CD Projekt Didn’t Have To Rush Cyberpunk To Meet Fiscal Demands, But Did Anyway

CD Projekt Group’s fiscal year ends in December.

Cyberpunk 2077 happened to be delayed three times then released in December.

Coincidence? Unfortunately, no.

Though it didn’t have to be this way, with a now historic launch debacle that began with complaints of rampant issues especially in PlayStation 4 and Xbox One versions then accelerated to various online stores and retailers offering full refunds plus, the cherry on top, PlayStation pulling it from its digital store in an unprecedented move within the games industry.

To understand why the company would have been fine, even benefited from, pushing out the launch of its new IP and latest flagship game past its fiscal year end, we have to look back at its general timeline and financial standing leading up to now. Plus, consider the reports brought forth by media like Bloomberg and others on difficult labor conditions and “crunch culture.”

Essentially: CD Projekt could have easily weathered a Cyberpunk 2077 release date in first quarter of 2021 financially, even if that coveted pre-order revenue smoothed out over time. The company boasted early on that pre-orders alone exceeded 8 million copies. The question becomes how many of those are being refunded or returned. And how many people will refuse to purchase it because of the company’s approach during a shaky launch.

My belief is that executives absolutely should have moved the date again to at least Q1, primarily to allow more time for developers to polish and ensure that previous generation versions were ready to go. The current debacle alone is proof that no flashy marketing push or early financial benefit is worth the dangerous publicity and loss of goodwill caused by a botched launch.

Until recently, Polish developer and publisher CD Projekt Red (the core games business of CD Projekt Group) was a one franchise studio with The Witcher fantasy games. The enormous success of 2015’s The Witcher 3: Wild Hunt and its subsequent support from the studio cemented it as one of the world’s preeminent action role-playing designers, and set the stage for exceedingly high expectations going into its next project.

In the time between then and present day, CD Projekt established itself as one of the largest and most financially successful publishers across all of Europe. It’s achieved at or above $100 million in sales each year since 2015, at times much more than that. At one point back in May, it even surpassed Ubisoft Entertainment as the region’s largest video game company by market valuation at over $9 billion in capitalization.

So, what happened?

The current debacle alone is proof that no flashy marketing push or early financial benefit is worth the dangerous publicity and loss of goodwill caused by a botched launch.

CD Projekt Red transitioned to a two-franchise studio as part of its mid-term strategy starting in 2016 when it kicked off pre-production on Cyberpunk 2077, a project that was actually announced a full generation ago way back in 2012. As its development continued and the company began to show the futuristic, first-person role-playing experience both privately and publicly, culminating with an appearance from Keanu Reeves, its legend grew to where it became one of the most anticipated games of the decade if not ever.

During this same time, the team continued support of the 28-million unit seller The Witcher 3 with two expansions in late 2015 and mid-2016, the introduction of a standalone version of its strategy card game GWENT, plus a Nintendo Switch version as recently as last year. While development costs along with marketing spend certainly ramped for Cyberpunk 2077 into this year, sales of these products bolstered its financial well-being throughout as its dedicated fan base showed support.

CD Projekt Major Product Launches:

  • The Witcher 3: Wild Hunt: FY15 Q2
  • Hearts of Stone: FY15 Q4
  • Blood & Wine: FY16 Q2
  • GWENT: FY18 Q4
  • The Witcher 3 Switch: FY19 Q4
  • Cyberpunk 2077: FY20 Q4

Overall, CD Projekt Group generated $140 million and just under $100 million in annual revenue during 2019 and 2018, respectively. Operating income hit nearly $50 million last year, over $30 million the year prior. That’s *growth* right smack between major titles, trending upward into a product launch even prior to the deluge of pre-orders. Does this happen without a level of trust built up over years of ongoing support and quality craftsmanship? Sure, The Witcher 3 had its issues at launch in 2015. But the whole reason CD Projekt garnered so much trust is its consumer-facing practices of constant improvement, support and attention to its audience.

At least, that’s how it used to be.

It’s clear to see when checking the charts in conjunction with its timeline of events. Even before pre-order dollars accumulated in recent quarters, CD Projekt had a stable revenue stream from the work its developers had already done and the goodwill it built with a sizeable base. Expenses will rise into a major, AAA release especially in the final push. It’s not always reinforced financially by work the team had already done on prior projects, like with the beloved Witcher series.

Subsequently, running parallel to its game development business was its GOG.com digital distribution platform. It sells a variety of PC games, and has become a notable supplement to the group’s structure in the lead-up to a big launch from its sister subsidiary. GOG.com has proven a reliable venture, contributing upwards of 40% to total sales at times over the past couple years.

While it seems at face value that CD Projekt goes as its major game franchises do, its distribution business offers a separate revenue stream even if some of that success is inevitably tied to its internally-published products. Producing games isn’t the sole driver of its direction, and this sort of supplementary source could have propped up the company into next fiscal year.

Now of course, another pressure point when talking about the timing of launches is investor sentiment. From all indicators, shareholders bought into the downright outrageous hype cycle of Cyberpunk 2077, which initially had a launch date of April 2020 (Can you imagine?). It was pushed to September. Then November. And after that, to December. A convenient timing right before its financial calendar turned to 2021.

Notably after the first delay, CD Projekt’s share price rose. And kept going, reaching a peak around September. After a brief dip in November during the last delay announcement, it bounced right up again showing the ever-present appetite of investors for that juicy Cyberpunk 2077 profit. Would it have declined again if it was delayed to 1st quarter next year? Sure. But I doubt it would have experienced the precipitous drop since launch day, December 10th, which has eliminated over $2 billion in market value in just over a week.

The stock is now trading below where it started the year. And it was all avoidable.

My hope is there’s a lesson here: a general change towards optimal quality over financial gain, transparency over secrecy, giving people time to complete quality work rather than setting a date to meet a deadline that wasn’t realistic in the first place.

Briefly on the development side, it’s now obvious even December ended up being an unrealistic deadline based on the results and reporting around its challenging launch timeline. In addition to media reports of long hours and tough work as far back as over a year ago, another Bloomberg story today shares that management held a question and answer session on Thursday with employees. Luckily, they were able to vocalize their frustrations and press executives on various topics related to Cyberpunk 2077’s development cycle.

A “developer asked whether CD Projekt’s directors felt it was hypocritical to make a game about corporate exploitation while expecting that their employees work overtime,” the story’s author Jason Schreier writes, revealing a frustration bubbling up within the very people who are now tasked with fixing the game.

(Word is that all employees will be receiving their intended bonuses regardless of where critical reception ends up. Which is how it should be. People should be compensated commensurate with their labor. I won’t overly celebrate management paying their workers acceptable wages.)

The elephant in the room, of course, is the impact of a global pandemic. One which hit right during the final part of the project’s timeline. The coronavirus effect, which is difficult to quantify and impossible to ignore. CD Projekt employs a workforce of over 1,100 people, the majority of which transitioned to remote working for 2020 according to its mid-year filing. As if crunching for a major product launch and dealing with an impractical deadline wasn’t enough, these folks also had to adjust to a new working situation and team dynamics outside of the office.

What now, then?

Well, it’s time to rebuild. And more importantly, regain trust. I firmly believe that the loss of goodwill and faith in the management team wasn’t worth the short-term financial boon of launching right before the 2020 financial calendar ended. What a quarterly table or chart doesn’t show is the longer term effect of losing credibility as an executive team, or having a set of employees still working to the bone on a game that should have been delayed to a more reasonable schedule.

Management needs to be held accountable, by all parties: employees, media and consumers alike. They should have been more open to feedback from their teams ahead of time, not after the fact. I doubt CD Projekt will ever reveal how many of the millions upon millions of copies sold were actually refunded, but revenue numbers won’t lie when that time comes.

This is the type of industry-shaking event that doesn’t happen often. My hope is there’s a lesson here: a general change towards optimal quality over financial gain, transparency over secrecy, giving people time to complete quality work rather than setting a date to meet a deadline that wasn’t realistic in the first place.

CD Projekt can bounce back from the launch of Cyberpunk 2077. In three to six months, the game could very well be in solid shape and people will be more confident in management’s decision-making. Its employees may return to more stable hours and have an improved feedback loop with higher-ups. Over the next couple years, it could (and likely will) go on to sell tens of millions of copies and people will forgive management for their hasty decisions back in 2020.

But it didn’t have to be this way from the start.

Sources: Bloomberg, CD Projekt Investor Relations, Sony Interactive Entertainment.

-Dom

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