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The way I figure it, when value is being knowingly and unnecessarily destroyed, someone somewhere in the chain is being irrational. Given that EA is a public co

The way I figure it, when value is being knowingly and unnecessarily destroyed, someone somewhere in the chain is being irrational. Given that EA is a public company, the obvious candidate for that somewhere is Wall Street. Your analysis seems to confirm that. But the stock market is supposed to be hyper efficient nowadays such that it's practically impossible to outperform it even for the experts, let alone for random punters on the Internet. What's the resolution to this paradox? Not a rhetorical question; I'm actually curious.

tempestn 12y ago
Sounds like the people buying games from EA are the ones being irrational in that description.
blumkvist 12y ago
>But the stock market is supposed to be hyper efficient nowadays such that it's practically impossible to outperform it even for the experts That's not true at all. Maybe in commodities, or foreign exchange or indexing, where algos can trade solely based on prices and public information it is true. But definitely not in individual stock picking. Domain knowledge is king here.
- kasey_junk 12y ago
  I'm not an efficient market hypothesis proponent in the least, but nearly every study, simulation, etc does in fact show that it is nearly impossible to beat the market via stock picking. Also as an aside, commodities and foreign exchange are places where it is explicitly allowed to have non-public information...
  - blumkvist 12y ago
    The average retail investor does not have, nor seeks domain knowledge. He's 21-black type of guy. Of course indexing will beat him.
kasey_junk 12y ago
I know that Wall Street is the boogey man for the HN crowd but how in the world can Wall Street be the villain in this story? The Sims was only completed because EA was able to prop up the studio while it was underdevelopment. They were able to do that because A) they are good at selling software and B) they were a large public company. Since then the studio has had a couple of huge flops (Spore and SimCity online) as well as a few enjoyable but disappointing from a sales perspective releases. In an industry built on the blockbuster model, I'd say its surprising they've lasted this long. They have because they have been spending other peoples money. So if there was an inefficiency here, it was that the studio got too much leeway, not that it was shutdown too soon. There is no paradox, because you started with a completely flawed conjecture.
- marcosdumay 12y ago
  > how in the world can Wall Street be the villain in this story? Two replies up, you'll find your answer there, as you probably jumped over it.
  - kasey_junk 12y ago
    No, I read the whole thread. I'm just having trouble understanding how a studio having failed at a basic business reality of their market, and thus being shutdown, has Wall Street to blame. Wall Street, even as the completely generalized abstraction, doesn't have anything to do with this, other than a big video game publisher used some money generated there, to back a studio that has been unsuccessful at their job. If it had been a US governmental bailout or kickstarter that the financing came from, would not have changed that.
    - freehunter 12y ago
      The idea is that they were set up for failure by the relentless push to drive higher profit margins. This approach is incompatible with long-term growth, as there are only so many people who will fall victim to the idea of buying a worse game than last year's edition yet still buy more and more expansions. EA pushes for day one profits seemingly without concern as to profits over the lifetime of the product. As soon as the product is unprofitable, they shut it down. Again, this comes from the idea that they need to make their profits look better and better because their stockholders demand it, which is sometimes at odds with what the players are looking for. Do you think Maxis failed on its own, or is there the possibility that EA milked it dry and left it to die? If the latter, why would they do that? Not because it's good for the company long-term, but because it makes their bottom line look good just before annual profit reports are coming out. Think about it: SimCity was rushed out to meet a deadline of the end of EA's fiscal year, which happens on March 31st. SimCity was released March 7th, 2013. What's today's date?
thaumasiotes 12y ago
> The way I figure it, when value is being knowingly and unnecessarily destroyed, someone somewhere in the chain is being irrational. Well, the model I see people using to describe EA basically amounts to buying studios with good long-term revenue prospects (known brands that, if consistently executed at a slightly below-average level, should maintain decent sales because the fans know what they're getting every time), and deciding to extract all of that future revenue all at once, by hyping up the latest incarnation of the series to extreme degrees while not bothering to execute at all. More sales now, less work now, no sales later. If you want to stand by describing this as irrational, I wouldn't say the obvious candidate is EA shareholders. I'd say the obvious candidate is the studios who can't manage their brand well enough that it's worth more than the EA strip-mining approach. If you think that the long-term revenue stream has more "inherent worth", the studios are the ones squandering it. (postscript -- I'm pretty sure I accidentally downvoted you when selecting a quote from your comment. I wish I could undo that.)
p23 12y ago
The problem is the stock market is somewhat disconnected from reality. I need to elaborate this further because now it just seems to be some anti-capitalist snark (which I do not want it to be). The way stocks were supposed to work is that you buy a part of a company keep it and make money by getting a part of their profits every year (called dividend). Todays problem is that we want to make more money, faster (which is not "wrong" intrinsically as some people might think, but it does not work with the "traditional" stock model). The reason it does not work is that it may take some time for a company to be profitable and even then they may want to keep some of their profits to invest in research etc. which keeps dividends small (sometimes even 0). The new way one tries to make money is to buy a stock while hoping to be able to sell it to someone else for more money in the future (nothing wrong about that either). The real problem is that this price is based on supply and demand/perceived value which might differ significantly from the actual value (worth of the company's physical assets, paid dividends, ...) - it is easier to see these differences on more tangible things like luxury watches, art, etc., which are nowhere priced for their physical value (a frame and some paint - does not seem to be worth much ...) but they are there for stocks, too. Now to the "hyper efficient"-part: yes, that's true, the market is hyper efficient, as in it is not that easy to get money out, because that would mean that someone else leaves it on the table, but everything still happens in the "perceived value" point of view, in which you would have to compete, too, to make money with stocks. The dilemma in which CEOs find themselves is that not all actions that are good for the company itself are good for the perceived value/stock price, at least not when you are forced to do "short-term thinking" (the CEO keeping his job, the trader making money now).

tempestn 12y ago

Sounds like the people buying games from EA are the ones being irrational in that description.

blumkvist 12y ago

>But the stock market is supposed to be hyper efficient nowadays such that it's practically impossible to outperform it even for the experts That's not true at all. Maybe in commodities, or foreign exchange or indexing, where algos can trade solely based on prices and public information it is true. But definitely not in individual stock picking. Domain knowledge is king here.

kasey_junk 12y ago
I'm not an efficient market hypothesis proponent in the least, but nearly every study, simulation, etc does in fact show that it is nearly impossible to beat the market via stock picking. Also as an aside, commodities and foreign exchange are places where it is explicitly allowed to have non-public information...
- blumkvist 12y ago
  The average retail investor does not have, nor seeks domain knowledge. He's 21-black type of guy. Of course indexing will beat him.

kasey_junk 12y ago

I know that Wall Street is the boogey man for the HN crowd but how in the world can Wall Street be the villain in this story? The Sims was only completed because EA was able to prop up the studio while it was underdevelopment. They were able to do that because A) they are good at selling software and B) they were a large public company. Since then the studio has had a couple of huge flops (Spore and SimCity online) as well as a few enjoyable but disappointing from a sales perspective releases. In an industry built on the blockbuster model, I'd say its surprising they've lasted this long. They have because they have been spending other peoples money. So if there was an inefficiency here, it was that the studio got too much leeway, not that it was shutdown too soon. There is no paradox, because you started with a completely flawed conjecture.

marcosdumay 12y ago
> how in the world can Wall Street be the villain in this story? Two replies up, you'll find your answer there, as you probably jumped over it.
- kasey_junk 12y ago
  No, I read the whole thread. I'm just having trouble understanding how a studio having failed at a basic business reality of their market, and thus being shutdown, has Wall Street to blame. Wall Street, even as the completely generalized abstraction, doesn't have anything to do with this, other than a big video game publisher used some money generated there, to back a studio that has been unsuccessful at their job. If it had been a US governmental bailout or kickstarter that the financing came from, would not have changed that.
  - freehunter 12y ago
    The idea is that they were set up for failure by the relentless push to drive higher profit margins. This approach is incompatible with long-term growth, as there are only so many people who will fall victim to the idea of buying a worse game than last year's edition yet still buy more and more expansions. EA pushes for day one profits seemingly without concern as to profits over the lifetime of the product. As soon as the product is unprofitable, they shut it down. Again, this comes from the idea that they need to make their profits look better and better because their stockholders demand it, which is sometimes at odds with what the players are looking for. Do you think Maxis failed on its own, or is there the possibility that EA milked it dry and left it to die? If the latter, why would they do that? Not because it's good for the company long-term, but because it makes their bottom line look good just before annual profit reports are coming out. Think about it: SimCity was rushed out to meet a deadline of the end of EA's fiscal year, which happens on March 31st. SimCity was released March 7th, 2013. What's today's date?

thaumasiotes 12y ago

> The way I figure it, when value is being knowingly and unnecessarily destroyed, someone somewhere in the chain is being irrational. Well, the model I see people using to describe EA basically amounts to buying studios with good long-term revenue prospects (known brands that, if consistently executed at a slightly below-average level, should maintain decent sales because the fans know what they're getting every time), and deciding to extract all of that future revenue all at once, by hyping up the latest incarnation of the series to extreme degrees while not bothering to execute at all. More sales now, less work now, no sales later. If you want to stand by describing this as irrational, I wouldn't say the obvious candidate is EA shareholders. I'd say the obvious candidate is the studios who can't manage their brand well enough that it's worth more than the EA strip-mining approach. If you think that the long-term revenue stream has more "inherent worth", the studios are the ones squandering it. (postscript -- I'm pretty sure I accidentally downvoted you when selecting a quote from your comment. I wish I could undo that.)

p23 12y ago

The problem is the stock market is somewhat disconnected from reality. I need to elaborate this further because now it just seems to be some anti-capitalist snark (which I do not want it to be). The way stocks were supposed to work is that you buy a part of a company keep it and make money by getting a part of their profits every year (called dividend). Todays problem is that we want to make more money, faster (which is not "wrong" intrinsically as some people might think, but it does not work with the "traditional" stock model). The reason it does not work is that it may take some time for a company to be profitable and even then they may want to keep some of their profits to invest in research etc. which keeps dividends small (sometimes even 0). The new way one tries to make money is to buy a stock while hoping to be able to sell it to someone else for more money in the future (nothing wrong about that either). The real problem is that this price is based on supply and demand/perceived value which might differ significantly from the actual value (worth of the company's physical assets, paid dividends, ...) - it is easier to see these differences on more tangible things like luxury watches, art, etc., which are nowhere priced for their physical value (a frame and some paint - does not seem to be worth much ...) but they are there for stocks, too. Now to the "hyper efficient"-part: yes, that's true, the market is hyper efficient, as in it is not that easy to get money out, because that would mean that someone else leaves it on the table, but everything still happens in the "perceived value" point of view, in which you would have to compete, too, to make money with stocks. The dilemma in which CEOs find themselves is that not all actions that are good for the company itself are good for the perceived value/stock price, at least not when you are forced to do "short-term thinking" (the CEO keeping his job, the trader making money now).