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Pink slips in the Teflon-coated games biz

For an industry as Teflon-coated as the games biz, I’m sure hearing a lot about layoffs lately.

For an industry as Teflon-coated as the games biz, I’m sure hearing a lot about layoffs lately.

The pink-slip party started in June, when LucasArts reportedly laid off 73 (although the company wouldn’t confirm that number), then picked up again in August, with reductions at Midway, NCsoft and last week, Activision Blizzard.

To be sure, these aren’t General Motors-caliber numbers we’re dealing with: 90 from Midway, 21 from NCsoft and as many as 160 from Activision Blizzard. A dribble, not a deluge. But enough to give you pause if you’ve been following, as I have, the industry’s ability to sail unscathed through these turbulent economic seas.

Are these recent layoffs an indication of a larger problem? Or just companies doing a little housecleaning?

“This is not an industry issue, so far. This is a games-specific and company-specific issue,” says Ben Schacter, an analyst with UBS Securities. “In every industry, there are winners and losers. And right now, the losers are getting smaller, and the big guys are getting bigger.”

Speaking of big guys, Activision got even bigger when it merged with Vivendi in July. Vivendi’s stable of studios included Sierra, High Moon and Radical Entertainment,  but Blizzard — makers of the hugely popular “World of Warcraft” and “Diablo” games —  was the undisputed jewel in the crown. It was the Blizzard name Activision wanted most from the Vivendi deal – the one name it wanted alongside its own.

Post-merger, company CEO Mike Griffith released a statement that Activision Blizzard had conducted a thorough review of Vivendi Games’ brand portfolio and was “retaining those franchises and titles that are a strong fit with our long-term product strategy.”

So it came as little surprise when word hit the Web last week that Radical had announced cutbacks in both staff and title development. The company confirmed to the Vancouver Sun that about 100 would be let go, and two of the four titles in development would be jettisoned.

Also last week, about 60 employees at High Moon Studios received pink slips, according to a report by industry Web site Activision Blizzard did not respond to repeated requests for comments on the layoffs at either studio, and a call to High Moon’s Carlsbad, Calif., offices were met with a terse “I can’t disclose anything” from the young lady answering the phone. (I did find out, however, that they don’t have a marketing department.)

In the last fiscal quarter, Activision Blizzard made a profit of $59 million, driven largely by the success of “Guitar Hero: Aerosmith,” and “Guitar Hero: On Tour.”  But the company, which is enjoying phenomenal success, wants the gravy train to keep on chugging, says Michael Pachter, an analyst with Morgan Wedbush Securities.

“I think the risk of making a bad game is too great to justify pursuing some,” he says. “The economics of making these games means that something’s got to give, and the publishers don’t want their profits to give.”

Indeed, the price of making a triple-A game — one that’s got the latest tech, the best graphics and a beefy marketing budget — has skyrocketed in recent years. “Grand Theft Auto IV,” Rockstar’s latest hit game from the series, reportedly cost $100 million to make. (A virtual New York City and endless storylines ain’t cheap to build, it seems.) Of course, that investment paid off in spades: “GTA IV” sold 11 million units and grossed $500 million in its first week.

But what if you don’t have $100 million to invest in a game? What if you’re a small shop, and you can’t afford a 200-person development team outfitted with the latest hardware? What if your budget can’t sustain endless motion-capture sessions for more “authentic” animations?

It’s tougher to compete, says Simon Carless, publisher of Gamasutra. “The size of projects is making independent developers who create large games more of a risky proposition, especially if you’re only working on one game,” he says. “Indies are tending to get more nimble in order to survive.”

Tim Schafer, founder of San Francisco’s Double Fine studios, says one way to be nimble is to employ a small team. “With smaller budgets you get smaller teams, but a smaller team is more efficient. It can change directions faster, and there’s less waste,” he wrote in an e-mail. “You can hide an awful lot of slacking in $100 million.”

Some studios, of course, don’t survive. In recent months, several small developers have shut down. Stormfront Studios, best known for “The Lord of the Rings: The Two Towers,” closed its doors in March and “Full Auto” developer Pseudo Interactive followed suit in April.

Last month, Flagship Studios, founded by former Blizzard North execs in 2003, laid off about 100 employees, according to a source close to the company.

Although the game industry as a whole continues to enjoy record revenues — market researcher The NPD Group reports July numbers up 28 percent over last year — the industry is always under economic pressure, says Jason Della Rocca, executive director of the International Game Developers Association, a professional association for industry folks.

“I wouldn’t say that we’re ever having it easy and not worrying about cost control and risk,” he says. “That being said, the game industry traditionally has been very boom-and-bust proof.”

Good news for investors, perhaps, but not much of a consolation to the dejected former character artist sitting on the curb with a severance package. But Della Rocca says that hiring remains robust in the game industry, and that artists, programmers and animators who find themselves without jobs will likely have little trouble finding a new one.

“For every studio that trims, there’s a hundred studios hungry to hire talent. Generally what we’re seeing is that one studio trims a bunch of staff and those people quickly get snapped up and absorbed into the rest of the ecosystem."