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Why a $75 Billion Industry Is Powering Down on Employees

The Wall Street Journal. logo The Wall Street Journal. 4/10/2017 Lauren Weber
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SAN DIEGO—The hit videogame “Rocket League” pits jet-powered racecars against one another in an antic soccer match. The big winner is creator Psyonix Inc., which has just 81 employees yet has amassed more than 29 million players in less than two years.

Employees at the San Diego company dream up new themes and car designs, program software, troubleshoot technical issues and watch over a network of contractors scattered around the world. The outside workers test “Rocket League” for bugs, translate it into foreign languages, transfer the software to new types of consoles and handle customer service.

“The smaller we can be, the better,” says Chief Executive Dave Hagewood, even though relying on contractors means less control over the speed and quality of the work needed to keep “Rocket League” humming.

Overall, 40 or 50 of the 120 people who work on “Rocket League” are contractors, he estimates. It had $110 million in revenue in its first year alone.

As outsourcing sweeps through almost every industry in the U.S., the videogame business looks a lot like the workplace of the future. A lean core of in-house employees focuses on the most important jobs, with the rest hired out to layers of contractors and subcontractors. Outside workers come and go based on project cycles.

Consulting firm Accenture PLC, one of the world’s largest outsourced labor providers, calls it the “liquid workforce,” which can be turned on and off like a faucet.

More than 300 of the roughly 2,000 people who built Activision Blizzard Inc.’s “Call of Duty: Advanced Warfare,” one of the best-selling games of 2014 in the U.S., worked for outside companies or were independent contractors, according to credits listed on the videogame database MobyGames. About 70 contracting firms are in the credits of “Final Fantasy XV,” released in November by Square Enix Co.

The videogame industry’s contractor-heavy model resembles Hollywood studios, which hire temporary workers ranging from directors to actors to publicists to make a film and have few long-term obligations after its release.

The difference between games and movies is that longtime work practices and unions in Hollywood provide a safety net for many actors and writers, whether on the job or between projects. People who make videogames are often hired quickly through Craigslist and gaming website Gamasutra or by word of mouth—and then are let go just as fast.

At the end of some subcontracting chains are 16- and 17-year-olds working from their bedrooms or school libraries. Ryan Morrison, a New York lawyer who represents game companies and developers, says he has drafted about 500 contracts in the past three years that required parental consent.

Companies say the result is just-in-time production fueled with human capital. By outsourcing low-value work or renting high-value expertise needed for a short time, game makers like Psyonix can focus on what they do best.

Outsourcing means studios “can in fact make very large games while still staying small,” Anton Wiegert, the head of outsourcing at Guerrilla Games, owned by PlayStation console maker Sony Corp., wrote in an essay in 2014.

Revenue from videogames hit $75 billion last year, double the world-wide sales from movie tickets, according to PricewaterhouseCoopers LLP, the auditing and consulting firm.

The videogame business is emblematic of a wider shift toward project-based work. Casey O’Donnell, a game developer and game-studies professor at Michigan State University, says the industry “is a decade ahead of where a lot of other industries are going.”

In the white-collar world, pharmaceutical companies are already packaging drug development into projects led by a team of employees who oversee a larger, mutable cast of outsourced research firms. Law firms are doing the same thing with complex litigation cases.

The shift is happening so fast that the federal Bureau of Labor Statistics recently proposed adding “project management specialist” next year to the official list of job titles used to track the workforce.

While companies clearly benefit from the flexibility of such arrangements, workers often reap less in the bargain. Adrienne Hunter, 30 years old, says she was a contract worker for Nintendo Co.’s U.S. subsidiary on and off for six years, mostly doing quality-assurance testing. She says permanent jobs there rarely came open and offered few advancement opportunities.

When dozens of testers crowded through the exit of the high-security room to take company-mandated breaks from trying games that were about to be released, the testers sometimes mooed to show they felt like cattle, according to Ms. Hunter. She now works as a design director at a virtual-reality startup.

Nintendo spokesman Charlie Scibetta Sr. says the company treats “all people with the same respect, regardless of their employment status.” The game maker uses “a hybrid approach of full-time and contractor positions so we can staff up quickly when needed,” he adds.

Mr. Scibetta says about one-third of Nintendo’s full-time, entry-level positions in the past five years were filled by former contractors.

Many companies play down their use of outside labor to encourage the perception that they alone created the technical wizardry in their games. Game developers say outsiders are sometimes required to sign “secret team” contracts in which they agree to be left out of the game’s production credits.

About 20 years ago, when the first versions of “Tomb Raider” and “Grand Theft Auto” were highly popular, companies directly employed almost everyone who worked on their games. Game creators staffed up with artists specializing in 3-D modeling and programmers capable of writing code for game consoles, personal computers and then online.

Teams at some stages of the production process ballooned, but it was tough to keep everyone busy, says Scott Hartsman, chief executive of Trion Worlds Inc., best known for the fantasy role-playing games “Rift” and “Trove.”

Layoffs often hit after a game was released, which was hardest on workers who were let go and damaged morale for those who stayed. “It was like ‘Welcome to the family!’ ” he recalls. “Then we released the game, and it was ‘See you later!’ ” Outsourcing became a solution to the hire-and-fire cycle, says Mr. Hartsman.

In 1995, Psyonix’s Mr. Hagewood dropped out of North Carolina State University in Raleigh to run a web-hosting company. He wound up working as a “modder,” or someone who modifies game code to add custom features, at Epic Games Inc., of Cary, N.C.

Mr. Hagewood, then 28, helped Epic Games modify Unreal Engine, a software tool that helps developers build intricate visual worlds. For two years, he also closely observed CEO Tim Sweeney, other executives and game designers for lessons on how to run his own game maker someday.

“I always liked vehicles that could jump,” says Mr. Hagewood.

He started Psyonix in 2001 and kept the fledgling company alive with contract work for larger studios that wanted help satisfying demand for visually dazzling, multiplayer games.

It was hard to ensure a steady flow of work. Mr. Hagewood says clients sometimes canceled games with little notice or failed to meet deadlines. Taking on more projects could swamp his small workforce if too many games went forward at the same time.

Contracting can be a brutal way to make money. Publishers wary of investing too heavily in a game that might never make it to market impose high-pressure requirements on their contractors.

While Psyonix worked for companies like Square Enix and BioWare, now owned by Electronic Arts Inc., a small team at Psyonix remained focused on creating its own games.

“Rocket League is our baby,” says Sarah Hebbler, Psyonix’s executive producer. Before “Rocket League” was released, she oversaw Psyonix’s work for Square Enix on the multiplayer vampire game “Nosgoth.”

Psyonix had inklings that “Rocket League” would be a hit. Players who received test versions of the game raved about it in online discussion boards, and Sony agreed to give free downloads to premium PlayStation subscribers.

“Rocket League” downloads surpassed Psyonix’s forecast within hours of its release in July 2015. Servers hosting the game’s software crashed.

Mr. Hagewood emailed former colleagues at Epic Games and asked whom they turned to when in need of outsourced help. Psyonix had 36 employees at the time.

As the game’s popularity has grown, so has Psyonix’s use of outside help. Panic Button LLC, of Austin, Texas, converted the software in “Rocket League” for use on Microsoft Corp.’s Xbox and Sony’s PlayStation 4 Pro.

Panic Button has 25 employees, including engineers and artists who work on projects for as many as six clients. Temporary workers on month-to-month contracts plug staffing holes.

“It would be ideal if one project ended while another was beginning, but it doesn’t work that way,” Panic Button general manager Adam Creighton says.

Less than half of the people doing quality-assurance testing on “Rocket League” are full-time Psyonix employees. The rest work in Montreal for a unit of Keywords Studios PLC, based in Dublin and a global contractor for the game industry. Inc. unit Twitch Interactive Inc. manages a live-events business where spectators pay as much as $95 to watch “Rocket League” teams compete in venues like the Avalon Hollywood nightclub.

Psyonix is looking for another contracting firm to help manage the game’s server capacity. Some players have complained that server problems are kicking them out of the game and making it hard to join matches.

Quality control constantly nags at Mr. Hagewood. He disliked feeling micromanaged when Psyonix did outsourced work for other game makers. But contractors don’t always deliver at the pace they promise and sometimes farm out work to another company or group of developers, even though contracts often prohibit subcontracting or require approval, he says.

The company’s previous testing contractor, Digital Hearts USA Inc., this month began reclassifying independent contractors as employees.

Eric Kwan, quality-assurance director at the Torrance, Calif., company, a unit of Japan’s Hearts United Group Co., says the change will help Digital Hearts retain its best testers.

Until now, “if someone else offered them an employee position, they’d most likely take it, and they’d be smart to take it,” Mr. Kwan says.

It can take longer for Psyonix to solve problems because employees and contractors usually don’t communicate face-to-face. The contractors are spread across multiple time zones.

From noon to 9 p.m. Central time, Ana Morazán answers players’ questions about “Rocket League” from the second-floor study of her family’s home in Tegucigalpa, Honduras. She works for 5CA, a customer-service outsourcing firm based in Utrecht, Netherlands, earning $7 an hour, about double the average in Honduras.

Ms. Morazán, 24, has little contact with Psyonix employees beyond seeing occasional notes from them in a shared database where customer-service agents log information and updates. She often chats online with colleagues and managers at 5CA.

“I don’t feel like I’m alone,” says Ms. Morazán, who has begun playing “Rocket League” in her off time.

Outsourcing helps Mr. Hagewood preserve the close-knit culture at Psyonix. On Friday nights, employees have dinner and “wrap-up” meetings, often staying late to drink beer and battle in Nintendo’s “Super Smash Bros.” while sprawled on four tattered recliners.

During the workday, employees’ dogs, with names like David Bowie and Gary Busey, amble around the office or lay by their owners’ feet. Employees catch up in the office kitchen while helping themselves to Red Bull or coconut water from the refrigerator and beef jerky from the walk-in snack closet.

Psyonix says contractors aren’t necessarily cheaper than employees because overseeing outsourced labor is so time-consuming.

For every new contract arrangement, Psyonix must hire or assign someone to manage the work. On the other hand, renting labor only when it is needed means the company isn’t “paying for someone’s downtime,” says Mr. Hagewood.

The debate over contractors versus employees never ends because videogame production costs are high, prices are stagnant, players are fickle, and the industry is awash with talent. Psyonix won’t disclose its revenue from “Rocket League” beyond the game’s first year or how much its profits are.

When Mr. Hagewood wanted to outsource some “Rocket League” art to China, where contractors churn out game characters, his art team in San Diego vetoed the idea. The employees were concerned about the quality of outsourced work and wanted to feel ownership of all the art in the game.

“We’re always evaluating,” says Mr. Hagewood.

Greg Nichols, Psyonix’s quality-assurance manager, raised the idea of sharply expanding the six-person, in-house team of testers to keep up with the exploding number of “Rocket League” updates and software patches shortly after the game was released.

Mr. Hagewood eventually approved hiring three employees. “Dave just didn’t want to spend money on stuff unless we absolutely had to,” says Mr. Nichols.

Mr. Hagewood says outsourcing is the best way to keep “Rocket League” from causing Psyonix to grow too big or too fast.

“It’s always a question of growth,” he says. “Do we want the team to grow, or is this just a short-term burst?”


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