'Shareholder Greed' And How Publicly Traded Companies Actually Work

Hello. Last time I talked a little bit about live service games and why they are so popular, why everybody wants them. And as part of that, I talked a little bit about publicly traded companies and how they kind of they use these live service games as a backbone to make their decisions and to deal with what is a very volatile, risky industry. Um and I saw some comments that made me think, I guess I don't really I I I shouldn't assume that everybody out there knows even what a publicly traded company is, how it functions, why it makes the decisions it does. And I talked about the word greedy and how I don't think it's super useful to add a human emotion component to this because it kind of it lets you say, "Oh, if only non-greedy executives were in charge of some of these companies. If only there were non-greedy people around, um things would be better." And I don't think that's true. We're talking about systems here that are created by people and maybe greedy people, sure, but they're

created in ways that incentivize certain behaviors that I think a lot of people would consider greedy, but calling the systems themselves greedy is kind of defeats the purpose. It makes it seem like if you were to replace, uh I don't know, the CEO of EA with someone who's not greedy, then you would get different results, which is not the case. Anyone who is running one of these companies is obligated to um what's called a fiduciary duty, meaning they are responsible to make as much money as possible for their company and for their shareholders. So, let's unpack all of that. Let's talk a little bit about what a publicly traded company is, how it fits into the world of gaming, and what that actually means. Um so, there are essentially two kinds of companies, uh at least here in the US, which is the the economic system that I'm most familiar with. Um publicly traded companies and privately owned companies. A privately owned company is your friend's dad's business, uh that, I don't know, manufactures rubber. It's um the company started by a handful of

people to do whatever, whether it's to make video games or make cars or, I don't know, publish books or anything else you want to do. If it is generally a little bit smaller than a publicly traded company and what is most important is that it is owned by um just a few people. It has It might It might have It might It um It might actually be big. A privately owned company can still be big. It might even have a board of directors. So, it might be governed in of the corporate governance of a traditional publicly traded company, but what's most important is that it is owned by a few people and not a public market. A private owned com- privately owned company, you cannot just go on your E*TRADE account and buy shares of it. It is not available on the markets. It cannot be traded. It is privately held. Um there are some companies out there in some kind of weird markets out there that actually let you take stakes in privately owned companies, but that's a whole 'nother story. Um for the most part, a privately owned company cannot be traded. It is privately held. If you own the majority of a private company or

if you are if you are like the generally the founders of a privately owned company are going to be the majority owners. Um they might sell off stakes as they try to raise investment. What's very uh common is if you are starting a company and you expect it to be big, um maybe you're in Silicon Valley and you're doing some AI gold rush, you will sell a chunk of your company to investors and in exchange they will give you a bunch of money that is kind of your your your seed capital, your money that you can use to grow the company and get the company going and those investors will expect a return. In exchange, they will expect you to go public or to sell the company and then they will get uh a bunch of money in return. If you've ever seen Shark Tank, you can see this in action where you have these privately owned companies coming and trying to pitch the sharks to invest in exchange for a percent of their company, their equity. Um by the way, this might seem basic to some of you out there, but I think a lot of people just kind of um don't know this stuff and it could be helpful to talk about the basics, especially as it applies to the video game world because you might see a lot of people out there just complaining about the way these

companies work and I I think it's very useful to understand some of this stuff. Um, so apologies if this is too basic for you out there. Um, private companies in the video game world specifically have some advantages. They can take more risks. They're owned by just a few people and those people receive the the majority of benefits and those people can distribute those benefits however they want. So if you are a privately owned company and you're just two or three owners and you decide, "Hey, we're going to grow our company to be 10 people." You can decide, "Hey, we're going to give everybody a share of the profits. We're going to make sure everybody at our company enjoys the success." Like I said before there might be a board of directors, but generally the founders have control and the board is kind of it could be kind of ceremonial or it could exist to just kind of try to keep the founders in check, but if you own more than 50% of one of these privately owned companies, you are in charge. You you can kind of do things how you want as long as I guess there there are exceptions to

that. If you are another if you're a minority stakeholder in one of these companies, you can you can ruffle some feathers and make some noise, but still founders are generally in charge, majority shareholders are generally in charge. Um, and so in the games world that can lead to a lot of cool stuff. I wrote an article a few years ago about how I'll link this in the show notes, it's on Bloomberg. I'll throw a gift link in the show notes see in the the YouTube description so you can read it for free. Baldur's Gate 3, despite being this massive AAA game with this huge budget and incredible production values, was actually made by a privately owned company called Larian and I wrote this article about how that really was the secret to its success. I've talked to you the CEO of Larian, Sven Vincke, um, a lot about this over the years. Um, publicly owned companies would not be able to make some of the frankly bonkers decisions that Larian has made such as putting a game in early access for three years and letting people just play it and and test it out and potentially find all sorts of bugs along the way or making a game where there are so many

decisions that most players will never actually see all of the content and some of the content that you've created that you put money into will only be seen by 0.0001% of players. These are the decisions, the types of decisions you can only really get away with if you are a private company and you are not feeling the same kinds of pressures to to to kind of check check the boxes and and hit the same kind of expectations, hit the same criteria that everybody else is. So those are the advantages of being a private privately held company. So why go public? Well, there are a few reasons. One is that doing an IPO, going initial public offering and going public and starting to sell shares of your company on the market can be a good way to inject a lot of capital, a lot of money into your company. If you are trying to grow and that is ultimately the one of the the main goal of a lot of these companies, most of these companies is to grow. We'll talk about that in a second. But if you are trying to grow, you're trying to, I don't know, make

bigger games, you're trying to make more games, you're trying to expand your team so you can make higher fidelity graphics, um, then you need money. You need money to support those that growth. And so you might choose to go public in order to raise a bunch of money by selling shares of your stock on the open market and as a result you will you will get a lot of capital that you can then spend to continue growing your company. It's kind of seen as a natural next step for a lot of companies once they hit a certain threshold of growth, once they hit hit a certain number of people, a certain number amount of EBITDA, which is essentially the it's earnings earnings before interest taxes and debt, which is essentially the the Wall Street code for profit, profitability, let's call it. So, at that point you might go public. You might also go public because you want to make a bunch of money yourself. And if you are a if you are the owner of a company, if you have started a company and it has grown and you own a bunch of shares in it, those shares are only theoretical

value until you either sell the company to someone else who will pay you money for those shares or you put the money in the the company on the public market, in which case those shares suddenly become worth a lot of money. You might have seen headlines recently about how Elon Musk has become the world's first trillionaire. That is because all of the shares he owned in SpaceX turned into real money when he took SpaceX public the other day. So, those are the advantages of being public. And in the games industry where a lot of companies saw competing as kind of an arms race for graphical fidelity and for outspending one another, going public was a necessity or at least continuing to grow on the public market was a necessity. A lot of these game companies like Ubisoft and EA and Activision and Take-Two had been public for a long time. And so, what happens is you can just kind of keep outspending your way to success by being public. You have access to I mean nearly unlimited capital. It's not not quite unlimited, but like as a publicly traded company

you can always do things, you can always raise capital in ways that you can't necessarily do if you are a privately owned company company. Selling a bunch of shares etc. And so, if you are participating in this video games arms race, which I've talked about in previous videos, where we've seen how games have gone from costing $20 to 200, 300, 400 million dollars, you have to be public to compete with that. And you can just kind of see you can brute force your way to success, outspend your way to success, which used to be more of a viable tool than it is today. These days we are seeing a lot of these big budget games just die on arrival in a way that we had not seen in the past as a result of market forces that I've I've discussed before, but essentially, um if you are a quote-unquote AAA, if you are a big budget game, it used to be that you could just position yourself in Walmart and just by default, you would get a bunch of people to buy your game. Nowadays, that is no longer possible. The field is more democratic. There are a lot more options for people. Uh you have more cases like Concord, um which

of course, I'm sure all of you out there have heard of, but essentially is Sony having spent a bunch of money on a game and sent it out and it had so few players that they had to pull it from stores almost right away, which did not really happen 10 or 15 years ago, unless a game was so buggy and busted that people couldn't actually play it. But most of the time that did not happen. So, what happens when you go public? You both go public and suddenly your company can be traded on the market. Um there are all sorts of different kinds of markets that you can be trading on. Um uh and uh once your your company is uh available for sale on the market, anyone can buy or sell shares in it. Um but what happens is that the majority of shareholders in these publicly traded companies wind up being institutions, institutional investors they're called. Um and I pulled up here. Let me pull up um some of the top institutional holders. So, uh a good way to think of this is that like when you have a publicly traded company, the bulk of its shares are going to these other kind of

publicly traded companies, usually banks or equity investment firms, hedge funds, etc. Um so like if you pull up the stock for Take-Two, um you can see it's this is all public. You can see its top institutional holders and they are um a few companies, BlackRock, State Street Corporation, Vanguard, JP Morgan Chase, um uh Morgan Stanley, uh Saudi, that's a whole 'nother story that maybe we can talk about down the road. Um but the Saudi Arabia government has its own what's called a sovereign wealth fund that it has used to buy up all sorts of game companies and buy stakes in all sorts and pretty much every game company. Um and uh these companies, these institutional investors, are holding money and investing it from all sorts of different people. A lot of it is their own, a lot of it is from other institutions. There's kind of this like or weird ouroboros where everybody is investing in one another and it's all uh what someone might consider a house of cards because everybody is propping one another up and we've seen kind of the the results of that with previous financial crises such as 2008's uh uh

big crises with Lehman Brothers and so on and so forth. But a lot of it is also retail investors. So when you talk about shareholders, um you might look at something like BlackRock which owns, I don't know, call it 10% of Take-Two and a large chunk of BlackRock's holdings are pensions and retirement funds and people's just kind of like, I don't know, brokerage accounts with E*TRADE or Vanguard or whatever. I mean, Vanguard is its own its own holdings in here. Um and so uh I believe, let me pull this up. Uh according to um a Gallup survey, 58% of US adults are invested in the stock market in some way or another. So that might be you. When you are posting online about greedy shareholders, if you have a 401k, um if you have an account with Vanguard or JP Morgan, you might be one of those greedy shareholders because it turns out that you're invested in Take-Two through some sort of ETF which is kind of a collection of stocks through the S&P or even through just buying Take-Two on your own. Some people just go on one of these accounts and decide to to buy

stocks on their own, which by the way, I would not recommend. Um my my I am not a financial advisor, but my advice would be uh to keep your stocks invested in broad portfolios such as the S&P, such as ETFs, such as any sort of um kind of account that just has you riding the entire market rather than individual stocks. But regardless, um shareholders could be anybody. Um so kind of saying, "Oh, these guys are are obligated to please greedy shareholders is kind of kind of a misleading statement. Now, what they are doing and what a lot of these boards and CEOs and C-suite executives are doing all the time is talking to people on Wall Street, which are these hedge fund investors and the people who are actually making decisions of how much to invest in these companies and how much do not. Um, they're people who are making daily trades and buying and selling on the stock market and impacting the the price of the stock market. Those are people who maybe look at and you say, "Ah, those freaking greedy investors and traders or whatever." Um, but they have their own kind of incentives and their own incentive

structures and a lot of what they're doing ultimately is on behalf of retail investors as well. Um, now there are other I think the the the kind of the core problem with this whole system and really what a lot of people are getting at when they think about greed and they think about wealth concentration is that the majority of the stock market is owned by a very small group of people. I believe the stat is that 90% of the stock market is owned by 10% of people. So, while you, your average investor who has a 401K that maybe if you're lucky has a couple hundred thousand dollars in it, um, depending where you are in life, of course, but if you if you out there have have some sort of investment that is a very very tiny tiny slice of the pie compared to what uh, the CEO of Take-Two has, which he's getting the amount of stock that he's getting is in the tens of millions of dollars per year. So, we're talking about kind of proportions here. That said, whether you are a tiny investor or a massive investor, Take-Two stock growing

benefits both of you. It just benefits the top a lot more than it benefits the bottom. And that fundamentally, I mean, if you want to talk about wealth disparity and problems in the US economy, that kind of that divide and how much it's grown over the few the last few decades, that might be what you want to identify rather than than just kind of saying greedy shareholders, which is kind of a meaningless term. Um, one more thing I'll say is that when you were part of a publicly traded company, when you were running a publicly traded company, your North Star is growth, right? Because if if I am an investor and I have money parked in the stock market, um, I am doing that rather than just keeping it in a in a bank or a government bond or something because I expect it to grow. I expect to see big returns every year. I'm hoping for 7, 8, 10% returns on that investment every single year. And so growth is the North Star. Growth is what these guys want constantly and what they're looking at. Um, and so the the kind of the goal of these

publicly traded companies is to watch their numbers go up every month every quarter, every year. They want operating income, profit to go up. They want revenue to go up. They want their Ideally, they want their head count to go up, although also often times they're also rewarded for cutting staff because Wall Street likes to see costs get cut as a result of that. But generally they want growth. They want their stock to grow. Now, what's really tricky and what's really fascinating to me, bonkers to me really, is that the performance of a stock is kind of is is tangentially linked and sometimes directly linked but often not directly linked to the performance of a company itself. When I started at Bloomberg about six years ago, I was like, "Okay, cool. I'm working at this financial business news outlet. I will I will learn more about how the stock market works." And I think now, six years later, I feel like I know even less about how the stock market works and the whims and the magic that it adheres to.

So the way that that this kind of the ups and downs work are so mysterious and so nonsensical to me and to a lot of people that it's like I mean, one of the reasons you don't want to day trade is because this is all just kind of nonsense. You might see a stock move for just the most inexplicable reasons and it might just move by complete [snorts] irrationality. What's that quote? There's this this uh fantastic uh uh Wall Street quote about how like the market I think this is Warren Buffett is it the market can remain irrational longer than you can stay solvent. Essentially saying that markets can be irrational for all sorts of reasons. But essentially uh all the kind of the fundamental basis for stock movement is that every quarter every 3 months cuz these companies operate based on fiscal quarters. So every quarter um a company will report earnings which means that it will put out a whole set of documents that are like this is how much we've made in revenue. This is how much we made in profit. This is how much we've uh had to spend in costs and um

this is what we're projecting for future quarters and for future fiscal years. And Wall Street will look at that and compare it to their own analyst invest uh estimates and say hey this is beating estimates or hey this is missing estimates or hey this is on par with estimates. And the stock will move accordingly and sometimes again it will just move completely irrationally. Sometimes um a company like Take-Two is a good example. They might say hey we missed estimates but you know what GTA 6 is still on track and that's going to be the biggest game of the year and as a result maybe the stock will go up. Or they'll say hey we beat estimates but actually we had to delay GTA 6 and so the stock will go down. And so again this is all just kind of arcane wizardry that is not really related to real life which is why if you are choosing to invest I I implore you to invest in broad ETFs and um S&P funds that are just tied to the overall performance of the market which has broadly I mean over the last uh I don't know 100 years or so the the overall market has broadly gone

up whereas individual stocks have gone in all sorts of directions depending on how they have done. One more thing I'll say real quick is that I think that um that that uh kind of another model to all of this is employee ownership, which is something that I've really been keeping an eye on in recent years in the games world. Um, is this idea of a company not just being maybe probably being privately held, but not just being owned um, in majority by its founders, but really everybody in the company gets a stake in it. Um, and I've long wondered why uh, more of capitalism doesn't just embrace that notion where everybody should have a stake in the company cuz I would think that like if every single employee in your company had a stake in seeing it succeed, then they would work harder, but that's besides the point. And that is to be fair, that is why a lot of um, big companies offer stock incentives as part of their compensation packages is to say, "Hey, well, if you do well, the company does well, then then you succeed." Um, but at these big companies, I mean, an individual an

individual employee's performance is not going to impact the stock in any way. So, that's again kind of just gambling. Um, but yeah, but employee ownership and just kind of co-ops and that model is also really interesting and I think um, it is is something worth thinking about and examining. I'm very curious to see how um, that works in the games industry, how much we're going to see it, how often we're going to see it. Um, I believe there are a couple of examples out there, one of which has since folded. Um, Motion Twin, the company behind Dead Cells, I believe is a worker-owned co-op um, and they seem to be doing pretty well. Um, something I'm keeping an eye on. But, in general, I just think it's worth understanding some of this stuff and hopefully hopefully you out there have uh, learned a couple of things from from this explanation uh, because when you look at publicly traded companies and and wonder how they work and why they operate in this way, um, this is this is why. Anyway, see you all next time.