Subnautica 2 Drama Explained in Simple Terms!

[music] This is a long diet tribe. I apologize, but it is kind of a complicated situation given the fact that there's huge two sides of this thing. So, Craftton is delaying Subnautica 2 ahead of a $250 million payout that was promised to the developers based upon performance, right? So the story fundamentally is that Craftton is postponing Subnotica 2 to 2026 for a lot of reason but one is that the co-founders Charlie Cleveland and Max McGuire along with the CEO Ted Gil were recently removed and replaced by Steve Paputsis of Striking Distance Studios. So the delay basically came right before they were potentially going to be able to earn a $250 million earnout in 2025. And so the allegations is that the postpone is a strategic move to basically eliminate the ability for them to pay this out. But Craftton is publicly claiming that the game is simply isn't ready and needs more polish. And then Unknown World's ousted

leadership is obviously insisting the game was ready and the staff had expected substantial bonuses. I guess to start this thing off, we have to understand the background here. So Crafted acquired Unknown Worlds after the success of the original Subnotica in 2021 for 500 million. Since then, they've only had one release, which was Moonbreaker, which was an absolute disaster of epic proportions. Like, it didn't do anything, right? So, to be clear, similar to what they did with Zingga, they put an impairment charge, a loss of 190 million in 2023 related to this acquisition. So, clearly, this acquisition has not gone well for them to date by any measure that I can see, right? But the absolutely critical part of this is the release of the sequel to their huge hit of Subnotica. And by the way, Subnotica was an absolutely amazing game, a game before its time, built by a small team. It took the world by storm and it is a very, very fun and great game. All right, so here's Craftton's argument. Craftton is saying they're delaying the game for quality. The content was missing in the game. The

leadership was not managing this process and they had other commitments and other things that they were doing. and they are claiming that they were basing it on project status, not the $250 million earnout for the executives. And Croftton is basically suggesting that they want to make sure that this game is ready and that they get a long-term success, not just like a oneshot like revenue hit, revenue bump in the year. Unknown worlds is basically saying the game was ready and argues that it was ready for early access. That they're accusing Craftton of basically delaying the game to avoid this $250 million playout. There's a breach of trust and they're they were unjustly dismissed by the company and now they are filing an legal action against the company
that is sealed. Yes.
What
the lawsuit is sealed which was interesting.
Oh really? Oh because there's a lot of information thrown around about this thing. That's why it's so complicated because it's just
Yeah. Yeah, I read up on it like before like the latest this morning and that was like oh I'm like oh that's kind of fascinating that you all are complaining

and but the lawsuit is sealed anyway continue on.
So okay so so here's my take on this right fundamentally right and and this is tough because obviously we don't know all the information but like there's two key questions that doesn't seem to be asked by anybody. I don't know why, but one question was asked. The second question was not asked. But the first question is, is the game ready for release? Right? Like that's actually a fundamental question. Is it ready for release? And by these leaked quote unquote documents that suggested what they anticipated for the early access launch to what they are planning on releasing for the early access launch, it is really relatively clear if you believe these documents that the title was not ready. Right? The title was not content complete to release. And I played this game enough to know that what they were releasing was not enough to keep players engaged and to create a service that would generate significant amounts of revenue for them going forward. Right? It's just 50% of the game was not ready for release based

upon what they originally assumed that they would do. So it I don't know. They seem to be offt target, right?
Yeah. These slides have been verified by Craftton that they are real from the milestone meeting. Just that's the latest,
right?
So these are legit slides that we're looking at.
I know. But it's so gross that these were leaked. Clearly they were leaked for a reason, right? they were. Anyway, so but I think the more important thing here that no one seems to be asking and I did read it on a Slack channel thing, but like given the performance of Moonbreaker, which would also be included in this calculation, like is there any way they would have gotten to the earnout bonus, right? Like if they're going to get a $250 million earnout bonus, they have to make more money than $250 million, right? And Moonreaker made nothing, right? So, can you tell me for certainty that like in the next like in the back half of this month, like the last three months of this year, that they would have been able to recoup the $250 million and above that in order to earn it? That's not how earnout works. Like they might

have had different triggers for the earnout. It could be production related. It could be review related. It's not necessarily how much they generate. Usually, it's earnout is some kind of a milestones that you achieve and then out of what you generate, you get a percentage. So above of 250 they would have gotten percentage from sales I think like that's typically I've seen
right but everyone keeps throwing this $250 million number out here like they were going to get a [ __ ] check
like it's guaranteed. Yeah.
Yeah. Well that that's how it works like the way I understand and the way I've seen earnouts being structured. So they already got the 500. So the founders I think got 90% of 500 or something like that and then the rest was left of 250 of the total earnout and there were milestones like one must have been the release of this game and then usually there's no
first of all that is dumb right like there was no way that anybody would ever structure a deal in which it's just based upon release it's
based upon performance. No.
Like, no. No. No. Like a

I've never seen an earnout structure in my life.
Are you being sarcastic?
Yes.
Oh,
I've never seen one, never signed one, never worked at a at a big publisher, and they would for sure not pay for reaching certain milestones.
But look, if you're a financially motivated company, a publicly traded company, you're not giving a $250 million check for releasing a game. You're getting it for performance on revenue. Like that. There's no way that doesn't even make sense. Okay. So I'm not going to comment more but let's say I have seen different and I you're coming from the right perspective of how or not structures should be but the way I'm telling you is often times there are other metrics that are tied to the earnout and then on top of that there's usually a revenue share that comes from so that component is like these are crazy contracts we're talking about 2021 contract it is absolutely ludicrous but I would assume that the release of this game would have triggered a big portion of the earnout. Yeah, it just seems like

half of their purchase price at 250 seems like a lot. And then the way that the 250 allocation works, 90% went to the three founders and then the last
10% goes to the company to the employees. The argument is that the three founders said that they were planning on distributing some of their earnout money to the team, but contractually that's not listed in anything that we've read. So that's a little bit of the disagreement as well that Craftton is saying that the founders didn't intend to distribute that. Whether that was going to happen or not and how that was going to happen, I think we don't know.
Just saying Chris, it could be it could be much crazier than you think. I see here the likely scenario is that the team was just not on track, right, to hit the earnout, right? And Moonbreaker like literally was like a big part of the calculus here and they just it was a disaster. It was just an absolute bomb. I don't think it generated more than

like three or four million dollars, right? So again, if you're talking about a $250 million earnout and they want to be whole and cash flow positive on this thing, they have to hit significant amounts of revenue on this game. And frankly, Subnautica, despite its success, did not do that much revenue. Like over its life, it certainly did, but certainly not initially. So anyway, it doesn't seem very likely that they were on track to earn the earnout. So what I think is that Craftton is delayed Subnotica so that they would be able to recoup as much money as possible from this acquisition that's gone sideways, right? And management said, "No [ __ ] way. We want a shot at our earnout." Or maybe, you're right, maybe part of the earnout at least. But realistically, I mean, this wasn't likely going to happen. And again, based upon performance to date, like it didn't make sense for Craftton to release something now, but it makes much more sense to release it later when it was actually ready for prime time and it could generate significance amounts of revenue and deliver on the promise of the game itself for that matter. Right? And so like the cynical part of me basically says that basically Crafting's claimed

that management kind of checked out and was working on other projects. It wasn't really focused on this game development and this is why it was delayed and why they didn't have any of the content that they promised, etc. that they weren't being leaders in the company. My my cynical side is basically saying, well, look, if they didn't believe they were going to hit this earnout, then maybe they did as creative people focus on other things, right? But the reality of it is I don't think they would have abandoned their child, right, of this game. I think they would want to get this thing done in an effective way. So, I think that's a little bit like cynical to think that they would have have done that, abandoned their baby type thing. On the flip side, like releasing a game like Subnotica with the level of content that they were suggesting just doesn't make sense like logically, right? Because the part of the engagement is the amount of, you know, the biomes and and all the content that they you need to get through like the Subnotica fans of this game would get through this content in like less than like 24 hours, you know. I was like that doesn't work for a game like this. So, I didn't know

that they actually closed the lawsuit, but um I I imagine we'll get more and more details as they go through discovery, but if they're trying to keep it on the hush hush, which I'm a little bit shocked given how much information was thrown out there. Anyway, that's all I got.
Yeah, really good breakdown. Thank you, Eric. For my point, just three things like I I think you're absolutely correct. I think, you know, even based on the reports, it's quite typical for founders to check out and I think they were doing other projects. I think they earned 500 million already and took 90% of that to the founders. So each of them was doing quite well uh probably traveling between Vegas and Honolulu [laughter] on the regular. I don't know. I'm just just throwing it out there. But you know any of us could imagine how their life would change if you go from grinding on this development studio to having 70 million in your bank account. There was interesting off-topic comment on LinkedIn from a person who used to work at Garina Corpdev. I couldn't find it. I tried to look at it, but he basically commented that um yeah, I

looked at this case and some sort of like we passed because of the founders or something like that. I'm paraphrasing, but I remember seeing that comment on maybe it was your LinkedIn was full of this news, but I remember seeing that it was weirdly open comment on it kind of like signing that there is an issue with the founders and that's why the Karina passed on it and I do believe that Craftton did pull the plug to avoid the earnouts and I think that the earnouts were milestone based in this case and that's why they pulled the plug. If they weren't, if it was about generating 250 mil, then I think there wouldn't be any kind of a rush of pulling the plug because this game that is not ready clearly wouldn't make that money. And yes, there would be bad PR just like with the mind's eye type of a thing, but that would have just, you know, killed the studio. So, in this case, if they knew that they would have to pay significant amount, then it they saved $250 million by essentially escalating this this case into a lawsuit.
I'm not going to let you go on that one. That doesn't make any sense. like, oh,

the milestone based earnouts.
These are smart people that know how to like negotiate terms. They're not giving away money on a release. Like, that's really that's just doesn't even make sense.
I'm not going to comment on that. What we could do is we could talk to the smart folks at ARM who deal with with sales and earnouts a lot or any of the VCs who see earnout sheets and they can comment if they have seen if you're a VC or an investment banker and you have seen earnouts where it's tied to release and production milestones. Holla at us DM. We will not tell who it is. We just say you're from reputable company or if we're wrong on this then also DM us. So, um, I'm not suggesting that there aren't payouts based upon
milestones. I'm not saying that. I'm saying that a $250 million payout,
yeah,
wholly is not based upon milestones. It is based upon
their purchase price. Yeah. I mean, that seems extreme.
So, in this case, it could be something like 50 mil is unlocked when they pass

pre-production, 50 mil is passed when they pass production, and then there could be like 100 mil when they reach. But there are elements that are tied to actually launching a game. In some companies that have live operations, it could be passing the test launch phases. So I've seen those with different companies. I
think we agree.
They are significant. They're like 30% of the earnout when you pass the milestone.
All right. So the one thing I wanted to mention is I have never seen a statement like this from a big company on their website going into this dirty laundry. I was absolutely shocked. Listen, I kind of applaud it. I applaud the transparency, but holy [ __ ] was it like, you know, get your popcorn out moment. The second thing I wanted to get Phil's perspective on really quick is early access means a lot more now than it did in 2021. When you early access a game, it is almost like a launch. And so, do you think, Phil, that had anything to do

with this? I think people just want more money for enzoy development crafting. [laughter] Yeah,
thank you for answering my question.
What a troll. What a troll.
I actually I actually did forget to mention that like I think they're feeling a bit burned too, right? Enzoya was a disaster. Kalisto Protocol was an absolute train wreck.
PUBG New State, how about that?
PUBG is [ __ ] delivering by the way. We haven't covered that. PUBG is doing a ton of crazy awesome [ __ ] right now. PUBG or PC PUBG.
The PC PUBG.
No, that's a Jacob. I Philip, that has nothing to do with this. This is all about
Did you just like mix up your son's name with Phil?
Yeah, I do that all the [laughter] time. Um,
we should call all these deals that they signed since the success of PUBG and just have not worked out, right? Particularly for the Western developers. Like, they're having their NetIs moment where they're just basically pulling back on all things, right? And so, you know, Kisto Protocol was a train wreck

of epic proportions in terms of money spent and dollars earned. And so, I think this is like actually part of that as well. I'm sure management is just not happy with these investments.