at 75% efficiency, but principals rarely get above 50%, and in many cases they're totally unbilled (100% utilization on business management, rainmaking, etc). This results in employees #1 through #4ish actually being a net drain on the principals' income as compared to just solo-consulting. After roughly employee #5 it starts getting really, really lucrative again.
OK, so that's a great explanation made on some assumptions; let me give you some actual experience though which is what gives me my bias:
I worked for a company that was already established as a design consultancy... so all the above that you lay out was already calc'd in their overhead...
They went after a contract for a large project and they didn't have the expertise in house to land the project.
They poached me to be able to gain the contract. They made several million on this contract, which they would have been incapable of getting without me joining and actually doing the work.
They billed me out for exceedingly profitable work; I did 100% of the work, their overhead for all the shit you mention did not increase, and they piled more work onto my efforts which they billed for.
they promised me a multi-tens-of-thousands bonus based on all this work and met with me on five separate occasions to go over documented revenue/bonus projections and confirm this amount (this was with the CEO) -- then when it came time to pay; they paid me 8% of the promised, documented bonus. and made excuses that "they weren't being paid by the client" -- and later had a seperate manager (known as "the snake") come in and tell me "tough luck - the CEO's calcs were wrong"
So, While your story sounds all nice and whatever... I can guarantee that it is not true in all cases.
An easy estimate to use when making back of the envelope staffing decisions (with the hopes of having a viable company) is assume each employee costs about $250k/yr to keep employed. This is all the insurance, plus various other costs that are direct to the employee.
But, you also have to add in all the staff costs of various overhead employees that support the money making employees, all the cleaning staff, HR, receptionist + senior management.
But you do sound pretty talented from other posts in this thread. As someone who has run his own company in several different lifetimes, and as someone who, perhaps like you, doesn't like having a boss, I can't recommend it highly enough.
But sadly, the numbers as patrick and tqbf are saying are unfortunately true.
I've run a consultancy. They're not making anywhere near the money you likely imagine. There are several major sets of costs to consider.
One set is costs directly related to employing you. Benefits, employer paid taxes, equipment, insurance, office space, a fraction of your manager, and so on. These alone are hefty.
A second set is buffer to pay you when you aren't being utilized. A well-run consulting company might expect 80% utilization, so 20% of the time you're incurring salary plus all the above costs and they are receiving absolutely nothing for it. A more typical consultancy might have even lower utilization rates.
A third set is the costs of customer acquisition and account development. There are expensive staff who do a lot of expensive things solely to get the contracts signed in the first place. And if a consultancy stops attempting to grow, it's at grave risk that a few existing customers will leave for one reason or another, and they'll be left in a terrible spot.
A fourth is the cost of finding somebody like you in the first place. If I'm hiring a junior employee it might be something like $10k direct, plus the time associated with sourcing, vetting, and interviewing candidates. For a senior employee, it could be a lot more than that.
Put all of these factors together, and the profits simply aren't nearly as hefty as you'd imagine.
If you're somewhere in the west you must be at least within reach of 50%. How much overhead do you have? Are you including the office and its costs as well?
If the average person there makes 100k per QUARTER I can see how they'd be losing a lot of money. Either you mixed quarters and years, or I'm in the wrong type of business.
your estimation for employee cost is too much. 100k/quarter is more than double on what you will need to hire an employee/rent/coffee/massage/heathcare all package included.
It's a new radical management concept: you start replacing pieces of your failing company with other smaller but more successful companies. Start at the bottom, finish at the top. In two years after a series of lay-offs and acqui-hires the whole staff will be replaced finishing with CEO with a proper replacement hired from Rovio's board.
From what I've read, Zynga is not run as a monolithic company, but as a confederation of studios that do not necessarily share programming, design and product management talent, but share HR, legal, and administrative.
Thus when some project reaches end of life, it's time for the entire studio to go.
trimming fat while investing in innovation is not mutually exclusive, esp if you have a sizable cash cushion and a new CEO like zynga. on the surface, it seems unfair to compare this acquisition with omgpop since naturalmotion offers defensible IP and technology that can be used in helping zynga's games appear more lifelike, or like lucas technologies, help others make their creations, whether games or movies, appear more lifelike. more realistic animations and game play will become more common as mobile phones become more powerful, much as we saw with gaming consoles. this is a bold investment in the future of mobile (and potentially smart TV) entertainment.
It's the same idea behind Facebook trying to buy Snapchat. Facebook realizes another team is much more innovative & successful than them in attracting young users, so they try and spend money to acquire that talent and invest in that team's innovative ability (pay $3B now to realize >$3B revenue in the future).
Comparing Facebook to Zynga is like comparing an astronaut to a bed ridden granny. They may believe they have acquired something which is innovative and defensible - but the kind of morale and culture Zynga has will completely overpower anything they do. I will definitely be interested in seeing how many NaturalMotion employees stick around - I am assuming most of them got big payouts with 2 yr cliffs which is probably the only reason not to change.
Compare this to Facebook which has some of the best talent, culture and reputation of incrementally shipping out product.
zynga knows it has an innovation problem. one way to jumpstart r&d and innovation is by acquiring talented engineers with impressive technology. by all accounts, naturalmotion offers both of these. rendering graphics more lifelike is very much one way to differentiate and innovate with games, and arguably the more defensible option. game mechanics can be cloned in a matter of months, if not weeks. however, as ea demonstrated with the madden and fifa franchises, mesmerizing graphics and lifelike animation cannot. they can help produce a high barrier to entry while advancing zynga's agenda of developing uniquely entertaining games.
Because it's massively beneficial from a PR perspective to lay people off the same day you're doing something "positive."
Specifically here, it has certainly diverted a lot of attention that would otherwise be on a negative like laying people off into something that looks far more positive for the company.
Last time Zynga laid off a large % of their workforce, wasn't it during a huge conference or the same day Apple had made an announcement about new products or something? That's another great way to minimize attention toward something like this.
I don't see how this comes out as a positive for Zynga. They're basically saying, hey, we weren't able to leverage our existing staff's talent, maybe if we bring in new talent our pattern of failure to efficiently manage our intellectual capital will somehow fix itself.
If I worked at NaturalMotion I'd be polishing my resume right now.
Basically all of their previous staff was hired by chimps, so they had to fire them. Fire staff that is, not the chimps. The chimps ordered a new batch. Perfect moon logic.
> On November 9, 2009, EA announced its acquisition of social casual games developer Playfish for US$275 million. On the same day, the company announced layoffs of 1500 employees, representing 17% of its workforce, across a number of studios including EA Tiburon, Visceral Games, Mythic and EA Black Box.
I was at Tiburon when that happened. Not a fun day. :(