• We looked at 79 listed games companies and 34 government schemes. The boom in games tax credits reads as industry policy, and in the accounts of those companies it is an earnings story, with dependence running from a couple of points of profit at EA to a credit worth more than the whole of Ubisoft’s.

• 21 of them can be shown to claim a games credit, and 9 name it in their own accounts. Rockstar’s British studio has claimed over half a billion pounds of UK relief in ten years, and Take-Two’s accounts never say which countries its credits come from.

• The landscape has started to move with Québec cutting the cash value of its credit while others extend or retreat, and due to differences in disclosure of accounts, the market cannot see which companies the gains/cuts lands on.

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The number of national schemes has roughly doubled in five years, as Ireland, Italy, Belgium, Australia and New Zealand each wrote one where none had existed, and the easy read is of an industry winning more support every year. The additions have kept coming, British Columbia lifting its credit to 25% and making it permanent, Ireland and France now running to 2031, and Brazil bringing games under two of its cultural incentive laws, but so have the withdrawals: Alberta has abandoned reinstatement, Pennsylvania has floated repeal, New York has left its credit to lapse after 2027, and Québec, which runs the largest of the Canadian credits, has begun cutting the cash it actually pays out.

The schemes differ on what they ask of a game and on how much they will pay any one company.

• What the scheme asks of the game: The culturally tested schemes, in the UK, France, Ireland and Italy, gate on a test certifying the game is British, or French, or Italian. Québec asks something narrower and sets its rate by it: 37.5% for a title commercialised in French, 30% for one that is not. Australia and New Zealand ask nothing of the kind and subsidise development of any sort.

• How much money one company can take: France stops at €6m a year and Italy at €1m, so no single major studio draws much from either. The Canadian labour credits in Québec, Ontario and British Columbia set no company ceiling and scale with local headcount, and neither does the UK, which caps only the share of a game’s costs that qualifies.

Several parties take a share of this money, and they do not want the same thing from it. The state wants jobs and a domestic industry; the small studio treats the credit as the difference between shipping and not; the worker’s wage is the base the largest credits are paid on; the large employer is what those credits exist to keep in place. The biggest claimants of all are studios you cannot see from the parent’s accounts, Rockstar’s British company among them, alongside privately held ones like Larian. And at the end of the chain sits the investor in a listed studio, holding whatever share of this reaches the accounts.

A studio that does claim one receives either cash or a reduction in the tax it owes, and inside a listed group it is just earnings, carried into the reported result like any other line. How much of that result it accounts for runs from almost nothing at one studio to more than the whole of it at another, and the accounts are the last place you would learn which: the credit is more often bundled into a wider line, netted into costs, or dropped on materiality than named outright. And the schemes are changing underneath all of it, with Québec now paying out less cash than it used to.

Where a company is listed tells you nothing about the credits it draws

Headline rates run from Louisiana’s 18% to Nova Scotia’s 50% of eligible labour, and the rate on its own does not tell you how much a company can actually get. A cap sets a ceiling on what any one claimant can take, which is why France’s €6m a year and Italy’s €1m bound what even a large studio can draw from them, while the Canadian labour credits and the UK set no company ceiling at all and scale with how much a studio spends locally. And most of these credits are refundable, which means the government pays out in cash even when the studio owes no tax.

A studio building a game spends for years before it sells anything, so it is loss-making for most of a development cycle by construction, and a credit that only reduces a tax bill is worth nothing to it in those years. A refundable credit arrives as cash while the game is still being made.

They are not all tax credits either, since Belgium runs an investor shelter, New Zealand a rebate paid by its broadcasting funder, and Germany and the Czech Republic grants, so governments have not converged on one instrument. The games-specific schemes are also only one of two things holding a studio’s tax bill down. Alongside them run the general regimes it shares with every other software company, Poland’s 5% IP box, China’s 15% high-tech rate, ordinary research credits, the concessions in Israel, Cyprus and Singapore, and for most listed studios those matter more.

Who claims the games-specific credits is narrower than the number of schemes suggests. We found those schemes by working outward from where these companies have studios, so a country none of them builds in is one we never looked at. Of the seventy-nine listed games companies we looked at, only about twenty can be shown to claim one at all; for most of the rest, the only lever visible in the accounts is a general regime. A company claims where its games are made rather than where its shares trade, so a studio developing in Québec claims in Québec whatever exchange its parent is quoted on. People Can Fly is listed in Warsaw and draws from Québec, Take-Two is listed in New York and claims through Edinburgh, and Sega is in Tokyo and takes UK relief through its British studios.

By number most claims are small, and the capped schemes keep them that way. Where there is no company cap the money concentrates, and the largest claims belong to subsidiaries of listed groups. Rockstar’s British studio alone has claimed £504m of UK relief over ten years. In the year to March 2024 two in five UK claims were small enough to take 2% of the money between them, while the largest claims took 81% of it, and in 2019 the fifteen biggest subsidiaries controlled from outside Québec took nearly three-quarters of that province’s credit.

Where the credit becomes the profit

A games credit can be a rounding in a large publisher’s results or the largest single item in a small studio’s, and the exhibit ranks each company by how much of its profit the credit accounts for. At the low end sit EA, whose only disclosed credit is a general research one and which pays above the US federal statutory rate even though its Codemasters studio claims millions in relief of its own, and Everplay, whose UK games relief has shrunk to almost nothing. At the high end is Ubisoft, where the credit runs to about a third of the profit the business makes before it. Don’t Nod sits outside the ranking, because it has made no profit in any of the three years for the credit to be a share of, and in 2023 its credit came to more than its whole revenue.

When the studio is profitable

For a profitable studio the credit is margin, a few points added to an operating profit the company would post without it, and it shows up as a lower tax rate. A low rate on its own says nothing about where it came from, and the general regimes produce lower ones than any games credit does. Where a low rate lasts, a general regime is usually behind it: CD Projekt’s comes from Poland’s research relief and its patent box, both of which sit in the general corporate tax code. A games credit sits in a scheme written for one sector, so a government can change it without touching the code every other company uses, and several are now doing exactly that.

When the studio is losing money

In a loss-making studio the credit stops being margin and becomes the operating result itself, which is what Ubisoft’s last three years show: its releases slipped and its profit fell away while the credit itself barely moved. In the most recent year what Ubisoft drew in credits and grants exceeded everything the business earned before them.

There is also no tax bill left to reduce, so the credit is not a rate at all; it is cash, and only if it is refundable. That is why Don’t Nod could draw its French and Québec credits as working capital while it was losing money, and why a non-refundable credit would have given it nothing until it was profitable again. That distinction is what Québec is now changing, converting its credit from the first kind into the second, on exactly the studios least able to use it.

An investor cannot see what a company draws, or from where

Among the companies that claim a games credit, only a few show it clearly. The self-listed pure-plays name it outright, and so does Ubisoft, which sets its credit out country by country. The larger, more diversified filers, Take-Two among them, take it against the cost of the games instead, where it reduces what the development is carried at rather than what the company pays in tax. The amounts are there in the accounts, and the country that paid them is not. At Digital Bros it is not a line at all. The Canadian grant its studios draw is netted straight into what the game is carried at on the balance sheet, and the Italian relief surfaces only as a provision against incentives that may have to be repaid. For most of the companies whose studios draw a credit, it does not appear in the group accounts in any form.

The difference is not that some companies are more forthcoming than others. A credit is easy to see in a small studio that claims it directly, and hard to see in a large group that consolidates many studios, where the same relief becomes a small item inside a far larger set of accounts. Frontier claims in two countries and names both reliefs in full, down to the few hundred thousand it draws from Manitoba; a group like Take-Two runs credits through studios in several countries, and by the time they reach the consolidated accounts they are one line among many. Both are reporting under the rules that apply to them. The credit is simply less visible the further it travels up through a group.

The financial accounts of the video games companies are part of the story, and some governments publish their own records of the recipients of tax credits in their region. Take-Two’s studios between them take the largest share of Nova Scotia’s credit, close to a third of everything the province has certified, and its filings name no Canadian jurisdiction at all. British Columbia publishes no recipient list of any kind, and then announced the rise in its credit to 25% in a release naming Microsoft, Nintendo, EA, Take-Two and CD Projekt Red as developers operating in the province, with a supportive quote from the chief operating officer of EA SPORTS Studios. EA’s British studios set out the UK relief they claim in their own accounts, and none of it reaches EA’s group filings; EA’s Vancouver studio sits in a province that will put the company’s name in a press release and publish nothing about what it pays.

Other large groups sit the same way, their studios named on public recipient lists their filings never mention. Read from the grantor’s side, the set of listed companies drawing on these credits is wider than the filings show, and the exposure an investor cares about is often visible only there. The reconstruction reaches only as far as each grantor allows, and Ireland and Nova Scotia publish every recipient by name while Québec publishes none.

Québec is paying the credit against tax bills its studios do not have

Québec has changed the tax credit it pays its video-game studios in two ways at once.

• It changed the base the credit is worked out on: A fixed first slice of every salary is now excluded, and the old ceiling on how much of any one salary counts has gone. For example, the excluded slice is Québec's basic personal amount, about C$18,500 a head and indexed each year,so a studio with four thousand eligible staff has roughly C$74m less payroll counting toward the credit each year.

• It is converting the credit from cash into a tax reduction, in stages: The credit used to arrive as cash whether or not the studio owed Québec any tax. Part of it is now non-refundable, which means it only reduces a Québec tax bill, so a studio that owes no Québec tax gets nothing from that part.

A studio that develops games for a foreign parent earns most of its profit outside the province, in the company that owns the game, and so it owes little Québec tax for a non-refundable credit to reduce. The part it cannot use never reaches the balance sheet, because a company books a deferred tax asset only so far as it expects the profit to use it against, and for a studio doing contract development for a parent elsewhere that profit may never come. The years it spends most on Québec labour are the years between games, when it earns least, so it accrues the most credit exactly when it has the least Québec profit to absorb it. Most of the province’s large studios are built on that model. Ubisoft says only that the payment of some of its Canadian credits depends on taxable income being generated, and carries under a million euros of deferred tax against the whole pool.

Who the change is for

Québec’s finance ministry says the changes were meant to improve the fairness and impact of the credits, in a labour market it describes as no longer what it was when they were written. Taking a first slice out of every salary costs a studio in proportion to how many people it employs, while lifting the ceiling on each individual salary hands money back only where that salary is high. A studio with a few well-paid people gains on both counts, and one with a large mid-paid workforce loses on both. The chief executive of one Montréal studio read that as the province deciding it wanted high-paying jobs rather than locally owned companies.

Making part of the credit non-refundable sorts the studios by something else. A non-refundable credit is worth its face only against a Québec tax bill, so it holds its value at a studio that owns what it makes and books the profit in the province, and loses most of it at a studio developing under contract for a parent elsewhere, however well that studio trades. Those are not the same two groups. Québec’s largest employers tend both to pay well and to develop under contract for a parent somewhere else, so the salary change treats them kindly and the refundability change does not.

For Ubisoft, the two changes take about a third off its Québec credit by the end of the decade, worth roughly a tenth of the last operating profit the group reported, at a time when the group no longer reports an operating profit at all. None of that is large against revenue, and none of it reaches the tax rate, because a credit netted into development costs falls on operating profit instead.

The exposure runs well beyond Ubisoft: the same Montréal studios do work for a long list of listed parents, among them Take-Two, EA, Embracer, Bandai Namco, Sony and Microsoft, almost none of which put a figure on what the province pays them. Nacon, a smaller French claimant that also draws Québec’s credit, has entered judicial reorganisation.

Closing

The jobs the credits support are real, and every one of these studios sits in a place that decided to write a credit to keep them there. Whether those studios would exist, or stay, without the money is a question the public numbers cannot settle, and it is not the one we set out to answer.

More jurisdictions offer a games credit than did five years ago, and several of the biggest are worth less than they were. Québec is turning part of its own into something most of its large studios cannot use, New York’s lapses after 2027 and Alberta’s is gone, while British Columbia raised its own and made it permanent over the same period.

The dependence belongs to the company, not the industry. For a company that leans on a credit it can be the difference between an operating profit and a loss, which is where EA’s Codemasters sits at the subsidiary level and where Ubisoft now sits at the group, and it rarely shows in the group accounts as more than a single line. Capcom keeps its development in Japan and runs a margin near 40% with nothing behind it but an ordinary tax credit any Japanese manufacturer could claim. The question for the rest is how much of their profit a government is currently paying for, and how long it intends to keep paying it.

More from The Side Quest

• Sony: When do you switch off physical distribution? Sony is ending PlayStation disc production in January 2028. A platform switches physical off when demand for the object falls below the cost of the channel that carries it.

• Jason Della Rocca (Griffin, Execution Labs, ex-IGDA): “Zero-to-evidence is where the market failure is” Most funds now wait for proof that players want a game, and reaching that proof often runs on savings, a grant if your country has one, or an incubator place if you can get one.

• Microsoft and Xbox: Separable, but still staying Microsoft has done everything you would do before selling Xbox. We priced seven ways of doing it, and every one it can execute itself is worth less than doing nothing.

• AppLovin vs Unity: are two of the market’s favourite ad engines worth it? We read the job postings on both sides of this market, the ad networks and the studios that buy from them, to test whether AppLovin’s and Unity’s ad-engine growth is worth what the market pays.

• Epic Games: what is it worth, and what did the generosity cost? Fortnite pays for four free layers. The cash Epic captures is worth about $7.5bn; the tools it under-monetises lift fair value toward $14bn, and the last mark sits in between.

• Roblox: A great company lost on valuation - It owns the most complete stack in interactive entertainment yet profits from it the least, and rising costs are eating into what little is left.

• AI won’t make AAA games materially cheaper to develop - the productivity gains are real, but two-thirds of the value leaves the P&L to the AI vendors before it reaches the bottom line.

Appendix

Every figure here comes from a company’s own filing, a subsidiary’s statutory accounts, or the granting authority’s own publication, and each carries its source and the date it was read. Where a number is inferred rather than disclosed, it says so at the point of use.

The claiming universe is seventy-nine listed games companies, each read from its own primary filing, with a three-year trace across parent and subsidiary accounts run on every candidate claimant. The scheme map covers thirty-four jurisdictions. That is not a survey of the world: we worked outward from where these seventy-nine companies build, so a country none of them builds in was never examined, and the count should be read as the floor it is.

A1. The claiming universe: who claims a games credit, and who shows it

Classification rule: owning a development studio in a credit jurisdiction is not a claim. Only a traced claim counts, meaning (a) the subsidiary’s own statutory accounts name the credit, (b) a grantor’s record names the company or its title, or (c) a parent line ties arithmetically to games-credit activity. Studio footprint alone establishes only that a company could claim and that its accounts are silent, which is a different fact and is never written as a claim.

The universe: 81 baseline less AppLovin (games business sold, closed 30-Jun-2025) less Thunderful (delisted from Nasdaq First North; last trading day 24-Feb-2026, Atari compulsory redemption) = 79, with Nazara IN.

The finding: among the companies that claim, more than half never name it. Twenty-one of the roughly eighty listed games companies claim a games credit. Nine name it in their own accounts. Twelve do not, and their claims are visible only in a subsidiary’s own filings or a grantor’s register.

The scale of what the group accounts omit: Rockstar’s UK studio alone claimed £70.8m of VGTR in FY2025 and £504.2m across the ten years to FY2025 (Rockstar Games UK Ltd, CH 03312220, from eleven filed sets of accounts). Take-Two’s own tax reconciliation names a separate US Research & development credit of $45.1m (FY26); its production credits never reach the tax line at all, being netted against capitalised software under IAS 20 by analogy, reducing cost of revenue by $75.5m (FY26) and $167.4m (FY25) with $283.4m of grant receivables outstanding. The amounts are disclosed; the jurisdictions and schemes never are.

A1.1 Names a games credit in its own accounts (9)

A1.2 Hidden claimants: the claim is traced, the parent names no scheme (12)

A1.3 Borderline: a game-development grant, not a credit (2)

A1.4 No traced claim (56)

Cleared on a three-year trace (7). Each owns a development studio in a credit jurisdiction, and three years of parent and subsidiary accounts show no games credit in any year:

Unresolvable, the deciding record is not public (2). Neither is a claimant on the evidence, and neither can be cleared:

No games credit and no studio in a credit jurisdiction (46). These reach their effective rate on general regimes only, and are the clean controls: Capcom, Koei Tecmo, Konami, Nexon, Square Enix, Kadokawa (Japan); NCsoft, Nexon Games, Shift Up, Webzen (Korea); Roblox, Playtika, Unity, GDEV, DoubleDown, PLAYSTUDIOS, Snail, Skillz (US); 11 bit, PlayWay, CI Games, Ten Square, Huuuge, Creepy Jar (Poland); Remedy, G5, Coffee Stain, Maximum, Nitro (Nordics); Bilibili, XD, Kingsoft, G-bits, 37 Interactive, Century Huatong, Giant, NetDragon (China); Sea, Gravity, IGS, Soft-World, Userjoy, Asiasoft (Taiwan/SEA); tinyBuild, Azerion, Atari SA.

A1.5 How the universe was verified, and what it cannot settle

• Method: every company was read from its own primary filing, and all 22 candidate claimants were then traced across three years of parent accounts and the named subsidiaries’ own statutory accounts (Companies House, CRO, French greffe filings), against grantor registers including the BFI cultural-test register and the Nova Scotia and Ireland recipient lists.

• What three years showed that one would not: four companies with only a studio footprint turned out to be claimants on their subsidiaries’ accounts (EA, Tencent, Embracer, Stillfront), six were cleared (Paradox, NetEase, Nintendo, Bandai Namco, Netmarble, Starbreeze), and two cannot be settled either way (CD Projekt, Krafton). A latest-year check would have missed all of it.

• A certificate is not a claim. A BFI certificate attests that a game passed the cultural test, which the Corporation Tax Act 2009 (s1217CB) makes a precondition of claiming rather than evidence that anything was claimed. Applying that distinction separates two cases: MAG Interactive holds certificates and its subsidiary accounts carry no credit, so it is not written as a claimant, while Devolver and Stillfront are claimants on their subsidiaries’ own filed tax notes rather than on certification.

• Time-series findings a single-year check would have missed: EA’s UK claim is falling (£9.9m → £6.2m) and its claiming entities are being dissolved (three Codemasters entities struck off in Mar-2024, Codemasters Group Holdings dissolved Apr-2026); Stillfront’s Everguild claim has fallen 81%; Sega’s UK studios moved from VGTR to VGEC in Jan-2024, changing the credit from a below-the-line tax item to taxable above-the-line income.

A1.6 Grantor populations, read from the official datasets

A2. The scheme map

Thirty-four jurisdiction-level schemes were verified against the grantors’ own published sources on 28 and 29 July 2026, each parameter carrying its source and the date it was read. Fifteen are games tax credits. Nineteen are not, and the exhibit labels the instrument rather than presenting them as equivalent.

Of the fifteen games tax credits, five are national (UK, Ireland, France, Italy, Australia) and ten are sub-national, all of them Canadian provinces or US states. The “menu has roughly doubled” claim in the opening rests on national schemes, twelve of them with ten operational, and not on this credit count.

The base the doubling is measured from. The opening claim needs a denominator, so we dated every national scheme in the population against a single question, could a video games company claim it on 1 January 2019, and five of them could.

That is five in 2019 against ten operational now. Two things in the count would each have moved it:

• Malta was live on the baseline date and is not in the current thirty-four, which counts only live schemes. A 2019 base cannot be built by filtering today’s population by date, because that silently drops every scheme that closed inside the window. Alberta is the same shape sub-nationally.

• The Philippines changed the vehicle, not the eligibility. Its current regime dates to 2021, but “game development” was expressly named in the 2017 Investment Priorities Plan, in force on the baseline date. Dating it by the current instrument would have counted an administrative reorganisation as growth.

We date each scheme from when games became claimable under it. Several run inside wider audiovisual or investment frameworks that games were admitted to later, and Italy is the clearest case: the framework law is Legge 220/2016, but games reach it only through the implementing decree of 12 May 2021, and the tax codes created for the 2016 credits in October 2018 contain no videogames code at all.

Each row was dated against the granting authority’s own text. Where a scheme names games in law but requires a further instrument before anyone can file, we date it to the instrument, which is set out under conventions in A7.

A2.1 The games tax credits

Malta ran a 30% credit capped at €200,000 per undertaking over three rolling fiscal years. The scheme lapsed on 31 December 2020 and Malta Enterprise lists it among closed measures, which is why Malta does not appear above.

A note on the cultural-test column. Four schemes run a cultural test proper, in the UK, Ireland, France and Italy, each certifying that the game is culturally British, Irish, French or Italian. Québec is not one of them, and our scheme record carries it as no test. What Québec runs is a language and commercialisation condition that selects between three rates rather than deciding eligibility, which is a materially different instrument and is set out in the row above. Greece runs a cash rebate rather than a credit and sits outside this table.

A2.2 The general regimes named in the body

§1 states that the games-specific schemes are only one of two things holding a studio’s tax bill down, and names four general regimes. They sit outside the fifteen games tax credits and outside the thirty-four verified schemes, so they are recorded here rather than in the table above.

These are lighter records than the thirty-four above. Each rate was confirmed against the granting authority’s own text, and neither is a games scheme, so neither enters the fifteen.

A3. Where a credit lands in the accounts

The same relief reaches four different lines depending on the reporting framework and the filer, which is why amounts are not comparable across companies and why only the first of the four moves an effective tax rate.

Sega’s UK studios moved from VGTR to VGEC in January 2024, which shifted them from the first row to the second. The trend across the frameworks runs the same way, from a visible tax item toward an invisible operating one, and the UK completes that move for everyone in 2027.

A company can sit in two rows. Ubisoft’s own accounting policy states that income from these incentives is presented as a reduction to R&D costs in the income statement, and that for capitalised research and development costs it is instead recorded as a reduction in the cost of the asset. So the expensed portion reaches the operating result immediately and the capitalised portion reaches it later, through amortisation. The classification is of treatments, not of companies, and the exhibit should be read that way.

A3.1 Where the credit sits in Ubisoft’s income statement

The exhibit that carries this is built on the statement below rather than on a model, so every figure is a filing figure.

Grants and tax credits are presented as a reduction inside personnel expenses, which sit within R&D costs. Personnel expenses recognised in operating income were €1,113.1m, being salaries of €975.0m and payroll taxes of €254.2m, less €151.4m of grants and credits, plus €35.4m of stock-based compensation.

Two things follow, and the exhibit carries both. The credit reduces an operating cost line, so any reduction in it lands on the operating result and on nothing above it. And the income tax line is a charge of €127.8m struck on a pre-tax loss of €1,388.7m, so a reader looking for a games subsidy in the effective tax rate will not find one at this company and would not have found one in a good year either. No effective rate is shown, because the ratio of a charge to a loss is not a rate a reader can use.

Ubisoft’s only statement about realisability is a footnote to the Canada line: the payment of some tax credits is contingent upon the generation of taxable income. It names no province, so the Québec attribution in the analysis is ours and is flagged as inferred.

A4. Earnings dependency

Metric: pooled games credit ÷ pooled Adjusted EBITDA, taken before impairments and before the credit itself, over each company’s latest three reported years. Pooling rather than averaging annual ratios stops a single weak year dominating. Where a credit sits inside reported EBITDA it is subtracted back out of the denominator, so the ratio measures the credit against the profit earned without it.

Not ranked, and why:

Ubisoft’s 34.2% is company-specific driven rather than a structural claim: the credit held roughly steady while profit collapsed, and in the most recent year the credit exceeded pre-credit Adjusted EBITDA outright.

A5. What the accounts show against what the grantor publishes

A5.1 The transparency spectrum

Visibility does not track size. Québec runs the largest of the Canadian credits and publishes no recipients at all, while Australia’s flagship federal offset has no register either, so its only visible claimant is the one that discloses voluntarily.

Ireland and New Zealand publish amounts in bands rather than in figures, and New Zealand holds even the bands back for two years after it pays, describing each studio’s rebate as commercially sensitive until then, so its most recent round is names only.

A5.2 British Columbia: named in the announcement, absent from the record

British Columbia publishes no IDMTC recipient list, so nothing establishes what any company draws or ranks one claimant against another. It does, however, name companies when it suits the announcement. The release of 7 July 2025 confirming the credit was rising from 17.5% to 25% and becoming permanent, effective 1 September 2025, names Microsoft, Nintendo, EA, Take-Two and CD Projekt Red as developers operating in the province, and carries a supportive quote from Natali Altshuler, chief operating officer of EA SPORTS Studios: “Long-term support like this reflects the Province’s recognition of the industry’s value and enables companies like ours to continue contributing to B.C.’s creative and innovative economy.” Premier David Eby is quoted in the same release.

Two things this does and does not establish. It does show the grantor publicly associating five listed groups with the credit, and one of them publicly welcoming it, while publishing nothing about amounts. It does not establish that any of them claims, still less that any is among the largest claimants: being named as a developer operating in a province is footprint, not a traced claim, and the standing rule in A1 applies unchanged. An earlier characterisation of EA Vancouver as “one of the largest BC IDMTC claimants” carried in the studio-to-parent map was unsourced and has been struck, because BC publishes no data from which any such ranking could be derived.

Two of the five named sit in classifications this release does not move. CD Projekt and Krafton remain unresolvable in A1.4 for exactly this reason, that the deciding BC and Québec records are not public. Nintendo remains cleared on its own filings, which name only a Japanese research deduction.

A6. The Québec reform, modelled through Ubisoft

Québec made two changes at once. It narrowed the base, removing the old C$100,000 per-employee ceiling while excluding a first slice of each salary equal to the basic personal amount. And it is converting the credit from refundable to partly non-refundable, 2.5 percentage points a year from 2025, holding the headline rate at 37.5% throughout.

We value the non-refundable slice at what Ubisoft could realise against it, capped at the €0.9m of deferred tax it recognises in its FY26 accounts and held flat through 2028, rather than at face. That is the load-bearing judgement. At face value the 2028 cut is €10.4m against €30.5m at the cap, so roughly two thirds of it comes from this one assumption, and the face reading is the right one for a company with Québec taxable income to absorb the credit. Ubisoft’s own accounts say only that payment of some of its Canadian credits depends on taxable income being generated, and name no province, so the Québec attribution is ours and is inferred.

A6.1 Who the two changes favour, and why they do not agree

The reform is usually described as one cut. It is two, and they sort the province’s studios on different axes.

The base change sorts by wage level. Excluding a first slice of every salary costs a studio in proportion to headcount, since the exclusion is per employee and set at the basic personal amount. Lifting the old CA$100,000 eligible-salary ceiling returns money only where a salary exceeds it. A studio with few, well-paid people gains on the first and loses little on the second; a studio with a large mid-paid workforce loses on the first and gains nothing from the second. Québec’s finance ministry frames the package as improving “the fairness and impact of these tax credits … in a context where the Quebec labor market is no longer what it was when these tax credits were created” (Charles-Étienne Bélisle, Ministry of Finance, 26 Mar 2025). A Montréal studio head read the same change as “the government saying we don’t really care about locally owned studios. We really just want high-paying jobs” (Chris Chancey, ManaVoid Entertainment, 26 Mar 2025). Both readings are consistent with the mechanics; the article attributes each rather than adjudicating.

The refundability change sorts by where profit is booked. A non-refundable slice is worth its face only against a Québec tax bill. It therefore holds full value at a studio that owns what it makes and books profit in the province, and loses most of its value at a studio developing under contract for a parent elsewhere, however profitably that studio trades. Québec’s own schedule states the consequence directly: for studios whose credits exceed their Québec tax, which is most large studios, the cash value falls about 10 points by 2028, while it is preserved for a Québec taxpayer.

The two do not select the same companies. The province’s largest employers are disproportionately the high-wage, foreign-parent contract studios, which sit on the favourable side of the wage axis and the unfavourable side of the profit-location axis. Ubisoft is the modelled case, and it is net worse off on both mechanisms: the base change costs it €8.7m in 2025 rising to €10.4m in 2028, and the stranded non-refundable slice costs €4.5m rising to €20.1m, so the mechanism that looks technical is the one that grows.

Basis: the rate streams and the exclusion threshold are Québec’s own published schedule, and the two quotes are verified against their sources. The characterisation of which studios are high-wage or contract-model is a judgement drawn from the studio-to-parent map and is flagged as inferred, not disclosed.

Swappable assumptions, all inferred and flagged as such: eligible Québec headcount 4,000, the Québec share of the Canadian credit line 0.78, half of eligible staff above the old ceiling by an average of C$25,000, and a normalised operating-income base of −€306m rather than the FY26 impairment trough.

A6.2 How the Québec series is built, year by year

Four things are held fixed across all five years, and they matter more than any single figure below.

• Eligible Québec headcount is 4,000, inferred, because Ubisoft discloses no Québec or Canadian headcount split.

• Wages do not grow, so the labour base moves only when Québec changes the rules.

• Québec is assumed to be 78% of the Canadian credit line, inferred, and this sets the scale of everything.

• FX is 0.68 CAD to EUR.

• There is no revenue, margin or release schedule anywhere in the chain, which is what makes this a sensitivity rather than a forecast.

Building the base. Ubisoft publishes no Québec figure, so the base is built backwards from its FY25 Canadian tax credit line of €114.4m, of which we take 78% as Québec. That gives €89.2m of Québec credit, and dividing by the 37.5% rate implies the labour base it must have been earned on. Every later year starts from that same figure and applies the two legislated changes to it. Removing the old C$100,000 per-head ceiling adds back 80% of the salary above it, worth a flat €27.2m a year because wages are held still. Québec’s new per-employee exclusion then comes out, at C$18,571 a head in 2025 and indexed at 2.85% a year, and that indexation is the only moving part in the whole model.

Turning the base into cash. The rate applied to that base is 37.5% in every year and never falls. What changes is how much of it arrives as cash, because Québec is converting 2.5 points a year into a credit worth something only against a Québec tax bill. Ubisoft recognises €0.9m of deferred tax against the whole pool in its FY26 accounts, and we assume it never recognises more, so the non-refundable slice is capped there in every year. That cap is the load-bearing judgement in this section, since it assumes recognition never rises even as the entitlement quadruples.

The cut against 2024 splits two ways. The narrower base is the net of both base changes, the floor exclusion less the ceiling add-back. The stranded amount is the non-refundable slice less what Ubisoft recognises, and it is the shaded area on Exhibit 7.

Two things the full series makes visible. The credit at face barely moves after 2025, falling €1.7m across three years, because nothing in the business is allowed to change and only Québec’s indexed floor moves. And the non-refundable slice grows from nothing to €21.0m while the recognised amount stays pinned at €0.9m, so by 2028 the model writes off 96% of it. The widening gap is that cap, not the rate schedule.

A known asymmetry, stated rather than fixed. The model indexes Québec’s salary floor at 2.85% a year while holding wages flat. Those are two sides of one subtraction, so letting the floor grow while freezing pay erodes the base slightly faster than it should. Holding the floor at its 2025 value instead would put the 2028 realisable credit at €59.9m rather than €58.7m, and the total cut at €29.3m rather than €30.5m, about 4%. It does not change the argument, and it errs in the direction that makes the cut look larger, which is why it is declared here.

The arithmetic is exact; the answer is only as good as the two inferred inputs, the 78% Québec share which sets the scale and the 4,000 heads with a C$25,000 average excess which set the rate of erosion. Both are listed as swappable in A6.

A7. Conventions

• Currency is native throughout. No figure is converted except where a comparison demands it, and the rate and its date are stated at the point of use.

• Credit ÷ Adjusted EBITDA is the controlling dependence metric. Credit ÷ revenue is kept as a secondary reference only, because it distorts a studio that capitalises its development.

• Adjusted EBITDA is taken before impairments and before the credit. Nacon’s earn-out reversals, which are non-cash income booked when acquired studios miss targets, are stripped out.

• Disclosed against inferred is flagged on every input. Nothing inferred is presented as disclosed.

• A claim must be traced. Owning a development studio in a credit jurisdiction is not evidence that a company claims. Public silence is not evidence that it does not.

• A scheme is dated from when a company could use it, not from when it entered the statute. Where a law names games but requires a further instrument before anyone can file, we date it to the instrument. Greece is the case that sets it: digital games are named in the original law of August 2017, with their own activity code and cultural test, but applications only opened with the ministerial decision of 12 April 2019. Belgium is the same shape, enacted in March 2019 and unusable until 2022. The alternative convention is defensible and would move Greece into the 2019 base; we take the operational reading because the article’s claim is about schemes companies draw on.

• A games tax credit has a games-specific track; a general scheme that games happen to qualify for does not become one. This is why New Mexico and Colorado sit under film credits rather than in the fifteen, and why Georgia’s interactive entertainment credit and Louisiana’s digital interactive media credit are in. Applied consistently, it also keeps Argentina’s knowledge-economy regime and Georgia’s international-company status outside the fifteen, though both name games in statute.

• Funder-side reliefs count as schemes. Belgium’s shelter relieves the investor rather than the studio, and Brazil’s routes run through cultural incentive laws, so neither is a production credit paid to a developer on its own spend. Both reach studios and both are things a government did, so they sit in the scheme map and on the movement exhibit, and outside the fifteen games tax credits.

• Sources are the companies’ own filings, the subsidiaries’ statutory accounts where a parent is silent, and the grantors’ published registers. Secondary sources may locate a primary document but are never the authority for a figure.

• Sony will stop producing discs for every new PlayStation game from January 2028. New releases remain available digitally through retailers as well as the PlayStation Store, and pre-2028 discs are unaffected.

• Physical was 22% of full-game units in the year to March 2026, and on the recent pace it reaches about 16% by the deadline.

• A platform switches physical off when demand for it falls below the cost of the channel that carries it.

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On 1 July 2026 Sony said that physical disc production for all new games releasing on PlayStation consoles would end from January 2028. New titles will still be sold at retail, but only in digital formats, and games released before the deadline, discs included, are unaffected.

Sony’s stated reason was consumer preference: players had moved to digital, which it called the natural direction of the industry. Its own results support that, with downloads at 78% of full-game units at their last fiscal-end and 82% in the latest quarter (Q1’26 CY).

A retailer-led petition against the change passed 213,000 signatures within a week, players called the move a loss, and Sony’s shares rose.

The argument runs that discs have grown expensive to make, so Sony was shedding a costly channel and keeping its customers on the digital one, where it keeps far more of each sale. It is true that Sony does keep more of a download, and switching the disc off moves the spending onto the digital storefront it controls, but a disc costs about a dollar to press, and the maker of the most expensive format, Nintendo, whose cartridge costs many times more, still has a significant physical distribution. If the price of the medium decided this, then the most expensive format would be the first to go - yet it’s the other way round due to the nuances of each company.

So the question is not whether physical dies, which it has been doing on its own, but when a platform decides to stop making it. Sony is switching off well after the format stopped carrying most of its sales.

Sony’s customers had already left

Sony’s full-game digital download ratio rose from 27% (FY’17) to 78% (FY’26) and physical fell the other way, from 73% to 22% across the same time period. If we assume that the trend from physical to digital continues, Sony would likely have a 16% physical share by January 2028, when the last new disc would be pressed.

In the United States, 73% of the PlayStation 5s sold since launch came with a disc drive, Circana reported through June 2026. Sony's own software mix moved to downloads anyway.

What they show is two parts of the same market moving at different speeds: most PS5 hardware kept the option to use discs while most PlayStation games moved to downloads. If the PS6 arrives without a drive, Sony is removing from the hardware an option about 73% of the PS5s sold across the generation in the US still had, even after physical stopped accounting for most game sales.

The maker with the most expensive format is the one keeping it

Microsoft sells the same two consoles Sony does, one with a drive and one without, but its buyers have gone further from the disc, with about two-thirds of the Xboxes sold in the United States last year carrying no drive, against about half of PlayStation 5s on the same annual basis. Microsoft has also sold fewer consoles than Sony, having focused on building its Game Pass offering in the past (See: Microsoft and Xbox: Separable, but still staying).

Nintendo is the other way, still selling close to half its games on cartridges and, from May 2026, pricing the download below the boxed copy rather than level with it, even though a cartridge costs it many times what a disc costs Sony.

Nintendo keeps the expensive physical format because its buyers still want the physical cartridge, to lend, hand on and sell again, and above all in Japan, where a used game holds its value and listed chains make a business of reselling it.

Digital distribution for Nintendo also arrived later than for its peers. A PlayStation owner could buy a new release as a download from 2007 and an Xbox owner from 2009, while a Nintendo owner waited until 2012, so Nintendo spent the years its rivals used to build a download habit still selling cartridges, and digital has only just passed half of its software sales.

Physical distribution channels are already failing

The physical distribution channel; the disc pressing, freight and retailers and the standing organisation behind them, is mostly fixed cost, built over decades. Those costs do not fall as the volume through them falls, so each remaining disc carries a larger share of them and creates negative operating leverage.

GAME, the UK’s specialist, went into administration in 2012 as an over-expanded, indebted chain that could not cover its rents once its banks and suppliers pulled credit. It was sold out of administration for a nominal sum, floated again, and returned to administration in 2026, its administrators this time blaming the shift to digital downloads and the absence of a major console launch in its final quarter. GameStop has leant on the equity its 2021 share rally let it raise.. The retailer works on the thinnest margin in the chain, so it is the first to go. A platform watching its specialists fail can read the channel as finished well before its own sales say so.

Sony’s own side of the channel is not failing the same way. Thalgau in Austria, which presses the discs, keeps about nine tenths of its volume after the January 2028 impact, because only new releases stop and the catalogue re-orders and the music and video work carry on. The plant has been building a second business in plastic microlenses since before the disc decision was announced, and it means to carry its workforce across to the new business rather than let them go. The catalogue re-orders are for games that came out before the cut, and nothing released afterwards joins as additional demand for that part of the business. The pool the plant works from stops being topped up, and Sony has not said how long it lasts.

Publishers have already shifted their own sales

The same fall shows up in five large publishers’ own accounts, physical dropping over the past decade to single digits for most of them, with only Nintendo, still on cartridges, anywhere near half.

Any publisher can move its own releases towards digital, but none can end the disc, because that decision sits with the platform that presses and distributes across the ecosystem.

What Sony keeps depends on the channel, not the disc

Physical software is under 3% of Sony’s games segment, and what Sony keeps of a $70 game is our triangulation from what the retailer and the publisher disclose. A download saves the retailer’s cut on Sony’s own games and replaces a small disc royalty with a larger store cut on everyone else’s, so ending the disc moves the spending to a channel Sony keeps more of, on the buyers who follow. That makes the buyers who won’t follow cheap to lose, which is what lets Sony act on a shift its customers had already made.

Music and film were the first to switch to digital

Physical media has been through this twice before, in music and then in film. Games held on longest, keeping a new-release shelf in shops years after the other two had lost theirs, and it is the last of the three to fall below 50% of the mix.

Other companies have switched a format off before, and the four we looked at turn on whether the replacement was already paying for itself. Netflix ended DVD-by-mail from half a percent of revenue, against a streaming business that had become the whole company. The two that went badly sit either side of that: Newsweek cut print before the digital title could carry itself, and Kodak held on until the market decided for it. Music never switched anything off, letting the CD go while vinyl held as a small profitable niche.

Sony announced with digital already about 80% of its units, and it switches the disc off with physical down in the mid-teens, far down its own curve and where the risk of cutting is lowest. That measures what the decision costs Sony, and not what it costs the people losing the disc.

The same logic points to a disc-less PS6

Sony already sells the PS5 Pro without a drive and sells the drive on its own, so the disc is an option the buyer pays for rather than a cost carried in every console. That add-on does everything a built-in drive does, playing PS5 games on disc, the PS4 back catalogue and 4K films.

A console needs a built-in drive only while new games ship on disc, and from January 2028 none will. We assume the PS6 arrives without one, and that the add-on carries the back catalogue for the buyers who still want it. Sony has said nothing about the next console, and it could keep the drive anyway, for the 4K film player or for Japan, where the object still sells, though neither of those is a reason that comes from the games business.

The buyer loses something the accounts do not carry

A disc could be lent, resold and handed on, without an account and without anyone’s permission, and a licence cannot be. Day-one patches became normal around 2013, so a disc often stopped holding the whole game, but the disc stayed transferable, and that is the part the switch ends.

Nothing in the move to digital requires that. Nintendo’s Game-Key Card holds no game, only the right to download one, and it has to stay in the console to play, so what the buyer owns is still an object: it is not tied to an account, and it can be lent or resold like a cartridge. Sony’s boxed code is spent on the first download and tied to one account, so nobody can pass it on. Grand Theft Auto VI is due to ship its physical edition as a code in November, the first blockbuster to do it, and from January 2028 it is how a boxed PlayStation game works.

Sony’s shares rose, on a reading that a small, low-margin line closes and most of the spending that ran through it stays. That reading covers one side of the decision, and what a buyer could do with the object they bought has never been a line in anyone’s accounts.

More from The Side Quest

• Jason Della Rocca (Griffin, Execution Labs, ex-IGDA): “Zero-to-evidence is where the market failure is” Most funds now wait for proof that players want a game, and reaching that proof often runs on savings, a grant if your country has one, or an incubator place if you can get one.

• Microsoft and Xbox: Separable, but still staying Microsoft has done everything you would do before selling Xbox. We priced seven ways of doing it, and every one it can execute itself is worth less than doing nothing.

• AppLovin vs Unity: are two of the market’s favourite ad engines worth it? We read the job postings on both sides of this market, the ad networks and the studios that buy from them, to test whether AppLovin’s and Unity’s ad-engine growth is worth what the market pays.

• Epic Games: what is it worth, and what did the generosity cost? Fortnite pays for four free layers. The cash Epic captures is worth about $7.5bn; the tools it under-monetises lift fair value toward $14bn, and the last mark sits in between.

• Roblox: A great company lost on valuation - It owns the most complete stack in interactive entertainment yet profits from it the least, and rising costs are eating into what little is left.

• AI in Video Games: Own the Loop - why a studio keeps its value only if it owns the content-generating learning loop, not the model. Uses Guild Wars 3 as a worked example.

• AI won’t make AAA games materially cheaper to develop - the productivity gains are real, but two-thirds of the value leaves the P&L to the AI vendors before it reaches the bottom line.

Appendix

Every figure the article uses, with what it rests on. The article keeps precise numbers out of the prose and points here instead, so this is where the sourcing, the dating and the caveats live.

How to read the basis column. Disclosed means the company published it. Reported means a named outlet or a filing of another party published it. Pleaded means it appears in a court filing as an allegation, not as a finding. Convention means an industry rate that is widely used and not company-specific. Derived means we computed it from figures in the rows above. Ours means it is our reading, and the article says so wherever it appears.

Fiscal years run to 31 March unless stated. Sony’s “year ended March 2026” is written FY2026 throughout, which is Sony’s FY2025 in its own naming, so the year end is always given.

A1. Sony’s own mix, and the remnant at the cut

Sony publishes one number that carries most of this article: the share of full-game software units sold as digital downloads. Its own definition is full-game units sold via digital transactions over total full-game units.

The early years cover the PS4 alone, because the PS5 did not exist, and the two consoles together from the year ended March 2021. A restatement of the 2019 and 2020 figures to 43% and 53% also circulates; we investigated it in July 2026 and could not tie it to source as full-year figures, they appear to be single quarters, and a PS4-plus-PS5 restatement is not possible for years before the PS5 shipped. The series here is as first disclosed, and those two values are not used.

Physical counts the boxed sale, not the medium. Sony’s split is on the transaction, so a game bought in a shop counts as non-digital whether the box holds a disc or a download code. The share therefore overstates offline ownership, and by a margin nobody discloses. A disc has not held a complete game since day-one patches became normal around 2013, and boxed copies have begun to carry only a code, with Grand Theft Auto VI’s physical edition, due in November 2026, the first blockbuster to ship that way.

The remnant at the cut

The article says physical reaches about 16% when the last disc ships. That is a projection, not guidance, and it is built from the disclosed series above.

The line the announcement affects

The other two console makers

The article says digital has only just passed half of Nintendo’s software sales, and leaves Sony’s 78% on the other side of the sentence. The two figures are not measured the same way, so both are set out here rather than differenced anywhere.

Nintendo’s prior year was 53.5%. Sony counts units and Nintendo counts money, so the distance between the two is not a number of percentage points and is not presented as one. Microsoft publishes no digital software share at all, which is why the article reaches for its hardware mix instead.

Nintendo’s price split cuts the download rather than raising the boxed copy. Nintendo announced on 25 March 2026 that its own Switch 2 titles would carry a lower digital price from May 2026, the first being Yoshi and the Mysterious Book. In the United States the split is $59.99 for the download against $69.99 boxed. The two had been level before it: Mario Kart World launched at $79.99 either way. The scope is first-party Switch 2 exclusives, and it is separate from the Switch 2 hardware price, which rises from $449.99 to $499.99 on 1 September 2026 and is a genuine increase. Basis: disclosed, Nintendo announcement, 25 March 2026.

When each store opened. The stores did not arrive together, and the gap covers the years in which buying a download became normal on the other two platforms.

Nintendo’s storefront opened about five years after Microsoft’s and did not carry full retail games until the year after that, so roughly six years separate the point at which a PlayStation or Xbox owner could buy a new release as a download from the point a Nintendo owner could.

Consoles sold without a drive. About two-thirds of the Xboxes sold in the United States in the last year carried no drive, against about half of PlayStation 5s, both on the same annual basis and both from Circana. A figure of roughly a quarter also circulates for the PlayStation 5 and is Circana’s life-to-date measure, which covers every unit since launch rather than the last year, so the two are not interchangeable. Part of PlayStation’s annual share is the PS5 Pro, which ships without a drive by default, so the figure reflects what was on sale as well as what buyers chose.

A2. The publishers

Physical net revenue as a share of total recognised net revenue, one dollar basis, so that live-services and mobile revenue sit in the denominator rather than being stripped out. That is a deliberate choice: it means the ratio falls both because physical declines and because a publisher’s other businesses grow, and both are part of the same shift.

Each publisher’s denominator, because they are not the same thing. Nintendo is on software net sales, so hardware sits outside it. Capcom is on its Consumer sub-segment, packaged plus digital, so its Mobile business sits outside it; on the wider Digital Contents segment the 2022 peak reads 34.3% rather than 36.0%. Ubisoft is the physical share of net sales from Note 4 of its accounts. EA is packaged goods over net revenue. Take-Two is one minus its disclosed digital share.

Basis: disclosed for every year, from annual reports and SEC filings. The 2028 column is a saturating scenario, ours, not guidance.

Capcom’s rise is a slate effect rather than a reversal. Its two troughs, the years to March 2020 and March 2023, are the years whose headline release was a paid digital expansion, Monster Hunter World: Iceborne and Monster Hunter Rise: Sunbreak, and Capcom described the first as selling primarily on digital. The years between each carried two full packaged releases. Capcom attributes the packaged strength of the year to March 2022 to Resident Evil Village, Monster Hunter Stories 2 and continued physical sales of catalogue Monster Hunter Rise. Physical was about a quarter of its units that year but over a third of its value, because packaged sales are new-release and near full price while digital volume is mostly discounted catalogue.

Take-Two’s fall from 2022 is partly arithmetic, because folding in Zynga brought a large all-digital mobile business into the denominator. Ubisoft’s 2025 to 2026 step is not a clean like-for-like either, because its 2025 net sales were restated in the 2026 report after the Vantage Studios transaction.

A3. The three formats

Physical’s share of each format over time, and the year each fell below half. The crossing years can be compared; the levels cannot. Games is counted in units while music and film are counted in money, and on a money basis physical sits nearer a tenth of games revenue for most large publishers than the fifth the games series shows.

Sony reports to a 31 March year end, so each of its years is plotted at the calendar year it mostly covers. The crossing Sony records as the year ended March 2020 therefore appears here at 2019. The workbook holds it as 2020, on the fiscal-year-end basis. Same event, two conventions.

Each series covers the part of its medium that was ever sold as an object. Mobile and free-to-play games sit outside the games denominator, because they never had a physical form; including them would put physical in single digits by the mid-2010s and reverse the order.

Basis notes. Music is on RIAA’s wholesale basis, which is what RIAA now reports, having retired estimated retail value; on the retired basis the crossing falls in 2011 instead, and that series cannot be completed because RIAA does not publish it for 2025. Film is disc sell-through plus disc rental, which is DEG’s own definition of physical product; on sell-through alone the crossing moves before 2012 and the order of the three reverses. Film’s 2011 opening figure is one DEG revised after first publishing it, its original rental having been projected from studio estimates, so the revised 77.8% is used in place of the original 81.1%. Film’s 2015 reading sits a third of a point above half, close enough that a restatement of about 0.7% would move that crossing to 2015, though no available vintage does. Film years are read from each year’s own year-end report except 2011, 2012 and 2015, and the denominator for 2022.

The one period all three move together is 2020, and all three move away from physical. The games year inside it also carries a basis change, being the first year the PS5 enters the series.

A4. What a $70 game splits into

Sony publishes none of this. What follows is built from one rate we assume and one a court filing pleads, with a third derived between them, and it is presented as gross proceeds rather than profit.

The 22 to 25% band is ours, not GameStop’s. Its disclosed new-software margins across those three years are 20.7%, 22.9% and 24.1%, so the band sits a little above what the filings show, and the 22% we use sits at the bottom of it.

The residual is derived rather than sourced, and that is deliberate. We assume the platform takes a fifth of a disc sale, on a secondhand report of Ubisoft putting it there, and the complaint pleads Sony’s royalty at 11.5%, so what is left is what making and shipping the disc absorbs, being 20% less 11.5% and so 8.5%. Holding one assumption and one pleaded figure, and deriving the third from them, is a choice; the alternative, taking a 15% royalty convention so the arithmetic lands on Ubisoft’s 20% exactly, uses a rate that is not Sony-specific.

The residual sits above Sony’s line rather than inside it, because it mixes Sony’s own pressing with case and freight that need not reach Sony. The plant is Sony’s, so some of it does, but not demonstrably all, and the table does not claim otherwise.

The 11.5% is a channel royalty, not a disc royalty. The complaint scopes it to physical and digital games sold at external retailers, so a download code bought in a shop paid the same rate as a disc. Sony withdrew those codes on 1 April 2019, which is the first day of its own fiscal year, and from then a third-party download could only mean a store sale at 30%.

The cross-check, and where it differs

Bloomberg’s Jason Schreier gives $45.50 for a first-party disc, against $48.65 here, and $35 against $49 for a third-party game physical and digital.

The digital columns agree exactly, which is a useful check on the 30% store cut. Every divergence on the physical side comes from one input, the retailer’s cut, where Schreier uses the round 30% convention and we anchor to GameStop’s own new-software margins. Schreier’s figure is retained as a guard, with the $3.15 variance stated, rather than used as the anchor: reaching it would require a 26.5% retailer, outside the band we use, or a 24.5% platform take, which breaks the 20% we assume.

The boxed code, which is where this is heading

From January 2028 a boxed PlayStation game carries a code rather than a disc, and the split for that state is the least disclosed of the three.

At the central setting the walk is $70.00 less 10% to the retailer and 30% to Sony, so $70.00 − $7.00 − $21.00 = $42.00. Against $40.60 on a disc and $49.00 on a store download, the boxed code sits between the two, and the step up from the disc is $1.40. In the exhibits this column renders almost entirely as outline and hatch, because the disc’s successor format is less disclosed than the disc it replaces.

A5. Margins, and the channel that carried the disc

Sony discloses no margin on its physical line, no per-disc royalty and no store commission. What can be shown is what other companies in the same chain disclose, which bounds the shape without pretending to the amount.

These are not one measure. Four are gross margins, one is an operating margin, one is a cost line and one is a revenue share, so the column reads as a set of separate disclosures about the same chain rather than as a ranking, and it is not charted anywhere.

The plant

Sony DADC’s site at Thalgau in Salzburg presses about 600,000 discs a day across every optical format, for games, music and film. Of that volume, PlayStation is about half, and of the PlayStation half about a fifth is new releases, so new-release PlayStation pressing is about a tenth of the plant’s total output, and that tenth is what stops in January 2028. Catalogue re-orders for games released up to the end of 2027 continue, as does the music and video disc business. The plant is converting part of its capacity to plastic microlenses under a Micro Optics division, with about €30m invested and about €10m more planned for 2027, series production from 2027, and its roughly 300 staff stated to be unchanged at least until early 2028.

Basis: Sony DADC chief executive Dietmar Tanzer, at a briefing at the plant on 1 July 2026, reported by ORF Salzburg the same day and by the Salzburg chamber of commerce on 2 July. The two-fifths catalogue share is our subtraction from those company figures. Shares are of units, not revenue.

Two figures that circulate against this plant are wrong and are not used here. A lifetime total of 24 billion discs matches no real figure; Sony’s own 23bn-plus belongs to the Terre Haute plant in Indiana across 1983 to 2022, and Sony publishes no lifetime total for Thalgau. And the plant’s output does not fall to a tenth, which inverts the figure above.

The retailers

GAME, the United Kingdom’s specialist, entered administration in 2012, was sold out of it for a nominal sum, floated again, and entered administration a second time in February 2026 owing about £16m. Its administrators cited the move to digital downloads alongside Brexit, sharper competition, and the withdrawal of its secured creditor’s support. GameStop’s survival rests on the equity its 2021 share rally allowed it to raise.

Japan is the exception, and it is a listed one. Three reuse chains selling used games and consoles disclose and are growing: GEO Holdings, Book-Off and Hard Off.

A6. What Sony does not disclose

Each gap below sits under a figure the article uses, so each is named rather than worked around.

• The margin on the physical line. Not published, and not derivable from the segment.

• The per-disc royalty on third-party games. Not published. The 11.5% used here is pleaded in the Caccuri complaint, and Sony’s actual rate is redacted in its filed licensing agreement.

• The commission the PlayStation Store charges. Not published. The 30% used here is the platform convention, which the same complaint applies to Sony.

• What the retailer earns on a boxed download code. Not published by anyone. GameStop describes the mechanism, a commission negotiated with the publisher, without giving a rate.

• How much of the physical share is a disc rather than a box. Not broken out.

• The size of the micro-optics business. No volume and no revenue.

• How long catalogue re-orders last after January 2028. Not forecast.

A7. Method and conventions

One basis per series. Where a comparison spans companies or formats, each series is stated on its own industry’s standard measure and the measures are named, because they are not interchangeable. Where that makes levels non-comparable, as with the three formats, the appendix says so and the comparison rests on timing instead.

Estimates are marked. In the exhibits, a solid fill means disclosed or a stated convention, a hatch means an estimate or a projection, and an outline means the thing exists but its size is not disclosed. Nothing inferred is drawn as though it were reported.

Coincidence is not cause. Where an event sits alongside a turn in a series, the exhibits mark it as a coincidence rather than an explanation, and where no explanation can be evidenced the turn is left unmarked and the appendix says why. Two candidate explanations for the steep falls in the games series were tested and dropped, one because the arithmetic could not carry it and one because the channel involved was too small.

Court filings are allegations. Figures from the Caccuri complaint are the plaintiffs’ pleaded case, not findings. Sony denies the allegations and the court has made no finding. Paragraph references are to the Second Consolidated Amended Complaint, filed 13 December 2024, which supersedes the earlier versions and renumbers them.

The price-gap evidence in that case is not used. The complaint pleads that PlayStation Store prices ran well above retail. The case’s own record undercuts it: plaintiffs’ expert found that in over 99% of sales the retail price was the same as or higher than the store price, and the damages theory fell from billions a year to a ceiling of about $29.6m. The article’s economics rest on what Sony keeps, not on what buyers pay.

• A wave of project funds, Griffin, Outersloth, Kowloon and VGames among them, now backs premium games on cleaner terms than many publishers offered, but most of it reaches the game whose demand is already proven, and less the one still proving it.

• Publishers came out of the pandemic glut able to wait for wishlists and trailers to tell them what felt safe, so developers now generate much of that evidence themselves before most funders will look at them.

• The phase before that evidence exists is where Della Rocca sees the market failure, so who reaches it is often settled upstream by savings, a grant, consulting income, or an incubator place, long before the better game is judged.

Watch the full interview with Jason Della Rocca below.

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A group of funds now finances games on terms developers have wanted for a long time. Griffin, Outersloth, Kowloon and VGames put up the money for a premium game, take a share of its revenue in return, leave the studio its IP, and do not ask for a say in how the game is made. Set against a full-service publishing deal, where the publisher may encumber the IP through broad rights and recoup its advance in return for running the marketing and distribution, the terms can be better for a studio that has already done part of that work itself.

Much of this money does not move, though, until a game has already shown that an audience wants it, through wishlists, a following on Discord, a trailer people have watched, viral TikTok posts and strong playtime or engagement in a playtest or demo build. By the time a fund commits, the game appears less risky, but that does not mean the studio no longer needs money or that the commercial risk has disappeared.

There are exceptions. Blue Ocean works at concept stage, Outersloth says a build or demo is optional, and WINGS, GameSeer and Phantom Friends can enter around prototype. The point is not that early money does not exist, but that it is scarce and highly selective, while many more options appear once the evidence is there.

The piece comes out of a long conversation with Jason Della Rocca, who has spent thirty years in games and now advises studios on how to raise money. He also works on one of the funds in question, Griffin’s Special Opportunities Fund: he sees where the money now goes, and he is candid about the gap it leaves at the start.

Why venture never fit premium games

How a game should be funded is decided by its business model, and games split cleanly into two in Della Rocca’s framework. This is his own starting point, and it has been for years. A studio building a game as a service, a free-to-play title, a live multiplayer game, anything with the shape of Fortnite or Roblox, runs on the economics of a software-as-a-service (SaaS) business: recurring revenue, a funnel, a cost of acquiring a player set against the value of keeping one. That is the shape venture capital is built to back, and on his account it is almost the only shape it has backed. “99% of all VC dollars that have gone into game studios has essentially gone into studios using some version of SaaS, GaaS, live service.”

A one-off premium game usually does none of that. The $20 title bought once on Steam and played to the end earns like a piece of content rather than a platform, and there is no funnel beneath it for a fund to compound over the years it would need to return several times its own size. So the studios making those games sat outside the venture category for years, and the money they went looking for was unlikely to arrive because equity was often the wrong instrument, even though rejection was usually read as a verdict on the game. “Venture is for GaaS,” as he puts it, “project funding is for premium games,” and the model, not the merit, decides the side a studio is on.

What that left was a whole class of viable games venture would not fund. A studio would pitch a fund, hear that “this is not the next Riot, this is not the next Supercell, we’re not interested,” and then, in his words, “they take a million bucks and they make 20 million, 50 million, 100 million.” A game that turns one million into fifty is a good business that venture could not back, because venture is not looking for a good return, it is looking for a rare and enormous one. The project funds are what grew into that gap, writing the deals venture was made to turn down.

How the money learned to wait

Before the pandemic, Della Rocca says, a studio could raise money on a strong prototype and a credible team, on how good an early build felt in the hands. What broke that was not a crash but a glut. The surge in players through lockdown pulled in a wave of investment, and when it receded it left an oversupply of games, and of the studios making them, all pitching at once. The people with money were suddenly seeing far more of everything and could still act on only the same few.

What changed was the ratio of pitches to deals, while the money behind the deals held roughly steady. “Maybe I got 1,000 pitches, and I did 2 or 3, 4 whatever deals,” he says. “Now I’m getting 5,000 pitches, and I’m still only doing 3, 4, 5 deals, because... I can only service so many games in a given time frame.” The number of deals barely moved and the number of rejections multiplied, so from the outside it looked like a market that had stopped funding anything, when the same money was simply turning away five times as many people.

Somewhere in that glut the people writing the cheques stopped trusting their own judgement. Too many bets had missed, playtime had softened after the lockdown highs, and in his words they “lost their confidence in their ability to pick winners.” A funder who no longer trusts it has an obvious way out, which is to let the market do the judging. The game that arrives with a hundred thousand wishlists will often beat the one that arrives with none, and waiting shifts much of the cost of generating that evidence onto the developer.

So the burden of proof moved onto the developer. Studios began doing the work a publisher was once meant to do, announcing early, cutting trailers, gathering wishlists, working festivals, viral TikTok posts and Discord, building the evidence of demand before approaching the people with money. Della Rocca calls it “inception publishing,” the point at which a developer has to run the marketing to prove the game is worth marketing. And once a studio has done that, a harder thought follows. It has found its own audience and validated its own product, so part of what a publisher was meant to provide has already been provided in-house, and the question becomes what the publisher is still for.

That question is the opening the project funds walked into. A studio that has done its own validation already has its players, and what it is missing is the money to finish the game, which is all the funds provide, along with none of what it no longer needs. “You did the marketing, you have your community, we don’t need to do that for you,” is how he frames their pitch, “but... you need more money to finish the game. Okay, here’s 500 [thousand], a million, whatever, and we just take a revshare with no IP rights, no derivative rights. It’s a very clean contract.” The publishers, by sitting back and waiting for proof, left the opening that now lets a studio pass them by.

The clean contract, and the equity on top

The developer-friendly language mostly survives into the contracts, on the evidence Della Rocca has seen. The contracts are short, the fund takes a share of revenue and little else, and the rights a publisher might fold in, sequels, merchandise, derivatives, a claim on the next game, tend not to be there.

Outersloth, which publishes its contract, splits revenue 50/50 until its money is repaid and then 15/85 in the studio’s favour, with the agreement ending after seven years. Griffin, the fund Della Rocca works on, takes no repayment at all and shares from the first dollar. For a studio that needs capital rather than publishing services, those are cleaner deals than a recoup-heavy publishing agreement. They are not automatically better in every case because a publisher may also be paying for and doing work that the fund leaves with the developer.

Some of the funds do more than share project revenue. Blue Ocean takes 20% of the company plus up to 30% of company revenue, although the revenue share falls away if the studio completes a qualifying seed round within two years. Denmu describes itself as a flexible-capital investment house, and reporting indicates that it can use both project finance and equity, but it has not published one standard structure, entry stage or set of terms.

Della Rocca is uneasy about company equity in these deals - he grants that the deals are fair, since developers sign them with the terms in front of them, and he stresses that it is not a comment on the teams at either fund. His reservation is with the instrument, not the people using it. Project finance exists in the first place because equity often does not suit these games. A stake in a three-person premium studio assumes some path to an exit or a wider stream of products, and for many of these studios that outcome will not arrive.

There is a reason a fund might want it anyway - if the money turns a game into the next Balatro or Palworld and a buyer appears, a pure revenue share leaves the fund outside the deal. “[Hypothetically speaking, if'] it was my money that made Palworld a success,” as Della Rocca puts the objection, “but then I’m not getting any of the proceeds of the... multi-billion dollar acquisition.”

Grant it entirely, and his answer still holds: that upside can be caught with a buyout clause or a conversion right, without taking a stake on day one. The instinct to take it anyway, he thinks, is inherited rather than reasoned. “If you come from the venture side, it’s like you’re a fish that only knows how to breathe oxygen in water.” Shown there is another way to breathe above the water, the reflex holds: “I need my equity, it’s in my DNA, it’s all that I know.”

The gap before the evidence

The map sets out the timeline of a game from idea to live:

To the right of the evidence line (first traction) the money is more plentiful and takes several forms, and to the left of it there is comparatively little. Blue Ocean, Outersloth, WINGS, GameSeer and Phantom Friends are among the funds that can reach back towards concept or prototype, and some publishers still do pre-evidence deals for an exceptional build or a proven team. The early money is not absent, but it is scarce enough that most developers cannot plan around receiving it.

Della Rocca is clear that this suits the later-stage funds. They can hold off while a developer spends their own months and their own savings proving the audience is there, and put money in only once the uncertainty has narrowed. “They just wait for the developers to put all the blood, sweat, and tears to generate the evidence on their own time,” he says.

Some of the recent funds go later still. Almost Ready and Ichiba, both launched in 2025, put their money into games approaching release, once the build is nearly finished.

He does not leave it there - once the evidence exists, Della Rocca argues, it can overwhelm many of the things that used to decide a deal. A game with a million wishlists carries the same signal whether it was made in San Francisco or, in his example, at a school in Vietnam. “If you can produce the data, you’re gonna get a deal,” he says. “The traction overcomes all.” That is his claim about the levelling power of market data, not a guarantee that every team holding strong numbers receives the same access or terms.

That fairness begins only once the numbers exist, and getting to them is where the cost sits. Generating demand takes money, and it takes it before a game earns anything: art, a trailer, the months of work behind them, and a way to live through those months. A developer with savings, consulting income, a government grant, or a place in an incubator can pay that cost, and one without cannot, so the field is thinned by who can afford to reach the starting line long before it is thinned by who has made the better game. That is the gap on the left of the map, and Della Rocca is clear about where it leaves things.“The zero-to-evidence is where the market failure is.”

The funds are not wrong to wait, because the odds on anything unproven are poor. Alinea Analytics estimates that games released during the year captured 29% of Steam’s full-game revenue in the first half of 2024, 27% in the first half of 2025 and 21% in the first half of 2026. The back catalogue took the rest.

On mobile, by his account, it is harder again, with almost all of the money going to games that already exist and next to none to anything new. Waiting for proof is how a fund stays out of the games that will not work. It also means the money collects around the games that have already shown what they are, and never reaches the phase where showing it is the hard part.

The fund nobody will build

The fix Della Rocca has in mind is to pay for the missing phase directly, and to do it by buying an option rather than backing a game outright. A small amount goes to the developer, enough to hire an artist and a programmer, build a rough prototype, make a trailer and put up a Steam page. The fund then waits to see how the market responds. “If reaction’s good, okay, then we double down,” he says. “If reaction’s bad, or just flat, then... we don’t exercise our option to continue, and you owe us nothing.”

He would run it as two phases of a fund. The first is small and expected to lose money, since its whole purpose is to place those options on games a partner judges promising before there is data to confirm it. The second commits the real capital once a prototype has proven itself, on the clean revenue-share terms the funds already offer. The closest thing that exists is Polden Publishing, which improves a game’s store presentation, pushes it out through creators and signs games that reach its public threshold of 30,000 wishlists. But developers generally arrive with a build, so it does not finance the full journey from idea to evidence.

None of that solves the problem for a developer who cannot self-publish, which is the other half of what Della Rocca would add and the half his own fund does not provide. Some others do. WINGS explicitly helps teams self-publish, including release strategy, marketing execution, business development and platform relationships. Outersloth offers advice and introductions, though it makes clear that it is not a full-service publisher. Della Rocca’s version would combine that support with broad prototype finance, public market testing and a dedicated follow-on cheque for the projects that work.

No scaled vehicle he identified combines all of those pieces in exactly that form. It needs capital that will accept losing a fixed share of itself by design, and conventional investors are reluctant to do that. Della Rocca’s defence is that the losses are the method, that you need ninety-nine failures to reach the one game that pays for them all. It is an intentional failure machine, and what he has not worked out is how to sell that to the people with the money. “How do I make an [intentional] failure machine sound investable?”

The audience is the asset

What carries a studio from one game to the next, in Della Rocca’s telling, is the audience it keeps: its Discord, its mailing list, the following that turns up for whatever it makes next. That audience survives a hit and gives the game after it somewhere to start, so a studio that holds its fans is bigger by its third or fourth game than its headcount would suggest, and bigger again with each game that reaches an audience already waiting for it. The project funds sit easily with this. A fund that only supplies the money and takes a share of the result has no cause to get between a studio and its players.

The offer a publisher makes is a real relief to take, since it lifts the marketing and the streamers and the press and the launch off a developer who would rather be building the game, and a studio that accepts it is not being naive. Della Rocca argues that the trade-off is that the arrangement can build the publisher’s audience more visibly than the studio’s. He makes the case through the publisher he admires most, Devolver, whose terms he considers fair, whose studios he says are well looked after, and which is as good at its work as anyone in the business. That, he says, is exactly why he calls it the worst.“Because they’re so good, nobody knows who you are.”

He demonstrates it with a test that catches even the people who should know the answer. Cult of the Lamb is among the biggest games Devolver has released, and a room full of developers, asked who made it, may not be able to say. It was Massive Monster, in Melbourne. Della Rocca’s interpretation is that much of the recognition accrued to the game and publisher rather than to the studio brand, potentially leaving Massive Monster less able to carry that audience into its next release. It is an argument about where recognition accumulates, not a literal claim that Devolver owns the studio’s audience.

Hollow Knight came out of the same country, and most people who follow games can tell you Team Cherry made it. In Della Rocca’s telling, that name gives the Adelaide studio an audience the next game arrives already holding. Della Rocca is not against publishers. He is for the studio keeping the direct relationship with the players who may buy its next game.

What it comes to

The funds are a real expansion of the financing menu, and a developer taking one can often keep company ownership, IP and creative control while raising the money needed to finish a game. They have not solved the earliest funding problem at scale. Some vehicles do fund concepts and prototypes, but the period before a convincing build or audience signal remains thinly and selectively financed. A studio still bridges it with its own savings, consulting income, a grant if its country runs one, an incubator place if it can get one, revenue from an earlier game, or months of unpaid work.

For a developer, that puts a hard edge on the advice Della Rocca gives, which is to reach evidence as efficiently as possible and to hold on to the audience it brings. Reaching evidence means treating the trailer and the Steam page and the wishlist campaign as part of making the game, since much of the later money will not come until they exist. Holding the audience matters because it is one of the few assets that survives a game and carries into the next, and once the direct relationship has been handed to a publisher, it is slow and expensive to build again.

For the funders, the gap is a thin and under-served part of the market. The risk sits in the phase before a game has evidence, and a fund that moved there could back winners before the wishlists made them obvious. It would also lose money on most of what it backed by design, and conventional investors are reluctant to accept that. So the work keeps falling to grants, incubators, studios with consulting income, and developers able to fund themselves, and none of those reaches every creator or every country.

At the end of the day, Della Rocca continues to push developers to build sustainable studios that can create amazing games for adoring fans all over the world.

More from The Side Quest

• Microsoft and Xbox: Separable, but still staying Microsoft has done everything you would do before selling Xbox. We priced seven ways of doing it, and every one it can execute itself is worth less than doing nothing.

• AppLovin vs Unity: are two of the market’s favourite ad engines worth it? We read the job postings on both sides of this market, the ad networks and the studios that buy from them, to test whether AppLovin’s and Unity’s ad-engine growth is worth what the market pays.

• Epic Games: what is it worth, and what did the generosity cost? Fortnite pays for four free layers. The cash Epic captures is worth about $7.5bn; the tools it under-monetises lift fair value toward $14bn, and the last mark sits in between.

• Roblox: A great company lost on valuation - It owns the most complete stack in interactive entertainment yet profits from it the least, and rising costs are eating into what little is left.

• Microsoft and Xbox: Too small to sell, too strategic to spin - On the numbers, Xbox is worth about $49bn, a rounding error to Microsoft. It won’t be sold, and any separation keeps a grip on the data its games generate.

• AI in Video Games: Own the Loop - why a studio keeps its value only if it owns the content-generating learning loop, not the model. Uses Guild Wars 3 as a worked example.

• AI won’t make AAA games materially cheaper to develop - the productivity gains are real, but two-thirds of the value leaves the P&L to the AI vendors before it reaches the bottom line.

• Microsoft’s July reset gave Xbox its own P&L, moved Mojang and King to report directly to Sharma, and cut costs to a shape any owner would want. None of it commits Microsoft to anything: the moves build the option to keep, fix, or separate the business.

• Rebuilt from the ground up on cash economics, Xbox is worth about $44bn (vs $49bn we published in the first piece), a rounding error at roughly 1.5% of Microsoft’s market value. The platform upside in King and Minecraft is worth nothing here, because nobody is funding it: none of the seven roles Mojang posted after the reset is a game developer.

• Across seven separation routes, every version Microsoft can execute itself returns less than keeping: the spins pay to stand up alone, and the sunsets destroy the store commission and Game Pass, which only earn while the console does. The two that beat keeping are sales made entirely of a premium nobody has offered. So Microsoft keeps Xbox.

I write The Side Quest independently and take on select advisory and consulting work alongside it, and I’m open to the right full-time role. If any of that could be useful to you or your team, I’d be glad to hear from you. The Xbox Model is available on request.

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The reset builds options, not a decision

Microsoft’s July reset of its gaming business, another 3,200 roles through FY27, came with Sharma’s claim that Xbox earns margins three to ten times below comparable platform and publishing businesses: expectations set low enough to license the cuts that follow. We covered the reset itself when it landed. This piece splits into two parts: what is Xbox worth now, and what is the most likely scenario.

Mojang and King move up, and the business gets its own P&L

Sharma pulled Mojang and King out of the studio organisation to report directly to her, calling them the two studios that “have increasingly become platforms”, the largest in the group by monthly active players. She gave Helen Chiang, who ran the Minecraft franchise and has spent nearly two decades at Xbox, the COO role with end-to-end P&L responsibility for the business. These re-shuffles have been in the making: a new CFO was named in December, two months before Sharma started, and a CSO and CTO joined in May.

Looking through a crystal ball at these decisions, we could infer either that the business will be run better inside Microsoft, or that Microsoft is ready to let Xbox go (see the table below). It echoes a trend in management style: preserve optionality until a decision has to be made. It buys time for leaders, and lets them test stakeholders’ reactions.

Part 1: What is Xbox Worth Now?

Base Case: A return to the old Xbox

We make a set of assumptions for our Base case:

1. Game Pass becomes a weaker version of a PlayStation Plus subscription.

2. The new Xbox console becomes a subsidy to increase the installed base.

3. Single-player AAA is exclusive, multiplayer sells everywhere.

4. Minecraft and King are harvested, not rebuilt.

Assumption 1: Game Pass becomes a weaker version of PlayStation Plus

The model assumes the following:

• AAA single-player titles return to full-price day one (i.e. not on Game Pass) and will enter Game Pass 1 year after launch (i.e. a delayed catalogue).

• Third-party Game Pass deals are frozen (i.e. there is no content-led growth).

• There’s no pricing power (i.e. the cost for the subscription is never raised).

The result is a service worth more as a ‘yield’ business than as the ‘moat’ it failed to build: roughly the same revenue, earned at a higher margin, without the day-one subsidy that made the growth version value-destructive.

The dynamics are as follows:

• Subscribers recover to where they started, and only because of the console. Game Pass falls from 29.7m in FY26 and climbs back to 34.9m by FY30, roughly the 34m Microsoft last reported in February 2024. The model builds subscribers as the installed base times an attach rate, so the recovery is the console base rebuilding on Helix, not the content pulling people back in.

• The sticker price holds while the price subscribers actually pay falls. Ultimate stays at $22.99, but the blended price drops from $13.00 to $11.50 a month as Ultimate’s share of subscribers falls from 40% to 28%. Withdrawing day-one games strips the top tier of its draw, so people move down to cheaper plans: the service cheapens by mix, not by discount.

• Revenue is flat, held up by volume against that falling price. It starts at $4.6bn, slides to $4.1bn by FY28 as the subscribers and the price fall together, and only recovers to $4.8bn in FY30 once the console base has brought people back. The $7.8bn Microsoft once targeted for 2030 is nowhere in sight.

• It becomes more profitable, but late, and borrowed from the hardware. The margin holds flat near 26% through the trough years, where the frozen third-party deals cut content cost about as fast as revenue slips. It then steps up to 32% and 33% in FY29 and FY30, lifting operating income from about $1.1bn to $1.6bn, as the recovering subscribers flow through onto content costs now held down. The gain is operating leverage on the Helix recovery, so it only lands if Helix does.

Assumption 2: The console becomes a subsidy for the installed base

If Microsoft continues to develop a console, the form it takes is still unclear. Sharma has said she is “committed to Xbox, starting with the console”, and that Microsoft “will continue to look at new business models … rather than just the most premium, high-performance console in the world”, floating more affordable models alongside it. Therefore, we assume that Microsoft will create a console that competes against PlayStation (and in the next generation of consoles, the PlayStation 6).

Consoles are typically sold below cost, and in the case of Microsoft, they need to re-grow their install base. So the hardware offering needs to be attractive to consumers from a pricing perspective as well as offering hardware that is on par with what is expected for the next generation of consoles. Both of these need to happen at a time when memory prices have risen sharply and console prices have increased.

At a time when profitability of the Xbox division is under scrutiny, selling a loss-making device is a difficult internal proposition. Yet, there are natural levers the company will pull to offset this. This includes additional revenue from a larger install base as a result of:

• The commissions Microsoft collects when other publishers sell games on Xbox;

• The Game Pass subscribers who join through a console;

• No platform cut for first-party exclusive titles that Microsoft develop.

The dynamics are as follows:

• Xbox starts at less than half of PlayStation’s install base. The base holds around 40m through the trough and recovers to 47m by FY30, roughly 43% rising to 47% of the 100m consoles we estimate PlayStation keeps active, and this generation Xbox has sold an estimated 34m consoles to PlayStation’s 94m. Helix is the bet to arrest a two-generation slide and claw back a few points of that gap, not to win the generation.

• Console shipments recover, and only because of Helix. Units fall from 3.8m in FY26 to a 3.2m trough in FY28, then jump to 8.0m by FY30 as the new console launches, and hardware revenue more than doubles with them, from about $1.8bn to $4.1bn.

• Every console sells below cost, and the loss deepens exactly when it sells best. The operating loss holds near $0.3bn through the early years, then widens to $0.6bn in FY29 as Helix ramps, before easing to $0.5bn in FY30. The reach is bought, not earned: the more consoles Microsoft pushes into living rooms, the more the subsidy costs, until the launch cost curve matures.

• The subsidy per console peaks at the launch it is meant to win. The loss climbs from about $79 to about $109 as Helix ships in FY29, then falls to about $63 by FY30 on the Sony-style cost curve the model assumes.

Assumption 3: Single-player AAA is exclusive, multiplayer sells everywhere

Given that Microsoft has already committed to make more first-party titles exclusive to its console (i.e. Gears of War: E-Day and Clockwork Revolution), with the rationale, in Matt Booty’s words, that people need “a reason to buy an Xbox”, it fits that we assume all future first-party single-player AAA titles will be exclusive to the console.

A single-player game made exclusive gives up only a one-time sale on rival platforms. Multiplayer titles, such as Call of Duty, we assume will remain cross-platform given the larger, continuous player base that supports these. Xbox also has great benefits from doing so:

• Retention holds up: the large shared player pools and cross-play remove the friction that would otherwise push players away.

• The revenue keeps coming from every platform, full-game sales and in-game spending across PlayStation, Switch and PC, where most of the audience for these franchises sits.

• And for the biggest it is not even a choice as Call of Duty is contracted to PlayStation into the 2030s.

The visible slate empties after FY27. Six of the notable releases land in that one year, and beyond it Xbox Game Studios falls to about $0.3bn of live-service revenues which tail off, with Call of Duty the one franchise that ships every year.

That thinning is what has been announced, not what will exist. Undated projects are almost certainly in development, id reportedly on a new Doom, Blizzard on a StarCraft shooter, and Obsidian on a new Fallout that Bethesda confirmed in July without giving it a date. The base prices none of the three, though it does credit Elder Scrolls VI in FY29 and the next Halo in FY30 on assumed dates, because both are far enough along to model where the other three are not.

First-party AAA is also hard to land, and Microsoft’s recent record is uneven enough that the base does not credit hits it has not seen: Redfall was not as successful as they hoped, the last Call of Duty drew hostile player reviews, and bets meant to refill the slate, the ZeniMax MMO and reportedly Avowed 2 among them, were cancelled before release. So the base prices the confirmed titles modestly, assumes none breaks out, and leaves the upside to the rumoured column.

Assumption 4: Minecraft and King are harvested, not rebuilt

Minecraft and King are the two most valuable businesses Microsoft owns in games, and what Sharma is doing with them is not building the platforms their elevation implied but harvesting the franchises.

The franchise around the game is being extended entirely through licences, so someone else funds each piece and carries its risk.

• Warner Bros and Legendary paid for the 2025 film and carried the risk that it failed; Microsoft collected a royalty and, worth more, a halo that pulled players back into the game.

• Merlin Entertainments is putting £50m into Minecraft World at Chessington and will operate it, with Mojang licensing the IP and overseeing the creative rather than funding the build.

Microsoft has no capital in any of it, and what comes back is a royalty and the halo, both high margin.

It appears that Mojang are doubling down on this strategy. In the week after the reset Mojang posted seven senior roles, and none of them is a game developer. Two are marketing jobs, one covering franchise expansion into film and consumer products, the other platform growth; one is a business development director running IP licensing and brand deals; two exist to run the studio’s own machine, a chief of staff for the marketing organisation and a business planner who allocates headcount and budget; and the last two are product roles only in name, because one builds internal AI tooling to make Mojang work faster and the other runs the China codebase with NetEase.

The one title that looks like evidence for the platform thesis is Director, Platform Growth and Ecosystem Marketing, and its description defines platform as the storefronts Minecraft is sold on, Nintendo, PlayStation, Xbox, Apple and Google, alongside gaming retail, the China ecosystem and Minecraft Education, with the hire asked to widen discoverability and merchandising across all of them. That is a job selling more copies of a premium game through more channels, which is very nearly the opposite of building a platform other people create on. The seven together describe a company assembling the apparatus of an entertainment brand, the deal-making, the marketing and the distribution a franchise needs once it has decided the game underneath it stays exactly as it is.

The roles King has open are game and product jobs to keep Candy Crush, Farm Heroes and Soda running, and its one forward-leaning move was to lend its mobile free-to-play craft to Minecraft through Blast, which put King’s live-operations machine behind another franchise’s brand. That ran as an iOS playtest in Malaysia and Canada for two weeks in November, and it has not been playable anywhere since, with no release date announced.

Minecraft’s premium base stays paid while free-to-play is confined to the edges, in China through NetEase and in a Blast playtest that has already ended, and King’s cash engine is run exactly as it stands, with the advertising ramp Microsoft has already signalled priced into the base and nothing beyond it attempted, so in both cases the part that actually earns the money is left alone. That is what you would expect from a leadership only months into its seat, because you get a grip on a business and steady it before you make substantial changes, and you make those only when you can say clearly why, which is a case Microsoft has not yet made.

So the base values them as what they are rather than what the platform language suggests, two durable high-margin annuities being protected and gently extended, and it pays for that durability rather than for growth neither is being asked to chase. A free-to-play Minecraft and an advertising King are both still possible, but they would need an owner who priced the reach differently from this one, or a Microsoft that had found a reason to change course.

Bull Case: A stronger recovery

The Bull Case for Xbox doesn’t lean on any substantial changes, it is a stronger version of the business Microsoft already runs:

• Hardware (Helix) has a larger uptake than expected.

• A better first party content track record.

• The data of Xbox is Microsoft’s whether it keeps the games or not.

Assumption 1: Hardware has a larger uptake than expected

With a modest recovery in hardware in the Base case, we assume that Helix rebuilds towards a larger active base toward 55m rather than 47m in the Bull case. The extra consoles pay through the annuity rather than the hardware: each carries Game Pass subscribers at the attach rate and store commission on third-party sales, and nearly all of that extra revenue drops through to profit. The per-console loss also narrows, but that is a separate assumption about the memory cycle easing, not something the volume earns.

That matters because a larger, cheaper-to-serve base is worth more than the consoles themselves. This switches Microsoft from subsidising a console to build a base, to a base that is growing.

We also consider that Xbox is shipping across devices Microsoft didn’t build (e.g. the ROG Ally). That puts the Xbox store and Game Pass on third-party hardware and televisions, with Microsoft collecting a platform fee at roughly content margin and carrying none of the console loss.

The model forecasts FY26 to FY30 explicitly, then values everything after FY30 as a single steady state growing slowly forever. These two rows describe that steady state, not the forecast years.

• Terminal hardware subsidy. The loss the console is still assumed to run every year once it reaches steady state, carried in perpetuity. In the base it settles at about $0.2bn a year: even long-run, keeping the console in the market costs Microsoft something, because the memory and build costs never fully clear. It is a floor, not a figure that fades to nothing, which is why it weighs on value more than its size suggests, a perpetual $0.2bn capitalising into more than $1bn of enterprise value.

• Terminal revenue. The whole business’s revenue in that same steady state, grown once, of which the console-linked annuity, the Game Pass subscriptions and the third-party store cut, is roughly a third; the rest is the mobile and multiplatform businesses that do not sit on the console at all.

• How the bull differs. The console reaches breakeven rather than carrying a permanent $0.2bn loss, and the larger base earns about 4.6% more terminal revenue, derived from the 55m fork itself, through the two lines that scale with machines in homes: Game Pass at the attach rate and the commission on third-party sales.

Assumption 2: A better first party content track record

Given Microsoft’s mixed record in releasing games on time that are commercially successful, we assume in the Bull scenario they have better success, and that the first-party portfolio, Elder Scrolls VI included, exceeds expectations. Elder Scrolls VI is already in the Base case at FY29, where Bethesda’s new releases climb from $130m to $450m once the PlayStation share that exclusivity forgoes is netted off, so the Bull adds no game to the slate; it assumes the games already on it do better.

There are two settings carry that: modestly better execution everywhere else from FY27, and one strong year in FY29 worth $0.6bn, roughly 8% on top of the content and services operating profit the Base already books that year, and no single title has to deliver it. Elder Scrolls VI is the largest candidate and the reason the year is FY29, but Call of Duty, King and Blizzard sit in the same portfolio, and a seventh Forza Horizon, a StarCraft shooter or something still unannounced would contribute the same way.

Assumption 3: the data is Microsoft’s whether it keeps the games or not

The bull carries a data line: about $1.5bn for the rights to the gameplay and telemetry Microsoft’s games generate, plus roughly $0.15bn a year of licensing on the scale of the Reddit and Google deals. Both are inferred, because Microsoft discloses neither and no game-data licence at that scale has been struck.

In a July post he calls the “reverse information paradox”, Nadella warns that using a frontier model means handing your proprietary know-how to whoever owns it, so the value of data run through AI accrues to the infrastructure rather than to whoever generated it. He was not talking about games, and he is likely talking his own book: Microsoft owns both ends of that trade, the games that produce the data and the Azure that trains on it, which leaves it on the right side of the paradox it is warning everyone else about. Read across to Xbox, it says Microsoft perceives value in the portfolio’s data. Crystallising it needs someone else, a licensee or a buyer, to agree.

On the evidence so far that agreement would be hard to win, because the data is thinner than the strategic language around it suggests.

• Minecraft is the one real latent asset, open-world play at a scale world-model researchers already train on, though much of that research is open and pays Microsoft nothing.

• The in-house showcases are demos: Muse and WHAMM are research projects, and one was trained on Bleeding Edge, a game by Ninja Theory, which is one of the four studios leaving the group.

• Call of Duty’s voice moderation runs on Modulate’s model, not Microsoft’s, and Flight Simulator’s whole-Earth twin is built from Bing and partner geospatial data, a pipeline rather than a proprietary corpus.

• King’s data already earns its keep inside the operating business, so there is no separate asset to sell.

So the value accrues to Microsoft as the infrastructure owner whether it keeps the games or spins them, because a separated Xbox would still run on Azure. The data sits in the bull as something Microsoft harvests rather than a transformation it attempts, and it cannot argue for keeping the games.

Blue Sky Case: King and Minecraft

King and Minecraft sit in Blue Sky because their platform upside is aspirational, not modelled.

Assumption 1: King, the option no owner is funding

The base already carries King’s advertising at about $630m, an assumption rather than anything Microsoft has disclosed: Activision reported only growth rates for King’s advertising, and Microsoft has published nothing since. The Blue Sky version is everything beyond it: advertising stops being a secondary line and becomes the growth engine, several times over.

Mobile monetisation splits by design: ad-led games are built for a broad, low-value audience, payer-led games like Candy Crush to deepen a small, high-spending one, and no mature payer-led franchise has turned advertising into its growth engine, because more ads degrade the payers who carry the revenue. The arithmetic agrees, since ad revenue is impressions times price, impressions scale with reach, and King’s audience shrank for every year Activision disclosed it.

King’s advertising roles survived the July 2025 cuts, when its board fell to eighteen openings, and in the spring of 2026, weeks after Sharma took the division, they were rebranded Xbox Advertising as the board rebuilt into the forties and fifties. The last of those postings went up in April, and by the July reset the board was back to eighteen, and the dedicated Activision Blizzard Media board now redirects to a page saying it is unavailable.

The boards cannot show whether the team survived, because internal moves never reach a public board, and a freeze during a 3,200-role cut suppresses everything. But Mojang posted seven roles straight through that same freeze, so the silence around advertising reads as a choice rather than a pause, and what it leaves is an ambition that was tried and let go.

An acquirer might still see inventory in that audience, or a future Microsoft might try, but the same problems would follow, and the synergy they would bank on is not missing, it is already running: Microsoft owns the ad business that came in with Activision, it sells rewarded video inside Candy Crush today, and Hershey’s has run a campaign there. What has not appeared, with all of that already in place, is any evidence that King’s advertising can carry the growth. So the option is real and entirely unfunded.

Assumption 2: Minecraft transforms into a Roblox/UEFN platform; the transformation Microsoft won’t make

The Blue Sky version of Minecraft goes free-to-play and creator-driven, a Roblox in the making, chasing reach and a billion daily players. It would trade away the thing that makes Minecraft worth holding: the margin comes from being a premium publisher that hosts almost nothing, pays no store cut where it matters and monetises a narrow surface, and free-to-play gives all of that back, carrying the hosting, paying the creators, taking a mobile mix through the app stores and living off a small paying minority.

The switch only out-earns the premium business it replaces if reach roughly doubles and monetisation rises with it, which is why the core stays paid and free-to-play runs at the edges.

Someone else could weigh it differently: an acquirer buying on a reach thesis, or a Microsoft several years and one rationale from now, might decide the reach is worth the margin where this owner does not. That is a disagreement about value, not a forecast, and a change that large leaves even the version that happens years out and high risk.

Valuation: Rebuilt from the ground up, Xbox is worth about $44bn

The first piece put Xbox at $49bn and this one puts it at $44bn, and the $5bn between them is not a revision so much as a different way of doing the sum. The first valuation took the division as a whole, worked out what margin it ought to earn once the business had settled down, and valued that.

This one takes each business inside Xbox separately, Call of Duty and King and Blizzard and Bethesda and the studios and Game Pass and the hardware, values each on the economics it actually runs on, and only then subtracts what it costs the group to hold them all together. Done that way the content comes out smaller than a divisional average made it look, because an average quietly lets the strong businesses carry the weak ones, and the biggest single change is Game Pass: a subscription we now assume never becomes the moat it was built to be.

The bull case moves further, from about $66bn to $54bn, and for the same reason: the first piece’s bull was mostly Game Pass growing into its moat, and this one does not grow it in any case.

From a Microsoft viewpoint $44bn is still a rounding error, roughly 1.5% of its market value, and on our estimates gaming earns about 3% of Microsoft’s EBIT.

Part 2: Which scenario is most likely for Xbox?

Scenarios: What each separation route returns to Microsoft shareholders

The reset opens a spectrum from keeping everything to selling everything. Every route on it is the same arithmetic: what the business is worth, less what it costs to stand up outside Microsoft, plus whatever Microsoft keeps a contract on.

Scenario 1: Microsoft keeps all of Xbox.

This is the reference case and it is what the $43.9bn describes: the business stays where it is, the reset lands, Helix rebuilds the console base through the back half of the decade, and nothing is separated or sold. Nothing about it triggers disposal accounting either, so the Activision goodwill is never marked against a transaction, though Microsoft goes on testing it every year exactly as it would anyway.

Scenario 2: Microsoft floats a minority and keeps the rest.

It sells 40% of the business to the public market and holds the other 60%, which is enough to keep control and to go on consolidating Xbox inside its own accounts, so there is no disposal to account for and the Activision goodwill is not marked against the float. Three things change and none of them is the business. Xbox gets its own listed shares, so the people running it are paid in Xbox equity rather than Microsoft equity. The market puts a price on a business Microsoft has never priced. And the share register fills with investors who wanted a games company, rather than investors who wanted a diversified software company and got a games division in the bargain.

Standing partly outside costs less here than under any other route, because Microsoft still owns both sides of the Azure relationship and can carry on selling itself cloud capacity at internal cost. What shareholders realise is $40.8bn, against a business worth $43.0bn underneath. The difference is not value going missing: it is the discount Microsoft concedes to get the shares away to people who have never owned them, and because that discount applies only to the two-fifths being sold and not to the three-fifths Microsoft keeps, a 12.5% concession on the float costs 5% of the business.

Scenario 3: Microsoft distributes the whole of Xbox to its own shareholders.

Every Microsoft shareholder wakes up owning shares in a separate games company, and Microsoft keeps nothing of the business itself. What that costs is everything Xbox was getting for free by being inside Microsoft: cloud capacity at internal cost, and the whole apparatus a listed company has to build for itself, from a board to a finance function to investor relations. Replacing it comes to $2.4bn, more than any route short of an outright sale, because this is the version where Xbox has to replace all of it at once. Microsoft does not leave empty-handed, though, because it keeps the right to train its AI on the data the games generate, and that licence is worth $1.5bn. Set the one against the other and shareholders end with $43.0bn, against $43.9bn if Microsoft simply keeps the business. Handing over the entire company costs about $0.9bn.

There is one cost the model does not charge here. The shares go to Microsoft’s own shareholders, who are overwhelmingly index funds and people who bought a diversified software company. A mid-cap games business is not what most of them are mandated to hold, so a good number of them will sell it the moment they receive it. What the model credits them with and what they get for it are not the same number.

Scenario 4: Microsoft spins the publisher and keeps King and Mojang.

The two Sharma pulled up to report directly to her, the two she calls platforms, stay inside Microsoft alongside the advertising and AI businesses, and the rest goes: Call of Duty, Blizzard, Bethesda, the studios, Game Pass, the store and the console. A Microsoft shareholder finishes holding two things instead of one. Inside Microsoft they still own King at about $7.7bn and Minecraft, with the mobile advertising that sits alongside them, together coming to roughly $11.8bn. Outside it they own about $30bn of shares in the publisher.

Keeping the pair also keeps the games with the real latent data in them, which is why the licence the first piece spent a section on nearly disappears: Microsoft does not need to write itself a contract for data it still owns the games behind, so a $1.5bn licence becomes a $150m one. Add the two pockets and shareholders have $41.7bn against $43.9bn for keeping. The $2.2bn is what the publisher pays to stand up alone, and it is more than Microsoft gives up by handing over the entire company. The reason is that licence: spin everything and Microsoft is paid $1.5bn for data it no longer owns, keep King and Minecraft and it is paid $150m.

Scenario 5: Microsoft sunsets the console and spins a pure publisher.

This is the version where Microsoft stops making the console, and it looks like the cleanest decision on the list, because the hardware loses money every year and stopping would save it. What it costs is everything that sits on top of the console.

The commission Microsoft takes when other publishers sell their games on Xbox decays as the installed base shrinks, because there is no new console coming to replace the old ones: that one line is $10.7bn.

The rest is the console’s own advertising, the subscribers who came in through a console and the cost of winding the platform down, set against the roughly $2.6bn of hardware losses Microsoft stops taking. Game Pass then goes as well, because most of its subscribers arrived through a console, and dissolving it forfeits about $12.5bn of going-concern value, of which about $1.2bn comes back as people buying the games at full price instead, so about $11bn net.

Shareholders end with about $26bn against $43.9bn for keeping, but that number is not what it looks like, because about $12bn of it is King and Minecraft, which Microsoft has not sold and is still holding. Take those out and the publisher that actually changed hands is worth about $15bn, and Call of Duty and Diablo and Elder Scrolls are worth the same there as they were inside Microsoft, because none of what the sunset destroys was in the games to begin with.

Once the console is gone the publisher that is left earns about $1.7bn a year and spends about $0.8bn running itself, roughly 10% of its sales, about what EA and Activision spent running themselves. You can still get to a $5bn Call of Duty owner, but only by charging the publisher a share of head office sized on revenue the sunset has switched off, Game Pass and the store and the hardware: overhead for businesses that are no longer there.

So the real cost of the sunset is about $18bn, and most of it is Game Pass and the store commission, which only earn while the console does. Microsoft also spends about $1bn stranding and restructuring the head office on the way out, and that is work the reset has already started, 3,200 roles at a time.

Scenario 6: Microsoft sells Xbox.

A buyer pays $57bn, which is 1.3x our $43.9bn, a 30% premium, and it is one of only two routes on the list that beats keeping. The premium is not for control, because Microsoft already has control and is not buying it back from anyone; it is what a buyer pays for the fit, for what Xbox is worth in their hands rather than Microsoft’s.

The size of it is defensible against what people actually pay for games companies. Take-Two paid about 1.6x Zynga’s undisturbed enterprise value, Microsoft about 1.5x for Activision Blizzard, both into a rising market, and the consortium taking Electronic Arts private is paying about 1.3x into a falling one, so the 1.3x we assume sits at or below all three.

Run it across a 1.25x to 1.55x band, the bottom set below the cheapest of those deals, and the price runs from $55bn to $68bn. At our 1.3x, Xbox changes hands at 14.6x its cash EBIT, against the 18x Microsoft itself paid for Activision Blizzard and the 24x on Electronic Arts once their multiples are put on the same cash basis. So whatever stops this happening, it is not that the price is too high.

Scenario 7: Microsoft sells everything except King and Mojang.

A buyer takes the whole of Xbox apart from the two Sharma calls platforms, so it gets Call of Duty and Blizzard and Bethesda and the studios, and it also gets the console, Game Pass and the store, which together are 73% of what Xbox is worth. Microsoft keeps King and Minecraft. At the same 1.3x premium the buyer pays $42bn for that perimeter, and with the $12bn Microsoft is still holding, shareholders end with about $54bn against $43.9bn for keeping.

That captures 94% of what selling the whole thing would return, on 73% of the price, and the price is the entire point. Fund it with debt at the same six times earnings a real buyout uses and the buyer still has to write an equity cheque of $26bn. The consortium taking Electronic Arts private is writing about $36bn. So this deal needs about 70% of a cheque that a group of people are raising in public right now, where buying all of Xbox needs about 94% of it. Across the same 1.25x to 1.55x range the price runs from $40bn to $50bn, and it beats keeping at every point along it.

What Microsoft Does: It keeps Xbox.

Every route Microsoft can execute itself returns less than keeping the business, and the two that beat it are both sales made entirely of a premium we assumed somebody would pay. Take the premium out and they return exactly what keeping returns.

The first piece called Xbox too small to sell and too strategic to spin, and both of those have moved.

• The data was never big enough to decide whether Microsoft separates, but it decides where the line falls, because the licence Microsoft keeps is worth ten times more once the games have gone than it is while they stay.

• Too small never meant nobody could afford it either: selling the publisher needs about three-quarters of the equity a consortium is raising for Electronic Arts right now, so somebody can. What stops a sale is that the buyers who could clear a regulator are buying content, and a content buyer has no use for a console, so they would be bidding on whatever survives the sunset rather than on the business Microsoft actually has.

Sharma gave the business its own P&L in July, which is the first thing you build if you might one day sell it, because nobody can buy or spin a business that has never been accounted for on its own. She pulled Mojang and King up to report directly to her, which draws the line exactly where a separation would cut. And she took 3,200 roles out, which hands whoever ends up owning it the cost base they would have wanted anyway. None of it is a decision. She has made Xbox separable without separating it, and the worth of that is entirely in not using it: every version she could execute on her own leaves shareholders with less than doing nothing, and the versions that beat doing nothing are waiting on a buyer who has not appeared.

Postscript: A billion people a day

Sharma has given the business one number to grow into and it is not a financial one: the reset announcement wants Xbox to be “one of the few companies that entertains more than a billion people each day.”

Add up what the portfolio actually reaches on a given day and it comes to about 160 million, and the word carrying that number is instances rather than people. Someone who plays Minecraft in the morning and Call of Duty in the evening is two of them. Nobody outside Microsoft can strip the duplicates out, because the player counts the company publishes are per game and never per person, so 160 million is the ceiling on what the arithmetic can see rather than a count of human beings.

Grow every line as hard as the arithmetic will bear and the total still falls short of half a billion, and even that needs three things to arrive together: a Minecraft larger than Roblox, a King portfolio several times its current size, and a console base rebuilt on Helix. Microsoft is building the third. It is not building the other two, because Minecraft’s premium base stays paid with free-to-play confined to the edges, and the roles King has open keep the existing games running.

Microsoft’s games are watched far more than they are played, and Minecraft was the first game to pass a trillion views on YouTube, so the billion closes only if entertained is allowed to include watched. At today’s playing estimate the claim needs more than 800 million viewing instances, double the top of what we can evidence. At a viewing estimate we can evidence, no playing case reaches a billion, the stretch case included. The billion lives in the single corner where both are stretched at once, and neither has had its duplicates removed.

Much of that watching happens on YouTube, where Google sells the advertising against it. Microsoft has the content the world watches, and not the place it watches it.

More from The Side Quest

• Epic Games: what is it worth, and what did the generosity cost? Fortnite pays for four free layers. The cash Epic captures is worth about $7.5bn; the tools it under-monetises lift fair value toward $14bn, and the last mark sits in between.

• Roblox: A great company lost on valuation - It owns the most complete stack in interactive entertainment yet profits from it the least, and rising costs are eating into what little is left.

• Microsoft and Xbox: Too small to sell, too strategic to spin - On the numbers, Xbox is worth about $49bn, a rounding error to Microsoft. It won’t be sold, and any separation keeps a grip on the data its games generate.

• AI in Video Games: Own the Loop - why a studio keeps its value only if it owns the content-generating learning loop, not the model. Uses Guild Wars 3 as a worked example.

• AI won’t make AAA games materially cheaper to develop - the productivity gains are real, but two-thirds of the value leaves the P&L to the AI vendors before it reaches the bottom line.

Appendix:

A1. How the valuation is built

The valuation is a five-year DCF on cash operating income, before stock-based compensation and before the Activision purchase amortisation. The amortisation is non-cash and rolls from $3,070m in FY26 to $480m by FY30, so leaving it in would book the roll-off as an operating recovery; the cash line excludes it throughout.

The parameters:

Enterprise value is the same three-line sum in every case: the present value of FY26 to FY30 free cash flow, the present value of the terminal, and, switched on in the bull only, a $1,500m data-rights add-on, our estimate of a capitalised training-data licence. Each forecast year’s free cash flow is cash operating income × (1 − tax) × the near-term conversion, discounted at its mid-year period; the three cases produce different near-term paths because each runs its own switch register, priced lever by lever in A3.

The terminal margin is an output, not a typed number. The model builds a normalised FY31 profit-and-loss: the through-cycle content margin on FY31 content revenue, less a steady-state central cost, less the terminal hardware subsidy. The result, divided by terminal revenue, is a pre-haircut cash margin of 20.75%. Each scenario then subtracts a haircut for platform-cycle risk. The haircut is our judgement, with no external anchor, and it is the single number the three cases most disagree on.

The same goes for the terminal revenue factor. The model carries a three-leg fork of the FY30 active console base, 40m, 47m and 55m consoles, and FY30 revenue is linear in the base, so each leg’s factor falls out in closed form. The base leg is the model’s own FY30 base, and the bear leg is not wired: the bear holds a neutral factor and takes its downside through the haircut, which also embodies its deeper terminal hardware subsidy rather than counting it twice.

The terminal construction, and the three enterprise values it produces. Figures are rounded to the nearest $10m for display; the workbook runs them to the cent.

A2. What the bear and bull actually assume

Every setting that separates the three cases lives in one register, bear, base and bull side by side, plus the Helix installed-base fork, which reaches the bull twice: through the terminal revenue factor and through a derived FY30 cash-operating-income delta. The decomposition below takes the bull’s enterprise value of $54.28bn and returns each lever to its base setting, one at a time, measuring what each is worth; the base case is $43.90bn, so the bull is a claim about $10.4bn, and every dollar of it is priced on a named row.

What the bull is made of, one lever at a time. The bear, on the same treatment: each row is what the bear gives back when that one lever is returned to base, so the column prices the $8.0bn gap between $35.89bn and the base.

The corporate fork belongs to the bear alone: the bull’s 1,670 is the base’s 1,670, so the bull claims no corporate cut the base does not already assume. The terminal hardware subsidy is a memo, not a working lever: the terminal margin all three cases build from embeds the base’s −$200m, the bear and bull forks feed only the memo row, and both contributions re-derive at exactly 0.00; the deep-subsidy world is priced inside the haircut.

Conservation check: with every bull lever returned to its base setting the bull column re-evaluates to $43.90bn, residual zero against the audited base; the bear column under the same treatment lands on the same figure, to the same residual. The decomposition is the scenario engine’s own arithmetic.

What each lever assumes:

• The haircut is our judgement, with no external anchor: a deduction from the normalised terminal margin of 20.75% for platform-cycle risk. The bull’s 0.5pp says the next cycle carries almost none; the bear’s 6.5pp prices a structurally worse decade. It is the largest lever in both directions.

• The Helix fork is derived, not typed: the bull assumes the next console generation holds a 55m active base in FY30 against 47m in the base case, and the 1.046 revenue factor is computed from FY30 revenue per incremental console, which the workbook verifies to be linear in the base. The fork sizes are our estimate; Microsoft discloses no installed-base figures.

• OEM platform licensing is a press-reported idea priced as if signed: a world in which an OEM pays Microsoft $700m a year to carry the platform. No such deal exists.

• The data-rights licence is the licence the first piece derived: roughly $100m a year of training-data value capitalised at 15x, scaled off press-reported AI-data deals (Reddit’s licence to Google runs c $60m/yr). It enters the bull undiscounted, at its face $1,500m.

• Data/AI licensing is our estimate from the same evidence family: ongoing external licensing revenue the base does not assume.

• The content-strength factor is an execution assumption: content and services operating income runs 2% better from FY27.

• The $600m is portfolio overperformance rather than a single title: about 8% of FY29 content operating income, taken once.

• The hardware loss factor scales the modelled FY29 to FY30 console losses: the bull’s 0.6x assumes the next launch is subsidised more lightly, the bear’s 1.5x that it costs half as much again.

• Corporate is the bear’s claim that the reset step-down never lands: addressable central cost holds at $2,270m instead of falling to the base’s $1,670m.

A3. The base case, parameter by parameter

The article’s base rests on four assumptions; each block below is the parameter path behind one of them. All figures are net-to-Microsoft, $m unless marked, fiscal years ending 30 June, recomputed from Xbox Model v6.5 (audited).

Game Pass: yield, not moat

The subscription is subscribers times a blended monthly price, with operating income built from an explicit cost stack.

The path starts from the near-$5bn of FY25 Game Pass revenue Microsoft has stated. Attach and price are both our assumptions: attach steps up with the FY29 console launch, and the blended price falls as the Ultimate mix thins from 40% of subscribers to 28%.

The margin expansion comes from the third-party freeze rather than pricing. The roughly $1bn a year Microsoft is reported to pay for third-party day-one content runs off to $0.5bn as deals lapse unrenewed, while the rest of the cost stack holds broadly flat, so the 32.0% and 33.3% margins of FY29 to FY30 are outputs of the stack, not targets.

The console: a subsidy for the installed base

Hardware loses money in every forecast year; what it buys is the installed base that every other line prices off.

Units trough in FY28 and the next generation launches in FY29; the loss roughly doubles in the launch year before volume narrows the subsidy. The re-exclusivity line adds 0.5m consoles a year from FY29, taking the FY30 base to 47.5m.

Exclusivity: single-player exclusive, multiplayer everywhere

The base ships The Elder Scrolls VI and Halo Next on Xbox and PC only, and prices the choice.

Exclusivity is a net cost of about $0.27bn of enterprise value: two tentpoles’ PlayStation revenue at high contribution outweighs what half a million extra consoles a year earn back. Multiplayer is untouched, since Call of Duty ships on every platform in every scenario, so the base pays for single-player exclusivity only.

Minecraft and King: harvested, not rebuilt

Both franchises are run for cash rather than rebuilt for growth.

King is harvested: monthly active users drift down 3% a year, revenue per user rises 4% on live-ops pricing, and net revenue drifts to just above $3bn.

Advertising is held at $630m flat across the forecast, an assumption, not a reported figure. The $1.4bn advertising ambition in the FTC record was Microsoft’s 2022 plan for gaming as a whole, not a King line, and it stays at zero here.

Minecraft holds near $1bn of net revenue at a 42% margin. Free-to-play stays at the edges: Minecraft Blast, the King-built mobile title, peaks at $15m a year; the franchise keeps selling copies rather than chasing conversion.

A4. The division, unit by unit

Microsoft discloses gaming revenue only at the division level, and gaming operating income not at all, so both tables here are our build. Two anchors tie it down: the disclosed FY25 gaming total of $23,455m, and FY25 content and services of $20,755m, that total less our hardware estimate, which the FY26 anchor rolls forward at −5%. Every other line is a unit model, built from drivers on its own tab and summed here.

Net revenue by unit ($m, fiscal years to 30 June):

Cash operating income by unit ($m), before stock-based compensation and before the Activision purchase amortisation:

First-party revenue is roughly flat across the span, the slate cycling rather than growing, and its operating income holds in a narrow band with it. Game Pass bottoms in FY28 and recovers when the next console, Helix, launches in FY29, the same year the hardware loss doubles on launch subsidy before easing as the machine scales. Central steps down from $2,897.5m in FY26 to $2,300.0m a year once the front-loaded reset costs clear, and that single step supplies most of the improvement in the total.

A5. Every route, against keeping

The body walks these routes as stories; here they are flattened onto one arithmetic: what the perimeter earns, less what standing alone costs, plus whatever Microsoft keeps a contract on. Everything is computed at the live central-cost basis: overhead is allocated by what caused it, so the corporate cost attached to revenue a route destroys dies with that revenue instead of landing on the survivors.

Workings, in $bn. The going-concern spin perimeters re-sum to the $43.90bn base before separation costs (residual zero inside the workbook), so for those routes the gap to Keep is exactly what separating costs less what comes back by contract. The sunset routes are not like that: switching the console off destroys operating economics before anything is separated, so their perimeters start below the base and most of their gap to Keep is destruction rather than separation cost. A6 takes that apart leg by leg. Figures are rounded to the nearest $100m in the route table above and to the nearest $10m in the workings below; the workbook runs them to the cent, so a leg may sit a cent from its stated sum.

• Keep is the core model’s base enterprise value, $43.90bn, reproduced in the scenarios workbook to the cent.

• Minority carve-out. The business is worth $42.97bn after the mildest dis-synergy of any route. Microsoft’s retained 60% at carrying ($25.78bn) plus the floated 40% net of a 12.5% new-issue discount ($15.04bn) realises $40.83bn; the $2.15bn conceded is a transfer to the incoming holders, not value destroyed.

• Spin everything. $43.90bn less $2.44bn of dis-synergy leaves a spun company worth $41.46bn; the $1.5bn data-rights licence Microsoft keeps brings the route to $42.96bn.

• Spin content, sunset the console. The spun content company, once the console decays away and Game Pass is wound down, is worth $26.61bn; the same $1.5bn licence brings the route to $28.11bn.

• Selective spin. The retained trio ($11.76bn) plus the spun company after dis-synergy ($29.94bn) comes to $41.70bn.

• Sunset, then spin the publisher. The retained trio less $0.62bn of overhead stranded at the parent while it restructures and a $0.42bn one-off restructuring charge leaves $10.72bn; the pure publisher is worth $15.43bn; the route totals $26.15bn.

• Trade sale. 1.30 × $43.90bn = $57.07bn of cash. The buyer’s equity cheque is $33.68bn after $23.39bn of acquisition debt (6.0x the division’s $3.90bn of FY26 cash operating income), and the sale crystallises a $15.93bn write-down against the $73.0bn Activision carrying.

• Publisher sale. 1.30 × the publisher perimeter’s $32.14bn, the premium struck before dis-synergy, matching the trade sale’s construction, gives a $41.78bn price; the retained pair adds $11.76bn; the route totals $53.54bn. The cheque is $25.63bn, on $16.15bn of debt under the same 6.0x rule applied to the publisher’s own $2.69bn of FY26 cash operating income.

Every route Microsoft can execute on its own returns less than keeping: the cheapest concession is the pro-rata spin’s $0.9bn, the dearest the publisher sunset’s $17.7bn. The two that clear the bar are sales, and everything they add is the assumed premium: set it to 1.00x and both collapse back onto the base to the cent.

Dis-synergy is the same two sourced legs as the first appendix: incremental public-company G&A at 0.55% of revenue, anchored between Kenvue’s disclosed 0.39% under a transition-services agreement and GE HealthCare’s 0.64% at a full break, plus $112m a year of Azure at commercial rates, flexed by perimeter and structure.

The carve-out is lowest because Azure stays intact and G&A runs at the transition-services rate; the sunset rows sit below the spins because the perimeter the percentage applies to is shrinking, not because separating is cheaper. The sunset routes also carry costs that are not dis-synergy and already sit inside the first table: a hardware wind-down of $1.44bn and, on the publisher route, the stranded overhead and restructuring left at the parent.

A6. What switching off the console destroys

The sunset route values what is left after Microsoft stops making consoles: the publisher spun out, King, Minecraft and the mobile-ads residual kept. The perimeter throughout is everything that would leave, the whole of Xbox less that retained pair. The scenario model builds the spun-out publisher as a bridge: it starts from a conservative anchor, the platform simply left to decay, then names every piece the dissolution adds or removes, all on one discount basis, and the bridge must foot back to the scenario’s own independently built publisher value.

Every leg is a present value on the model’s 9.25% discount rate and 21% tax rate. Residual check: the anchor plus the legs, less the scenario’s own independently built value, comes to zero; the legs are rounded for display and foot exactly as shown.

Measured against letting the platform decay, dissolving Game Pass costs $10.94bn in total, and the Game Pass leg net of its full-price tail is $11.25bn. Game Pass is essentially the whole cost; the other legs roughly cancel.

Table A6b: the route. The pure publisher is one side; Microsoft’s retained pair is the other, less two charges the parent bears for dismantling the cost base of the revenue the shutdown destroys.

The stranded leg is the head office attached to the destroyed revenue, borne by the parent and run straight-line to zero over three years; the restructuring charge is a $600m one-off, tax-shielded and discounted. Keeping is the base enterprise value of the core model.

Table A6c: the rump’s head office. In the terminal year the surviving publisher is charged a full standalone head office, sized on the sales it actually keeps rather than the revenue the shutdown destroyed.

The charge is corporate G&A at 5.08% of the rump’s sales ($0.42bn) plus the rump’s proportionate share of the shared-platform layer ($0.43bn). That is a standalone publisher’s overhead at a publisher’s rate: Activision, EA and Take-Two ran all-in G&A at 9 to 16% of revenue.

A7. Comparables and premium precedents

The article values Xbox on cash operating income before stock compensation. The comparables’ published multiples run on GAAP operating income, which charges it, so comparing the two directly mixes bases. The table carries both: the multiple as usually quoted, and the same deal restated to the article’s cash basis by adding each company’s disclosed stock compensation and acquisition amortisation back to its operating income.

Xbox’s own mark at $43.9bn is 11.3x its FY2026 cash operating income, and the assumed sale at 1.3x is 14.6x, below both restated deal multiples.

The premium precedents, all on one basis, enterprise value over undisturbed enterprise value: Take-Two paid about 1.60x for Zynga (deal value $12.7bn against an undisturbed enterprise value built from the $6.00 unaffected close and the $541m of net debt Goldman Sachs states twice in the merger proxy); Microsoft about 1.5x for Activision Blizzard; the Electronic Arts consortium about 1.3x. The familiar 64% Zynga figure is a share-price premium, a different measure.

A8. The stock-compensation basis

The valuation runs on cash operating income before stock compensation, the same basis as the first piece, and the model charges no stock compensation anywhere: the head-office cost per person is cash pay and benefits. The comparables in A7 are restated to the same basis. Charging the roughly $800m a year of stock compensation would take the base from $43.9bn to about $35.7bn and lower every case by the same amount, leaving the spreads intact: the base-to-bear gap is identical to the cent on either basis, so nothing in Part 2’s ordering turns on the convention. One alternative reading exists: if the per-person cost were taken to include stock, about $0.3bn a year is already charged and the reference would sit nearer $38bn.

A9. The reach table, line by line

Most lines in the postscript’s reach table are built the same way: the last disclosed monthly count, times a daily-to-monthly ratio held at or about the strongest any comparable business has disclosed. Three are not, and say so in their working: Minecraft China has no activity figure to apply a ratio to, the casual line divides a daily count of hands rather than a monthly count of players, and the studios line adds an estimate for the ones that disclose nothing. Microsoft has never published a daily figure for anything it owns.

The total can be tested against Microsoft’s own words. The June reset memo says more than a billion people play each year, for 72 billion hours, excluding much of China: 197m hours a day. Our c 150m ex-China instances imply about 1.3 hours per player per day, between a mobile session and the 2.6 hours Roblox disclosed for its daily users last quarter. A materially higher gross would need the whole portfolio, consoles included, to average under an hour a day, which nothing on record supports.

The viewing axis is looser than the playing one, and the grid treats it accordingly. YouTube counted 100 billion hours of gaming watch time in 2020 and 201 billion Minecraft views in that year alone, about 550m a day for one franchise, before Minecraft became the first game past a trillion cumulative views in December 2021. Views are not viewers, a daily viewer watches several, and nothing per-game and per-day is published, so the 200m to 400m range is our estimate and the grid runs it as an axis rather than a point.

A10. The job boards, dated

The hiring evidence is a set of point-in-time captures of the public careers boards, archived and live. Boards show external hiring only: internal transfers and a freeze are invisible, so absences are weaker evidence than presences. The advertising row needs one more caution: its first four cells are samples of the board’s first page, and that page sorts toward older requisitions, so a role missing from it is not proof the role is absent. Only the last cell is a count of the whole board, which is what makes it the strongest reading on the table.

Against that shrinkage, Mojang posted. Seven Minecraft roles went up on Microsoft’s careers board in the four days after the reset, and the board’s own labels make the point: two marketing, two business operations, two product management, one business development. None is a game-development role. Six of the seven requisitions were created on or after reset day; the exception, the China technical product manager, was created six days before it.

A11. The studio cuts, attributed

Two similar numbers from the same week belong to two different studios. At Obsidian, 52 people were let go, per a California WARN notice, about a quarter of the studio per Bloomberg’s reporting of 8 July 2026, alongside the cancellation of the Avowed sequel and the start of a Fallout project under Josh Sawyer. At Bethesda Game Studios, staff told IGN that more than fifty people were cut from The Elder Scrolls VI’s active development, and the studio’s union counted dozens of programmers, artists, designers and testers among the losses; the union’s parent, CWA, puts 440 union-represented cuts across the ZeniMax studios.

A12. Sources and what kind of number each is

Every figure in the piece is one of four kinds.

• Disclosed. In a filing or an official company post. The 3,200 roles and the ambition to entertain more than a billion people a day are both in Microsoft’s Resetting Xbox post of 6 July 2026; the memory-cost figures behind the console price assumptions are Sharma’s own; Sony disclosed 93.7m PS5 consoles shipped in its May 2026 results; Activision Blizzard’s segment reporting runs through 2022, its last full year as a listed company; and the 34m Game Pass subscribers is Microsoft’s last official count, from February 2024. These are the fixed points the model is built between.

• Company statements. Said by a named executive at a named venue, not filed. Sharma’s “committed to Xbox, starting with the console” is from her Windows Central interview; her “new business models … rather than just the most premium, high-performance console in the world” was said at Fortune’s Brainstorm Tech conference; Matt Booty’s “a reason to buy an Xbox” is from Variety. We quote them verbatim and read them as intent, not as fact.

• Reported, not announced. Carried by the press or a tracker and never confirmed by the company. Schreier at Bloomberg is the source for the cancellation of Avowed 2, and for Elder Scrolls VI being at least two years out, which is what places it in FY2029. The $7.8bn subscription-revenue target and the $1.4bn gaming-advertising ambition, both for 2030, come from 2022-vintage internal slides surfaced in the FTC’s Activision case: Microsoft’s own plans, but leaked, and the model treats neither as achieved. The roughly 34m Series X|S consoles sold this generation is a tracker estimate, because Microsoft discloses no console units at all.

• Our estimates. The model’s own constructions, each shown in this appendix with its working. The 43m active Xbox consoles is ours, and the roughly 100m active PlayStation consoles is derived from it and an assumed activity ratio, because Sony discloses shipments, not active machines. King’s advertising at $630m a year is our assumption, not a disclosure. The per-unit revenue splits, and every lever in the bear and the bull, sit in this class.

Reported figures are attributed in-line wherever the article uses them; our estimates live in this appendix with their workings, with one exception: the free-to-play grid behind the Minecraft trade is a parameterised sweep rather than a modelled line, and the exhibit that carries it states its own basis.

• We read the job postings on both sides of this market: the two ad networks, AppLovin and Unity, and the game studios that buy from them. The studios staff whole teams to independently check and reconcile the networks’ numbers, at their own expense, and one of them, AppLovin, is quietly hiring to extend beyond games into e-commerce.

• Both companies are valued on the growth of an ad engine, AppLovin’s AXON and Unity’s Vector. That growth is real and disclosed. What the filings will not let you do is take it apart: how much is a genuinely better engine, and how much is mix, price or a cyclical bounce, and whether the edge lasts. AppLovin narrates a yield metric it never defines (net revenue per install); Unity discloses no standalone Vector line at all.

• Their strategies are diverging. AppLovin is extending its demand into e-commerce while keeping a large mobile-game base; Unity is rebuilding its ad product. They still compete for game user-acquisition budgets, but each is aiming at an increasingly different market.

I write The Side Quest independently and take on select advisory and consulting work alongside it, and I'm open to the right full-time role. If any of that could be useful to you or your team, I'd be glad to hear from you. The Unity/AppLovin Model is available on request.

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Mobile games spend heavily to acquire users. Across the listed publishers, user acquisition runs at roughly 30 to 40% of net revenue for the heavier spenders, and less for the lighter ones, and it is the main lever on growth, so how efficiently that money is spent is one of the most important lines an investor in the sector can look at. The companies on the other side of it, selling the tools that spend it, are AppLovin and Unity.

Recently I was asked, “Chirag, both AppLovin and Unity are priced on their ad engine being a genuine, durable edge. How do I actually know the engine is as good as they say, and not just growth that’s really mix, price, or a cyclical bounce?” I did not have a clean answer, and it turns out to be a genuinely hard question worth working through.

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The valuation of AppLovin and Unity are based on a number they share, but isn’t disclosed

AppLovin and Unity arrived at the same place from opposite directions. Both came out of games, AppLovin making them, Unity making the engine they are built in. Both rebuilt themselves around a machine-learning advertising engine, AppLovin’s AXON and Unity’s Vector, that decides which ad to show which player and what to bid for the chance. Both are now valued less on the games they came from than on the belief that the engine is a durable, compounding advantage. AppLovin went further than belief and sold its entire games business in 2025 to become a pure advertising platform. Unity kept its engine and bet the other way, that owning the thing games are built in is the edge.

The official stories are clean and, to a point, true. AppLovin’s AXON scaled advertising revenue from $1.8bn to $5.5bn in two years with no acquisitions to explain it away. Unity’s Vector, after a period of self-inflicted damage, is recovering fast enough that its strategic advertising line is growing at a rate the headline number hides. This piece is about two things underneath those stories:

• What neither company lets you establish is how much of that growth is the engine getting genuinely better, rather than a shift in mix, a change in price, or a cyclical recovery, and whether the advantage is durable. AppLovin narrates a yield metric that climbs on its own as its mix shifts (net revenue per install); Unity discloses no standalone Vector figure at all.

• The two businesses’ strategies are diverging, and where the two were once compared to each other, they increasingly are not.

1. The machine both companies run

Many free mobile games, especially casual and hypercasual titles, make their money by selling the advertising slots inside them, and filling those slots profitably is the business both companies are really in. When a player opens the game, an engine decides within milliseconds which advertiser’s ad to show and what to bid for the chance to show it, pricing each impression on a prediction of how likely that particular player is to install or spend after seeing it. This is the part people mean when they say the engine: AppLovin’s is AXON and Unity’s is Vector, and it is the part both are now valued on.

The winning bid clears an auction, and both companies run their own. Above the auction sits the mediation layer, the software inside the app that runs a single real-time auction across the ad networks that bid into it and gives the slot to the highest. Whoever operates that layer sees the competing bids on every impression routed through it, a commercially powerful position, because it is the one place from which a company can watch what its rivals will pay for a given user. AppLovin operates MAX, which sits in roughly two-thirds of the top games, and Unity operates LevelPlay.

Once an ad has run, someone has to decide which network to credit for the install that followed. Because each network reports on its own performance, that judgement usually goes to an independent measurement firm, a mobile measurement partner. AppLovin owns one of the measurement firms advertisers can choose, Adjust; where an advertiser picks it, the referee is owned by the network it is judging. Unity owns no controlling measurement firm, and relies on the independent one most of the industry uses. The chart below illustrates this loop:

This business model is the entirety of AppLovin, but only half of Unity as they also have a game engine, the software games are built and run in, which Unity licenses on a per-seat subscription. Unity is strongest in mobile and among smaller studios, while Epic’s Unreal, the other major engine, leads the high-fidelity PC and console work that Unity touches less. Beneath both, a free and open-source engine called Godot is rising from the indie end, though it has yet to displace either in professional or mobile games at any real scale.

Both advertising engines have grown, from very different starting points and at very different rates. AppLovin’s roughly tripled its advertising revenue in two years. Unity’s went flat and then began to recover, having been caught by the same industry-wide move to deep-learning ad models that carried AppLovin up.

A better model wins a given quarter, but the model is a contestable capability, with rivals like Moloco and Liftoff running comparable engines. The durable difference is structural: the integrated loop each has built around the model, more than the model itself.

2. The people who buy the ads do not believe the numbers

One way to validate the strategies of each company is to understand more about their hiring strategies and their customers. So I read the postings on both sides of this market: on the ad side, what AppLovin and Unity are recruiting for; on the customer side, the user-acquisition and marketing-data roles at a range of mobile game studios. The two answer different questions:

• The ad companies’ postings show the strategy each is running: AppLovin expanding into e-commerce, Unity building out its core ad platform.

• The studios’ postings show that the people spending the money build and reconcile their own version of the networks’ numbers rather than take the dashboards at face value.

For the ad companies:

AppLovin hires for very few roles. About half its open positions are demand-side sales, and most of the rest are machine-learning and research posts for the engine. That fits its model: one ad engine, run by a small commercial team, which is where its operating margins come from. Its newer roles are aimed at a different customer. Business-development posts target “eCommerce, retail, subscription and lead generation,” a growth role exists to bring e-commerce advertisers to AXON, “starting with Shopify operators and DTC founders,” and the careers board keeps standing teams for e-commerce and connected TV. The company that grew up selling ads inside games is now hiring to sell them to e-commerce brands.

Unity hires several times as many people, split between two jobs. One is the advertising stack: the Vector bidding engine, the ads SDK, a user-acquisition prediction team, and ads measurement. The other is the game engine: core-engine, 3D and on-device-AI roles. It is funding both at once, rather than running the engine down to pay for the ads. Its measurement roles are building the ability to judge, from Unity’s own first-party data, “whether a given ad drove an install,” without relying only on the third-party firms the rest of the industry uses.

For customers:

The large studios we sampled employ people to independently check and reconcile the numbers the networks report, and their postings describe the work directly.

• Scopely hires marketing data scientists to run “geo experiments, holdouts, incrementality tests” and to measure results “where deterministic attribution is limited.”

• Zynga and its studios want analysts to keep “a high bar for marketing data integrity” so that “tracking, attribution metrics and performance reporting are precise and reliable.”

• Rovio asks a user-acquisition analyst to spend part of the role “resolving data inconsistencies and improving tracking across our systems and platforms.”

What these roles have in common is that the studio builds its own measure of what an install was worth and whether the ad caused it, and weighs that against the network’s dashboard rather than acting on the dashboard alone. It adds to the cost of running paid acquisition, a cost sophisticated buyers take on rather than treat the platform’s numbers as enough.

3. The quality of the number

Even Unity, which also sells a game engine, is bought mainly for the growth of its advertising business, the same as AppLovin. In both, the figure meant to show the ad engine is creating that growth, rather than riding a cyclical recovery, is one an outsider cannot check.

A large advertising business usually discloses two figures side by side:

• A measure of how much it sold

• A measure of what it charged for it.

Meta gives ad impressions and the average price per ad; Google gives paid clicks and their cost; Snap, Pinterest and Reddit give active users and the revenue per user. The pairing is the point: it separates growth that comes from selling more from growth that comes from charging more, which is most of what an investor wants to know.

AppLovin reports both figures, but they do not line up. Its yield number is net revenue per install: all of its advertising revenue, divided by the number of installs.

• The revenue on top is everything AppLovin sells, and a growing share of it, e-commerce and connected-TV advertising, has nothing to do with an install.

• The count underneath is installs only. As that non-install revenue grows, the top rises while the bottom does not, so net revenue per install can climb without the engine improving at all. AppLovin’s CFO confirmed as much on the Q1 2025 call, that the numerator carries web and commerce revenue the install count does not; how much of the rise is this mix effect, and how much a genuinely better engine, cannot be separated from what it discloses.

The CFO has said as much: the figure goes up “because the installation volume in that metric is staying stagnant.”

Unity gives even less. Its headline figure is that Vector’s revenue grew 80% in a year, a number it repeats on its earnings calls but never attaches to a standalone dollar line. You can bound it from the mix Unity does give, though: in the first quarter of 2026 the ad network Vector powers was about four-fifths of a $279m strategic advertising line, so it runs near $220m a quarter. It will not break the advertising segment down either: asked to, the chief executive said “we are not reporting breakdowns in the ad revenue number.”

So the figure tells you the business is growing, not what is driving the growth: how much is the engine improving, and how much is mix, price or a cyclical recovery. You take that split on management’s word. Fuller disclosure, a defined metric on AppLovin’s side and a revenue line on Unity’s, would narrow the gap, though no single number would close it, since whether the edge is durable is a separate question again. The thin disclosure is as much a catalyst held in reserve as a shortcoming.

4. Only one of them owns its scorekeeper

The industry has a neutral party for exactly this problem: the mobile measurement partner, an independent firm that decides which network earned each install, so that none is taken at its own word.

AppLovin owns one. It bought Adjust, a mobile measurement partner, in 2021. Advertisers choose their own measurement partner, but for those who pick Adjust the firm grading AppLovin’s campaigns is owned by AppLovin, which also holds the bid through AXON and the auction it clears through. The analyst Eric Seufert flagged the oddity when the deal was done, a company on the buying side of advertising acquiring the neutral firm that scores it. AppLovin says the two are kept apart, that Adjust’s data is not shared with AXON or used to train it. Grant that entirely, and the conflict remains: the firm that marks AppLovin’s results is owned by AppLovin, whichever way the data flows.

The rest of the industry has moved the other way. In June 2026 Google, Meta, Moloco and Unity each agreed to take a non-controlling minority stake in AppsFlyer, the independent partner most of the industry uses, on terms that give none of them preference; the deal was signed subject to regulatory approval. Four competitors agreeing to buy into a shared referee, to keep it independent, is the opposite of a single advertiser owning its own measurement. AppLovin was not among them.

So the conflict runs one way. Where an advertiser chooses Adjust, AppLovin owns the firm grading its ads; Unity has agreed to a passive minority stake, next to its rivals, in the firm that grades everyone’s. In a market that is moving to keep measurement independent, the company that owns its own is the one not among the named backers.

5. The claim no one outside can test

The engine is supposed to create incrementality: sales that would not have happened without the ad, as opposed to ones the advertiser would have got anyway. The clearest public way to measure it is a holdout, where the ads are withheld from a matched group and the two are compared. It is not the only method, but it is the most direct. AppLovin could not be tested this way until recently; the geo-targeting a holdout needs arrived only in late 2024. Since then a few measurement firms and agencies have run tests, and they do not agree.

The results swing on the brand and on how much it spends.

• Haus, an incrementality firm, ran geo holdouts for four brands and measured real lift for the ones it tested.

• An agency called BlueAlpha ran the same kind of test for the beverage brand Cann, at a low weekly spend, and found none the test could detect: the dashboard had shown a large return, the holdout showed no incremental lift, and Cann cut the budget.

• Prescient, a modelling vendor, put AppLovin’s median advertiser roughly level with Meta.

Each was run by a firm with a product to sell, on a handful of brands over a short window, and AppLovin has published no holdout of its own.

So the public evidence does not settle it. What there is skews positive, but it is all vendor-run and self-selected, so none of it establishes a typical incremental return or whether the lift scales. What they have in common is that the platform’s dashboard is not the same as the measured result, which is the whole of the incrementality problem.

On its late 2024 earnings call, AppLovin’s chief executive told investors that advertisers in its new e-commerce pilot were, “in many cases,” seeing “nearly a 100% incrementality” from its traffic. But that is the company grading itself, on early data from one new vertical, and the outside record is too thin and too mixed to confirm it. AppLovin has since assembled the favourable tests into its own published review, reporting that the measured incremental factor has more than doubled in a year, which is the company marshalling the evidence for itself, not an independent audit.

The strongest evidence on the bull side is not a test at all. Named advertisers have raised their AppLovin spend and said so on the record: the supplements brand Paleovalley more than fivefold over eight months while hitting its return targets, as Modern Retail reported. That is real, and it is adoption, sophisticated buyers acting as though the engine works. It is not a measurement that the spend was incremental, because the return an advertiser cites is an attributed number, and attribution is the very thing a holdout exists to check.

Unity has its own version of the same problem, a claim about its engine that no outsider can test: that feeding first-party gameplay data into Vector is an edge AppLovin cannot copy.

6. What Unity says it owns

An ad network already sees a great deal: which ad ran, whether it led to an install, and, through the SDK and its measurement partner, what the user did next, the purchases, the retention, the in-app events. What it does not see is the game itself, how long people play, where they give up, the sequence of behaviour inside a session. Unity’s bet is that feeding this gameplay signal into Vector targets better than ad signals alone, drawn not only from Unity’s own titles but from other games built on its engine where the developer has configured and consented to share it. That, Unity says, is the thing AppLovin cannot match, having sold the studios that were its window onto gameplay. AppLovin’s history reads at least as easily the other way: it bought those studios to train its early models and sold them once the models were built. Whether that means it no longer needs to own games to keep the engine sharp is our reading, not something it has said.

The bet is also still a bet. Unity scheduled runtime data to enter Vector’s live models during Q2’2026, and by its own chief executive’s account the growth so far came without it; whether that rollout has completed, and with what result, it has not disclosed. August brings the first management commentary since the rollout, not a test of it: isolating what the data actually adds would need a cohort comparison or a controlled experiment, which Unity has not promised. Until then the edge is a claim about what the engine will do, not something the numbers show, which leaves Unity where AppLovin sits: priced on a proposition about its engine no outsider can yet establish.

7. Where the next two years go

A two-year forecast is uncertain, so the method matters more than the estimate. We project each company’s advertising line a quarter at a time, run three scenarios, and carry the disclosed costs through to net income. As a check on the method, we ran it back against the recent past a quarter at a time: it fits AppLovin’s last eight reported quarters within about 3% each, and Unity’s within about the same over the three interior quarters where the split is disclosed. That is a fit to history, not proof the two-year path is right, and the 2028 figures are an annual extrapolation beyond the quarterly grid. What matters is not the number but what each forecast leans on.

AppLovin’s forecast leans on net revenue per install, still climbing, and on its move into commerce. It has taken the top of mobile-game advertising, a mature market where it already takes the largest share, so commerce is the natural next market. Commerce advertising is far larger than games, but most of it is beyond an outside network’s reach: China is largely closed, and the big Western platforms and retailers keep their advertising on their own inventory. The part that remains, running in independent apps and on connected TV, roughly doubles the market AppLovin can address, on our estimate, and in it AppLovin holds only a few per cent, against Google, Meta and Amazon. The move is a raid on a contested slice, not the filling of white space.

In June 2026 it opened its platform to every advertiser on a self-serve basis, the step that lets the commerce push scale, on the same loop that won gaming. What it lacks is proof the loop scales in commerce: the three incumbents each run their own, and AppLovin’s commerce business, last quantified at about a tenth of revenue in early 2025 and larger now though unquantified, is still small beside them. The price already leans on it getting much bigger.

Unity’s forecast is the mirror. It is rebuilding its ad product, on Vector, to win back the game user-acquisition budgets AppLovin is extending beyond rather than leaving. Through 2025 Vector’s growth and ironSource’s decline cancelled out; that ended when Unity closed the ironSource ad network at the end of April 2026, though its exchange and programmatic demand continue, and the ad line has started to climb. Whether that climb is real share or a small base flattered by advertisers moving off Unity’s own legacy network is something Unity cannot show and an outsider cannot check. Its guided return to profit by end-2026, which our build reaches in the base and bull cases but not the bear, leans partly on old acquisition costs rolling off rather than on the ads. Vector is the widest single swing in that range, which runs from a return to profit to none at all, though Create’s growth, costs, stock compensation and tax move it too.

8. What you pay for it

The ruler we use is EV/EBITDA on next year’s earnings, with stock compensation charged as a cost. It is a choice, not the only one, but it is where the difference between these two shows up.

• AppLovin barely moves between the two bases, about 26x either way, because it pays out almost no stock.

• The Trade Desk trades near 5x with the stock added back and about 9x once it is charged, so the charge nearly doubles its multiple.

Even charged, AppLovin at about 27x is roughly three times the Trade Desk. That distance is a growth premium, not a stock-comp gap.

For Unity, the two columns pull apart.

• With the stock added back, it trades around 32x, a growth multiple, a little above AppLovin’s.

• Charge the stock as a cost and the multiple balloons past 130x, because almost all of Unity’s adjusted profit is the stock it pays out. Strip that stock and only a sliver of earnings is left to carry a $13bn enterprise value; and that sliver exists at all only because we set aside a one-off ironSource writedown from this year. On last year’s accounts, charged for the stock, Unity had no EBITDA and no multiple.

In fairness, Unity converts nearly all of its adjusted EBITDA to cash, and the stock is a dilution cost rather than a cash one, its share count rose about 6% in a year; and the reported operating loss is mostly a non-cash amortisation of the ironSource intangibles, now running off, not a cash hole. But once the stock is counted, there is little underneath.

A multiple tells you the price, not whether it is earned, so we also use a DCF. At a discount rate of about 11%, built from a 4.5% risk-free rate, a 4.2% equity risk premium and a beta of 1.5 we apply to both, and with the stock charged, only AppLovin’s bull case on a premium exit multiple reaches its price; every other case, and every Unity case, sits below. On a conservative terminal that reverts growth to 3% after 2028, both fall well short. The distance between those two terminals is a measure of how much of the price rests on the terminal assumption rather than on the years we actually forecast.

So we can run the DCF backwards: hold the share price fixed and solve for the growth the model then needs to reach it. The figure depends on the terminal method, so we show the range, from the exit multiple we lean on to the conservative perpetuity.

• AppLovin’s $515 implies advertising revenue of about $18bn to $27bn by 2028, three to five times its 2025 level: the low end on the exit-multiple terminal, the high end on the perpetuity. Even the low end needs about +50% a year, and the high end +70%, at or below the pace it has just been reporting.

• Unity’s $30 implies strategic Grow of about $8bn to $9bn by 2028, near seven times its 2025 level on either terminal, a pace of roughly +90% a year. That is well above what Unity has actually shown: its strategic advertising line grew about 49% last quarter, and even its Vector component, the fastest part, grew about 80%. The price is asking for acceleration, off a smaller and less-proven base.

Both prices, then, are a bet on years of growth. AppLovin’s requires its advertising revenue to grow threefold to fivefold by 2028, at or below the pace it has already shown. Unity’s requires strategic Grow to grow sevenfold, faster than it has ever managed.

Close

AppLovin and Unity are each priced on the claim that their advertising engine is compounding real value, and the reverse-DCF turns that claim into a number. AppLovin’s price needs its advertising to keep growing at close to the exceptional pace it has just posted, and to hold a premium multiple at the end of it. Unity’s needs its strategic advertising line, which grew about 49% last quarter, to accelerate to nearer 90% a year and hold it. Both are demanding; Unity’s is the further reach from what it has actually shown.

What you cannot do from outside is verify the engine behind either number. AppLovin narrates a yield metric it will not define; Unity reports a growth rate and only a rough, self-derived figure for the revenue beneath it, and stakes part of its case on runtime data it has scheduled into Vector but not yet shown to work. None of this requires anyone to have done anything wrong. The growth is real; what it is made of, and whether it lasts, is the part the disclosure keeps out of reach.

More from The Side Quest

• Epic Games: what is it worth, and what did the generosity cost? Fortnite pays for four free layers. The cash Epic captures is worth about $7.5bn; the tools it under-monetises lift fair value toward $14bn, and the last mark sits in between.

• Roblox: A great company lost on valuation - It owns the most complete stack in interactive entertainment yet profits from it the least, and rising costs are eating into what little is left.

• Microsoft and Xbox: Too small to sell, too strategic to spin - On the numbers, Xbox is worth about $49bn, a rounding error to Microsoft. It won’t be sold, and any separation keeps a grip on the data its games generate.

• AI in Video Games: Own the Loop - why a studio keeps its value only if it owns the content-generating learning loop, not the model. Uses Guild Wars 3 as a worked example.

• AI won’t make AAA games materially cheaper to develop - the productivity gains are real, but two-thirds of the value leaves the P&L to the AI vendors before it reaches the bottom line.

Appendix:

The appendix contains where its figures come from and how the analysis was built, section by section. Charts already shown in the article are referred to here, not repeated. Figures are stated from company filings unless flagged as an estimate, and are rounded for display, so rows may not foot.

A1. The opening claims.

Mobile-games studios spend heavily on user acquisition. Across the listed free-to-play peers the figure runs at roughly 22% to 40% of revenue, clustered at 30% to 40% for the heavy spenders (Modern Times Group, Playtika, Zynga, Huuuge) and lower for the lighter ones (PLAYSTUDIOS at about 24%, SciPlay in the low 20s). Neither AppLovin nor Unity discloses a user-acquisition efficiency figure of its own; that line is the buyer’s cost, which is the point of the second section.

AppLovin’s advertising revenue grew from $1.84bn in 2023 to $5.48bn in 2025, and the growth was organic: its filings record no business combinations in 2023, 2024 or 2025, the functional currency is US dollars with no material foreign-exchange effect, and the 2024 rename from “Software Platform” to “Advertising” did not change historical results. The games business it left was the Tripledot divestiture, closed on 30 June 2025 for $715.6m in cash and stock plus a roughly 20% retained stake.

Source: AppLovin’s filings; the peer UA figures from the studios’ own reporting, or derived from sales-and-marketing spend over revenue where a company does not disclose the ratio.

A2. The machine, and who owns each layer.

An ad passes through four layers: the bidding engine that picks it, the auction that prices it, the mediation layer that runs a single auction across networks, and the measurement partner that decides which network to credit. The ownership grid is shown in the article: AppLovin owns all four (AXON, ALX, MAX, Adjust), Unity the first three (Vector, iSX, LevelPlay) and not measurement.

Two figures on that grid are worth pinning. MAX sat in about 73% of the top 200 games by downloads in early 2025 (AppMagic), a share AppLovin partly compels by requiring MAX to reach its performance tools, so it is a reach figure rather than a pure choice. Adjust has been owned since 2021, and AppLovin states in its filings that Adjust’s data is not shared with or used to train AXON, so the conflict is ownership of the referee, not a data loop.

The growth-divergence chart plots advertising-segment revenue from 2021 to 2025: AppLovin from $0.67bn to $5.48bn, Unity’s Grow line from $0.60bn to $1.23bn and flat since 2023. AppLovin’s 2021 and 2022 figures sit under its former “Software Platform” label; Unity’s 2023 includes a full year of ironSource, so that year’s step up is acquisition arithmetic, not organic growth.

Source: both companies’ filings for the ownership and the revenue series; the MAX share from AppMagic (March 2025).

A3. The buyers’ survey.

The claim that studios build their own numbers rests on a job-postings survey, read on 3 July 2026 directly from each company’s own hiring system rather than an aggregator. On the selling side it covered five networks (AppLovin, with 28 openings; Unity, about 150; Moloco, 48; Digital Turbine, 32; Liftoff, 19). On the buying side it covered about nineteen studios, among them Scopely, Zynga, Dream Games, Supercell and Rovio. The roles quoted in the article are verbatim. Postings rotate daily, so the counts are a single-day snapshot.

Source: the companies’ applicant-tracking systems (Greenhouse, Lever, Workday), read 3 July 2026.

A4. The quality of the number.

Large advertising businesses disclose a volume figure and a price figure side by side, so an investor can separate growth from selling more from growth from charging more; the benchmark in the article shows Meta, Google, Snap and others doing exactly that. AppLovin reports installs and net revenue per install, but the two do not line up, which is the point of the card below: installs have gone from up 87% to down 18% year on year while net revenue per install has climbed from up 5% to up 93%.

The reason they diverge is disclosed, not inferred. On its first-quarter 2025 call, asked directly, AppLovin’s chief financial officer confirmed that the yield metric’s numerator includes web and commerce revenue while its denominator counts only installs, so as non-install revenue grows the ratio rises on mix alone. How much of the climb is mix and how much a genuinely better engine cannot be separated from the disclosure.

Unity discloses less. Its headline is that Vector’s revenue grew 80% year on year in early 2026, a rate it repeats but never attaches to a dollar figure; from its own mix disclosure the Vector-powered network runs near $220m a quarter, though Unity never prints the standalone line. Asked for a breakdown of the advertising segment, its chief executive declined.

Source: AppLovin’s quarterly and annual management discussion for the install and yield series and the CFO’s remarks; Unity’s first-quarter 2026 release and call for the Vector figures.

A5. The scorekeeper.

AppLovin owns Adjust, one of the measurement firms an advertiser can choose; where an advertiser picks it, the firm grading the campaign is owned by the network being graded. In June 2026 the rest of the industry moved the other way: Google, Meta, Moloco and Unity each agreed to take a non-controlling, non-preferential stake in AppsFlyer, the independent partner most of the industry uses. The agreement was signed subject to regulatory approval and had not closed. AppLovin is not among the named investors.

Source: the AppsFlyer release (22 June 2026); Adjust’s ownership from AppLovin’s filings.

A6. Incrementality

Whether AppLovin’s ads cause sales that would not have happened anyway can only be settled by a holdout, and the few public tests disagree; the article’s table lists each with the tester’s conflict printed alongside. What they share is that every one was run by a firm with a product to sell, on a handful of brands over short windows, so none establishes a typical return, and each anti-engine figure traces to a vendor- or short-conflicted source. The strongest evidence for the engine is not a test but adoption: named advertisers have raised their spend on the record. AppLovin has since published its own review gathering the favourable studies, which is the company assembling the evidence for itself rather than an independent audit.

Source: the individual vendor and agency case studies (Haus, BlueAlpha, Prescient) cited in the article’s table; the adoption examples from Modern Retail (1 October 2025).

A7. Runtime data

Unity’s claimed edge, feeding first-party gameplay data into Vector, is prospective. The framework that collects it launched in 2025 and reaches live models only in the second quarter of 2026, and on three consecutive calls management has said Vector’s growth so far came without it. The first read on whether it works lands at the August 2026 earnings. Against the claim sits a reach-versus-yield gap: on third-party panels Unity’s ad software is in more games than AppLovin’s, about 40% against 28%, yet earns a far smaller share of ad revenue, roughly 10% to 16% against 27% to 37%. These are independent panels on different denominators, so the figures are directional.

Source: Unity’s earnings calls for the runtime-data timeline; the reach and revenue-share panels from AppFigures, Tenjin and Sensor Tower.

A8. The forecast and the market

The two-year forecast is built a quarter at a time from the filings, in three scenarios. Run backwards against the recent past, one quarter ahead at a time, it fits AppLovin’s last eight reported quarters within about 3% each; Unity’s fit covers the three quarters where the strategic-versus-legacy split is disclosed. The 2028 figures are an annual extrapolation beyond the quarterly model.

AppLovin’s out-years lean on its move into commerce. The addressable-market exhibit sizes that pool and AppLovin’s share of it; its two softest rows, the off-platform commerce pool and the slice serviceable on independent inventory, are our estimates rather than disclosed figures, and are shown as ranges for that reason. Unity’s out-years lean on Vector as the ironSource network is wound down, a closure that carried a $279m writedown in the first quarter of 2026.

Source: the model, built from both companies’ filings; the market-size ranges cross-checked against measurement-house estimates (eMarketer, GroupM, Dentsu, IAB).

A9. What you pay for it.

The article carries three valuation exhibits: the forward comparables, the discounted-cash-flow football field, and the reverse-DCF. The sourced build behind the comparables, revenue through to enterprise value for each name, is the card below.

Every market price sits on one reconciled close, 30 June 2026 for AppLovin, the Trade Desk and Digital Turbine and 1 July for Unity, and the comparable multiples are struck on next-year earnings. The discount rate in the DCF, about 11%, is built from a 4.5% risk-free rate, a 4.2% equity risk premium and a beta of 1.5 applied to both companies; the exit multiples are struck on stock-inclusive terminal earnings, so a lower “adjusted” multiple is never applied to a stock-charged base.

Unity’s forward multiple carries one deliberate adjustment: the one-off ironSource writedown is set aside, without which its stock-charged EBITDA is negative and no multiple computes. Almost all of Unity’s adjusted profit is the stock it pays out, about $385m of a $409m adjusted EBITDA, which is why charging that stock moves its multiple so far, and AppLovin’s, which pays out almost none, so little. The reverse-DCF holds each price fixed and solves for the growth it would take to justify it under two terminal methods, and reports the range; those figures are in the exhibit.

Source: the valuation model, rebuilt from the filings and independently recomputed; the peer forward revenue from consensus estimates, the subjects’ forward earnings from the model.

A10. Conventions:

Profitability is stated with stock-based compensation left in as a cost; each company’s own “adjusted EBITDA”, which adds it back, is shown only as a memo and never used for a comparison multiple. Net debt is funded debt plus finance leases, with operating leases excluded. AppLovin’s figures are continuing operations throughout, its games segment discontinued after the June 2025 sale. Balance-sheet figures are as reported at the first quarter of 2026 unless noted. The forecast is bottom-up by quarter, full-year figures being the sum of the four quarters, with guidance anchoring the nearest forecast quarter. Figures are rounded for display and may not sum.

• Sadly, the cuts we expected in June have landed: 3,200 roles through FY27 and five studios divested. Those cuts, and a tighter process for funding games, are aimed at a margin that runs far below the rest of Microsoft.

• Xbox is focusing on its platforms, Minecraft and King, now reporting to the CEO, and its biggest AAA franchises, while shedding the smaller studios it bought to feed Game Pass.

• The value sits in a few big franchises and the cut Microsoft takes on other publishers' games, not the console or the divested studios.

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In June, we valued Xbox on the news that the division might be spun out (See Microsoft and Xbox: Too small to sell, too strategic to spin) and concluded Microsoft would most likely keep it. In our base case we left a door open in the headcount assumptions banking “only the first wave and leaving the rest to a broader round still to come.” Sadly, that has now come to pass, with Microsoft and Xbox announcing cuts to the division, reducing headcount by 3,200 through FY27.

1. What we learnt about the new Xbox strategy

Going back to the original thesis (See Microsoft and Xbox: Too small to sell, too strategic to spin), there were two reasons we looked at why Microsoft was turning its attention to change at Xbox:

• Focus. Gaming consumes leadership attention for a 3% margin business that has only just returned to growth, while the $168bn Microsoft Cloud business grows at 23%.

• Capital. The more than $20bn Xbox absorbed over five years is real money for a company spending about $65bn a year on capital expenditure, most of it the AI build-out. It is immaterial to the balance sheet and still an ineffective use of capital.

The announcement by the CEO of Xbox acts on the set-up laid out above, and on Microsoft's previous communication.

Focus: Xbox will become focused on both platform and AAA first-party titles

Mojang and King now reporting to the CEO of Xbox is perhaps the most interesting part of this strategy. The two are doing different jobs:

• Minecraft is the platform play: a user-generated creation platform that competes directly with Roblox and Fortnite’s UEFN, and the clearest case of Sharma’s “increasingly become platforms.” King is the profitability play: a mobile free-to-play business with a very large audience and high margins, whose value is the profit it throws off rather than any creation platform. The reporting change aligns management attention with where the margin actually is.

• The promotion of Helen Chiang, who ran Minecraft, into the COO role, replacing Dave McCarthy, though hers is the first such role given end-to-end P&L, points to the greater weight platforms will carry.

• Mojang and King also have a very large number of monthly active players, plausibly rivalling the rest of the portfolio combined, which (Mojang and King) have probably not commanded management attention proportionate to the profit they generate.

• Microsoft will also provide “open development tools” to help independent creators. That is the other half of the same platform pivot: rather than owning every studio, it wants creators building on its platforms, Minecraft’s marketplace the clearest existing example.

The sale of the studios helps focus management time too. In the CEO’s own words, “we now find ourselves competing not only with the largest publishers, but also with smaller independent studios.” For illustration purposes, the studios being let go share a profile: mid-scale, AA studios picked up in the 2018–2021 expansion, none anchoring a franchise at the scale Xbox now wants to concentrate on.

The refocus runs inside the studios they are keeping, too. Bethesda is moving to a franchise-first model, concentrating on Elder Scrolls, Fallout and Doom over experimental bets like Starfield, and the reported cuts land across the AAA studios. This reads as reallocating investment within the AAA tier rather than retreating from it. Where a live game like Elder Scrolls Online loses headcount, the more likely read is a shift to running it for its annuity, harvesting the recurring revenue with less new-content investment, rather than a franchise being cut.

Tying this back to Microsoft, alongside the Xbox memo the group’s Chief People Officer said the “business is changing because the world around it is changing. The way technology is built, deployed, and used is transforming faster than at any point in my time here.” Microsoft’s strategy as a whole is tilting harder to AI, and that speed of change in the core business accelerates the need to reshape a mature division like Xbox. This is about where the company is putting its resources and attention, not about AI taking these particular jobs.

Capital: Xbox is working towards its group management margins

Capital is now being tied to focus, which likely means further investment into established, profitable franchises and a more concentrated portfolio of bets:

1. The four to five studios handed back or made independent will likely lift the division’s margin: most were in development, spending cost against little current revenue, so removing them takes out near-pure cost. Sharma framed the studio economics as loss-making (“in a typical year, we lost 64 cents for every dollar we invested”), though that figure depends heavily on the period and the mix of in-development versus launched titles, so it reads more as a snapshot of front-loaded spend than a settled loss rate.

2. Helen Chiang’s promotion to COO also creates an investment committee (IC) approach to capital allocation within Xbox: she will “bring our businesses together under one operating model, making sure we make clear investment decisions, learn from our successes and failures, and hold ourselves accountable for results.”

3. With that, games likely have to clear a set of hurdles for investment to continue, inferred from the statement that Xbox is “also making reductions across other units, and in some cases, shifting investment to focus on higher priority projects,” to various degrees across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and XBOX Game Studios.

4. There will be “50% reduced vendor spend,” a standard variable cost line most businesses pull when restructuring.

2. What does this all mean?

For the future, the CEO of Xbox has stated two ambitions:

• Xbox “entertains more than a billion people each day.” That is an aspirational scale ambition, not a quantified target, and the portfolio is a long way from it today, a few hundred million monthly players across Candy Crush, Minecraft, Game Pass and the console, reaching different audiences. A billion daily is a very high bar.

• Returning to growth in 2027. Sharma has said that since the April 2026 price cut, Game Pass has seen “acquisitions grow, and retention improve,” early signs on what she calls the “path to restore durable growth” rather than a return already achieved. With that, resources concentrated on the biggest platforms and most profitable franchises, and a tighter capital process, there are levers to pull.

For the valuation, there’s another way to think about it. Instead of valuing Xbox as one blended business, look at where the value actually sits and what each part is worth:

The value was never evenly spread and it sits in a handful of established franchises and in the toll Microsoft takes on everyone else’s games. The drag is the console and the studios it bought to feed Game Pass, a content bet that never grew the subscription enough to justify it. The reset is Microsoft narrowing Xbox to the parts that were carrying it all along.

More from The Side Quest

• Epic Games: what is it worth, and what did the generosity cost? Fortnite pays for four free layers. The cash Epic captures is worth about $7.5bn; the tools it under-monetises lift fair value toward $14bn, and the last mark sits in between.

• Roblox: A great company lost on valuation - It owns the most complete stack in interactive entertainment yet profits from it the least, and rising costs are eating into what little is left.

• Microsoft and Xbox: Too small to sell, too strategic to spin - On the numbers, Xbox is worth about $49bn, a rounding error to Microsoft. It won’t be sold, and any separation keeps a grip on the data its games generate.

• AI in Video Games: Own the Loop - why a studio keeps its value only if it owns the content-generating learning loop, not the model. Uses Guild Wars 3 as a worked example.

• AI won’t make AAA games materially cheaper to develop - the productivity gains are real, but two-thirds of the value leaves the P&L to the AI vendors before it reaches the bottom line.

• Jen MacLean has been in games since she tested Civilization II, and now runs the small studio Dragon Snacks Games. She describes an industry that “swings wildly from one extreme to another,” over-building when money flows and cutting in “panic” when it stops. The swing is structural to public video games companies, with leaders who have lived every cycle still over-hire into a rising share price and cut into a falling one, and the buybacks and dividends land in the same years as the layoffs.

• The money that funds games has both shrunk and changed shape. Venture capital retreated to ‘completion funding’ that locks out anyone without personal runway, publishing terms hardened, and the equity that stayed re-narrated itself around AI. Inside games, the bankable use of AI is on the cost side, automating the work engineers hate, not the generative gameplay the money chased.

• You cannot allocate your way to a hit, and you cannot reliably pick one, so the rational move is to minimise the capital at risk and outlast the swing. That is why the studios that last are small and private, off the share-price signal, and why a market that now prices a breakout at $50 or a viral hit at the cost of a coffee rewards spending little to find out what works.

Watch the full interview with Jen MacLean below.

The cost base always arrives a cycle late

MacLean’s first reference point for the games cycle is a supply-chain exercise she played in business school, where teams forecast orders without information and “swing wildly from one extreme to another.” That, she says, “is very much what’s happening in the games industry, and what has consistently happened.”

When money is good the industry moves to “overproduction” and “over-investment”; when it turns, the reaction is “almost in panic.” COVID was the most recent swing. Demand spiked as people locked down, studios scaled to meet it, and then demand normalised while the cost base kept climbing and had to be cut. She points to 2008 as the same shape a cycle earlier.

Part of why the cost base overshoots is that nobody can price the building. MacLean quotes an executive she worked with at Xbox who told her the industry is “used to production methodologies best suited for a two-story house” and now finds itself “making skyscrapers that are mixed use.” The methods that worked at one scale do not carry to the next, so budgets get set against a structure the studio has not built before and cannot fully estimate.

Why the public companies cannot stop

The leaders running the public companies have all been through this before. MacLean names Andrew Wilson at EA and Strauss Zelnick at Take-Two, and the overreaction comes anyway. “It is very difficult to avoid that overreaction,” she says, “when you have shareholders who are saying, hey, why isn’t your stock price up?”

Whilst a public company allocates against its share price, a private one can allocate against a set of accounts it controls, and MacLean reads the difference in who has built the studios that last. She points to Supergiant and Larian, run by people who have "gone through the ups and downs" and hold what she calls "a real sustainable studio mindset," without a listed company's shareholders, or its share price, to answer to.

The reflex is legible in the cash flow statement:

A buyback is management stating that its own shares are the best available use of the company's cash, and EA was making that statement across the same years it was cutting staff and booking restructuring charges, returning billions to shareholders through repurchases, including $2.5bn in FY2025. Activision returned its cash a different way and after reporting a record year it cut roughly 800 roles, about 8% of its staff, in February 2019, while paying a $283m dividend. Its one large buyback had come years earlier, in 2013, to buy out Vivendi's stake.

Who gets to start now

The money that used to fund new studios has not just shrunk, it has changed shape. MacLean describes venture investors pulling back from equity and moving to “completion funding,” which pays only once a game is 12 to 18 months from launch. She does not think that is a bad model in itself, and says that as an LP she would prefer it. But it constrains who can start. To reach the point where completion funding is available, a founder has to survive the first half of development on personal runway, which means being “independently wealthy” or building the game as “a second or third job.”

It has also repriced pedigree. In the 2020-21 boom, MacLean says, venture money would back someone on the strength of a marquee name on their CV, Riot, Blizzard, EA, even where they had been “one of many” rather than leading a project or delivering a game. She is blunt that “a credit on a game from Blizzard does not mean you are going to be a good entrepreneur,” and that leading a design team inside a big studio is a different discipline from setting one up. What has replaced that confidence is a rule she repeats: “it doesn’t mean a thing until the check hits the bank.” Dragon Snacks had a publisher that could not honour its term sheet once the publisher’s own funding fell through.

The terms on offer have hardened too. MacLean divides the work a publisher does into commodity tasks, localisation and compatibility testing, where “players only notice if it’s really, really bad,” and the parts that genuinely move a launch, chiefly marketing, which changes “month to month” as storefront algorithms shift. What worries her is the newer publishers who fund none of the development but still take a permanent cut. “If someone says, I’m gonna take 10% of net, and I don’t have a cap,” she says, a hit could mean “paying tens of millions of dollars for somebody doing marketing for a launch,” which she calls predatory.

The one input that has genuinely got cheaper is talent, because the map has widened. MacLean now looks to hire concept art and specialist work from Southeast Asia, Central Europe and Latin America, places a studio “never would have looked” five years ago. That is good for a small studio’s economics and hard on the people it used to hire; she notes that North American developers in high cost-of-living areas have been hit hardest by the cuts.

The money re-narrated itself as AI

Follow the venture money and it has not so much left games as relabelled itself. In February 2022 the London firm Hiro Capital sponsored a metaverse-themed blank-cheque company, Hiro Metaverse Acquisitions, and listed it in London. It never completed a deal, and was delisted two years later with its shares redeemed. Twenty-two months after that, Hiro re-emerged as an AI-first fund, with the former Meta executive Nick Clegg as a general partner and Yann LeCun advising, and gaming demoted to the fourth of its four themes.

a16z’s games accelerator now bills itself around “tech, entertainment and AI”; generalists that ran gaming summits in 2022, such as Index Ventures, now say more than half of recent money goes to AI. The honest reading is not that these funds abandoned games. but rather, it is that games venture, like the studios it funds, chases the prevailing story, metaverse in 2021 and AI now, more than it backs a settled conviction. Konvoy, a gaming fund that publicly doubts AI will “save mediocre games,” is the reminder that the turn is not universal.

What the capital chased is not what has actually paid off inside games. MacLean has promised Dragon Snacks players they “will not see generative AI” in the game, and the studio keeps it entirely away from anything player-facing. Where it uses AI heavily is on the engineering side, on “the tasks that no one wants to do.” Automating the build process freed the studio’s lead engineer to build peer-to-peer networking for 16-player sessions that only has to store a world state rather than run a server for every game instance, which lowered cost and improved the experience at the same time. The generative gameplay that drew the funding she is wary of, calling it “so nascent” and warning that people “confuse environments with gameplay.” A model can generate a town to walk around, “but walking around a town is generally very not very fun” without the designers who make it worth the walk.

You don’t need to be big

MacLean’s own answer to the cost problem is to reject the premise. The question, she says, is not whether a studio should stay small but “do you need to be big?” Over the last year small teams have sold millions of copies of games that are nowhere near AAA polish and were never meant to be, to a generation that “grew up on Roblox” and “care if it’s fun,” not whether it is polished. She is careful about survivorship: the successes get talked about and the far larger number of failures do not, and “anytime your strategy is expecting something to go viral, it is deeply flawed.”

She is impatient with the annual story that Steam is drowning in new releases, because most of those games were never commercial in intent, someone deciding to “fool around in Godot” (the free open source game engine) and sell fifty copies to friends and family. The count of games built for commercial success has risen slowly, not at the rate the headline suggests. A studio “can absolutely hit a fluke out of the park,” she says; doing it “consistently” is “much, much harder.”

The constraints she expects over the next three years favour the small and the cheap. Hardware is expensive enough that more players will stay on the machines they already own, which suits a studio like hers with no photorealistic art style. Regulation aimed at how teenagers talk to strangers online, already moving in the UK, could reach the games industry, and she hopes it “holds a mirror up to us and forces us to prioritize people over profit,” while adding that she is “not confident it will.”

The market is repricing what a game is worth, and that sets the ceiling on what a studio can spend to make one. MacLean points to Clair Obscur: Expedition 33, priced just below the $70 tier at $50, which she thought “an incredible bet,” because to a player anchored on $70 it “sounds like a bargain.” The cheap co-op hits she calls “friendslop” sell for the price of “a coffee at Starbucks,” an impulse buy. A $70 game, she thinks, increasingly has to be a GTA to justify itself. Everything below that is now made, and priced, by studios that keep what they spend inside what the market will pay for it.

More from The Side Quest

• Epic Games: what is it worth, and what did the generosity cost? Fortnite pays for four free layers. The cash Epic captures is worth about $7.5bn; the tools it under-monetises lift fair value toward $14bn, and the last mark sits in between.

• Roblox: A great company lost on valuation - It owns the most complete stack in interactive entertainment yet profits from it the least, and rising costs are eating into what little is left.

• Microsoft and Xbox: Too small to sell, too strategic to spin - On the numbers, Xbox is worth about $49bn, a rounding error to Microsoft. It won’t be sold, and any separation keeps a grip on the data its games generate.

• AI in Video Games: Own the Loop - why a studio keeps its value only if it owns the content-generating learning loop, not the model. Uses Guild Wars 3 as a worked example.

• AI won’t make AAA games materially cheaper to develop - the productivity gains are real, but two-thirds of the value leaves the P&L to the AI vendors before it reaches the bottom line.

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Appendix:

The three exhibits are built from primary filings only: annual reports (Form 10-K for the US companies, universal registration documents for Ubisoft), results releases, and the venture funds’ own published statements. No third-party financial trackers are used as load-bearing sources. The full workbook is available on request.

A few conventions apply across the exhibits:

• Demand is measured two ways: “Net bookings” is each company’s own non-GAAP or non-IFRS metric, roughly reported revenue adjusted for the movement in deferred revenue, which captures cash-basis sales including the deferred portion. Companies only began disclosing it around FY2018 to FY2020, so the deeper history runs on reported revenue instead. Both lines are shown, indexed to each company’s base year, so the comparison is of shape rather than absolute level.

• The revenue-standard break: All four companies adopted the new revenue standard (ASC 606 in the US, IFRS 15 for Ubisoft) around FY2018 to FY2019, on a modified-retrospective basis, meaning they did not restate their earlier years. The demand line therefore steps at that point, and the exhibits mark it rather than splicing across it.

• Currency: Ubisoft reports in euros; EA, Activision and Take-Two in US dollars. Figures are not converted, because each series is read for its own trajectory, indexed to its base year.

• Filed versus reported: Where a figure is a company disclosure it is stated plainly. Where it is press-reported context, for example a round headcount-cut number the filing does not itself give, it is flagged as such below.

Exhibit 1: headcount against demand

Headcount is period-end total employees as each company states it in its annual filing. The important caveat is that a rising headcount line is often a corporate action or a change of definition, not organic hiring, and this differs by company.

• Activision Blizzard: Two of its steps are not organic growth. The 2016 rise, from about 7,300 to 9,600, is the acquisition of King. The 2022 rise, from about 9,800 to 13,000, is largely a reclassification: the FY2021 filing counts “approximately 9,800 full-time and part-time employees”, while the FY2022 filing counts “approximately 13,000 full-time and part-time non-temporary employees”. The word that appears is “non-temporary”. Through 2021 and 2022 the company converted temporary and contingent workers, chiefly quality-assurance testers, into permanent staff, and those converts enter the count. The FY2021 filing flagged the start of it, “the conversion of approximately 500 temporary workers to full-time employees at our Activision studios”, and the North American share of the workforce rising from 68% to 72% is consistent with US-based conversions. The two years are therefore not on a like-for-like basis, and the increase should not be read as 3,200 net new roles. The 2019 dip, from about 9,900 to 9,200, is the February 2019 reorganisation, roughly 800 roles, after a record year. The series ends at FY2022, the last full year before the Microsoft acquisition closed in October 2023.

• Take-Two: The 2023 rise, from about 7,799 to 11,580, is the acquisition of Zynga, which closed in May 2022. It is an inorganic addition, not organic growth.

• Electronic Arts: is the counter-case: its total headcount rose across the whole period, and reported revenue actually outgrew it. The workforce reductions of 2023 and 2024, a cut of about 6% announced in 2023, show up as restructuring charges, about $111m then $62m, rather than as a fall in the total, because they were offset by hiring elsewhere.

• Ubisoft: Headcount is the period-end worldwide count reported in the annual report. Two notes apply. First, the definition was broadened in FY2013 to include game testers, so the figures on either side of 2013 are not strictly on the same basis, and the exhibit marks that break. The later change of label from “Effectif” to “Total headcount” is a translation, not a change of basis: the two carry the same period-end worldwide definition, and the FY2024 and FY2025 registration-document figures equal the results-release figures of 19,011 and 17,782 exactly. Second, the workforce climbed on real hiring, the 2019-20 document frames it as a “high volume of recruitment”, to a peak of 20,665 in FY2022, then fell to 16,590 by FY2026, a reduction of 4,075, or about 20%. Ubisoft is the one company of the four whose recent decline is a genuine net reduction in headcount rather than a corporate action or a change of definition.

Exhibit 2: capital returned to shareholders against layoffs

This exhibit sets what each company paid out to shareholders, share repurchases and dividends from the financing section of the cash-flow statement, against the years it was cutting staff, measured by restructuring charges and dated reductions. Two clarifications matter.

• Activision Blizzard: In the reduction year of 2019 the company did not buy back stock at all; it had paused repurchases from 2014 to 2022. The capital it returned that year was a dividend of about $283m, paid alongside a restructuring charge of about $132m and the roughly 800-role cut, after a record year. Its one large buyback, about $5.8bn in 2013, was the repurchase of Vivendi’s majority stake, a one-off ownership transaction rather than a signal about the share price, and it is labelled separately.

• Electronic Arts: EA is the clean case. In FY2025 it repurchased about $2.5bn of its own stock, its largest single-year buyback, and paid a dividend of about $199m, in the same year it booked restructuring charges. The step up followed a new $5.0bn repurchase authorisation in May 2024, which replaced the earlier $2.6bn programme; buybacks had run near $1.3bn a year before it. EA then suspended repurchases the following year in contemplation of the merger, which is why FY2026 falls to about $769m. The relevant cash-flow line is “repurchases and excise taxes paid”, so it bundles the buyback with its excise tax rather than being pure repurchases. The Saudi-led take-private was announced in September 2025 but had not closed as of the FY2026 annual report, so EA remained a listed company through the series.

Exhibit 3: the venture money

The table records how games-focused venture funds described their own investment thesis in 2020 to 2021 against how they describe it in 2024 to 2025, in each fund’s own words, taken from its website, a fund-launch release, or an attributed partner statement, each dated. Funds are sorted into three verdicts: “shifted” (rebranded toward AI), “broadened” (added AI as a pillar while keeping a games fund), and “stayed” (games-pure, unchanged).

Two points keep the exhibit honest. First, the pattern is not universal: for most funds that moved there is a same-scene peer that held the line, and the table shows both. Second, “AI” is the second re-theming in three years, not the first. Several of the same funds and portfolios were sold as “metaverse” or Web3 in 2021 before being sold as AI in 2024 to 2025, which supports reading this as capital following the prevailing narrative rather than a settled conviction.

Caveats: The two generalist firms in the table, Lightspeed and Bessemer, were never games-pure, so they represent a de-emphasis of gaming in their public content, not a fund-level pivot, and are marked as texture. Two individual cells, Konvoy’s 2020 to 2021 wording and a16z’s “generative AI tidal wave” line, are attributed to secondary or undated sources and should be read as such. Fund-size and portfolio-mix figures, where mentioned, come from third-party trackers and are not primary.

On figures and estimates

The following are press-reported or estimated context, not company disclosures, and are flagged where they appear: the roughly 800 Activision roles cut in February 2019; EA’s roughly 6% workforce reduction announced in 2023; and the roughly 1,100 quality-assurance testers Activision converted to full-time in 2022. The underlying charges, dividends, buybacks, headcount totals and net bookings are taken from the filings.

• Epic is converting Fortnite into a creator platform, the thing Roblox was built as from the start. It discounts the engine, gives the online services away, runs its store at a loss, and funds a 40% creator pool, all on one declining game.

• Of $100 a Fortnite player spends, the stores take about $26, Epic keeps about $63, and third-party creators receive about $11. The advertised 40% becomes an effective 15%, because Epic’s own Battle Royale is the pool’s largest claimant.

• The cash Epic captures is worth $7.5-11bn of equity. A c$3bn premium for the strategic tools it under-monetises, Unreal and its online services, lifts fair value to $10.5-14bn. The freshest $12.16bn mark sits inside that range; only the $31.5bn 2022 peak still needs the metaverse.

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This article is a follow on from Roblox: A great company lost on valuation.
The Epic Games model is available on request.

Epic Games is spending its way through a conversion. Fortnite is a maturing game in a shrinking genre, and Epic’s answer is to turn it into a creator platform, a place where the content is made by its players and the company’s job is to run the economy underneath them. This is not the move Roblox made, because Roblox never had to make it: Roblox was built as a user-generated-content platform from its first day, and its economics, for better and worse, were designed around that. Epic is attempting the conversion mid-life, out of a single game, while that game declines. The pitch is that the destination is worth it, that the market for platforms is far larger than the market for any one game, and that the way to win it is generosity:

1. Unreal Engine: the discounted royalty (5%, waived entirely on Epic’s own store, 3.5% for games that also ship there).

2. Epic Online Services: free by design, no revenue line, carrying the 972m-account identity and anti-cheat graph.

3. Epic Games Store: a 12% take against the industry’s 30%.

4. The UEFN engagement pool: 40% of Fortnite’s net revenue paid into the creator pool.

Sweeney’s stated logic has been consistent for years: the economy is shifting from buying games to buying things in games, and the most generous platform wins the shift. The generosity needs careful definition, because free tools are not what make Epic different. Creating on Roblox is also free as (a) Roblox Studio costs nothing to use (b) Roblox hosts every experience on its own servers at its own expense, an infrastructure and safety line that ran to about $1.2bn last year.

The difference is where the free things live and whether a ‘checkout’ sits at the end of them. Roblox’s free tools work only inside its walls, and everything built with them monetises through Roblox’s checkout, where the platform takes its share. Epic’s giveaways extend beyond its walls:

• Unreal Engine: Powers games that never touch Epic’s store, on consoles and on Steam.

• Epic Online Services: runs accounts, matchmaking and anti-cheat for any game on any engine and any store with game hosting (the expensive part) staying the developer's cost.

• Epic Games Store: The store takes 12% of games against the 30% the industry grew up on.

Roblox subsidises creation it always ends up monetising. Epic subsidises creation it mostly never monetises, on the theory that the network converts into a business later.

Epic’s official story deserves a fair hearing, because the openness is real and more than $1bn has genuinely been paid to creators since 2023. The accounts, as far as a private company lets anyone read them, tell a more specific story.

What they show is that the pool pays Epic’s own islands first, that the ‘free’ layers feed a store few people buy from, and that the one business funding all of it is a battle royale whose engagement has been falling since 2025. The generosity is not a side cost of the strategy. On these numbers, the generosity is the mechanism of the loss.

1. The TAM: The increase is mostly a change of denominator

Roblox claims it holds 3.4% of a global gaming content market of $190bn, and that its target is 10%. Epic's bet is the same move: stop being a share of a game genre, and start being a share of all interactive content.

Build both markets from the bottom up and the denominator is doing the work. On Roblox’s chosen denominator, Roblox is 3.4% and Fortnite is about 2%, both minnows with vast runways. Measured against the money actually spent inside UGC platforms today, Roblox holds more than half the market and Fortnite’s pivot is a challenger position in a category its rival defines.

For both companies looking into TAM expansion the growth all sits in one place - adult UGC spending. So for Roblox, this is the 13-24 cohort Roblox is aging up into from below, at the same time as Fortnite pivots into it from above. Let’s not forget that there are other horses in this race as well, because Epic is not the first company to subsidise a UGC platform into existence.

Yet the pattern in the table above is the context for everything that follows. No one has yet made a UGC platform profitable at any take rate. The one platform that disclosed its UGC margin was keeping 30c on the creator dollar against 70c on its own content, and it is the one that shut down.

The survivors either pay creators most of the dollar while losing money, or subsidise the platform from an unrelated business and the engagement-pool mechanism Epic adopted in 2023 is one Roblox itself retired in 2025. This is the market Epic is giving away four layers of its business to enter.

2. The two value chains: Roblox charges creators; Epic’s 40% pool recaptures to its own Battle Royale

Follow $100 of player spending through both machines.

Roblox’s version is in its filings, and the last piece walked through it (See Roblox: A great company lost on valuation). The app stores take $15.80, creators receive $22.14 through the Developer Exchange, and Roblox spends $52.26 running the platform, which turns that $100 into an operating loss of about $18. It is the most complete stack in the industry, taking the largest cut, and it loses money.

• Store fees average 26% by Epic’s own disclosure.

• Epic then reserves 60% of what remains for itself before the pool exists, and the 40% pool it advertises is distributed among all islands, explicitly including, in Epic’s own words, “Epic’s own islands like Battle Royale”.

• In 2024, the one year with a disclosed outcome, third-party creators received 36.5% of that pool, in line with their share of playtime, and Epic’s own islands collected the rest.

Roblox pays creators about 22 cents of the retail dollar and gets attacked for keeping the rest. Epic advertises 40% and pays about 11 cents, because the 40% is measured against net revenue after platform fees, not the retail dollar, and is then paid into a pool where Epic's own islands are the largest competitor.

Inside that c $11, the split among creators is sharper still, and it is Epic’s own disclosure. Of roughly 70,000 paid creators in 2024, this is who the pool reached.

The distribution is a power law (which is close to identical to Roblox) where the top 1,000 creators take about 85% of the payout and roughly half earn under $100 for the year. The generous pool does not build a broad creator class on either platform and it funds a few dozen studios above a tail of tens of thousands earning small amounts of money.

The pool is skimmed once more whenever a creator builds on licensed IP, and here the value chain forks. An island using a partner’s brand hands a fixed share of its engagement payout to the IP holder, deducted before the creator is paid.

The steepest terms belong to the biggest investor. Disney put $1.5bn into Epic in 2024 and owns Star Wars, which carries the highest override (20%) and is the only brand allowed to monetise in-island at all, taking a further 30% there. The LEGO family’s holding company put in $1bn in 2022 and owns the LEGO Group, at 15%. So a creator building on either brand returns 1/5th or 1/6th of their pool earnings to a company that also owns a piece of Epic, on top of the reserve and recapture that already took most of the pool before it reached them.

There is one channel where Epic is unambiguously generous. Since January 2026 creators have been able to sell items directly inside their islands, keeping about 37 cents of the retail dollar at the standard rate, and 74 during a launch promotion that runs to January 2027, against Roblox's 22. The catch is size. Direct sales launched only this year, and more than $900m of the roughly $1bn Epic has paid creators to date came from the pool, not the storefront. Epic's most generous channel is also its newest and smallest.

The pool is also only one of four subsidies, and the other three are what make Epic’s version of the platform bet more expensive than Roblox’s.

• Unreal’s royalty applies only above $1m of lifetime revenue per title, is waived entirely for sales on Epic’s store, and drops to 3.5% everywhere for games that also ship there.

• Epic Online Services has no revenue line by design.

• The store’s 12% take has never covered its costs: it was still unprofitable in Epic’s own sworn testimony in 2023, after $444m of exclusivity guarantees in 2020 alone.

• Roblox gives its creators comparable things, free tools and free hosting, but inside its own walls, where every resulting transaction passes its checkout. Epic’s giveaways mostly stand outside any checkout at all.

3. Time vs money: Islands took 47% of hours, creators get about a tenth of the dollar.

Epic’s engagement disclosures are the best evidence the pivot has, and they are strong: creator islands took 47% of all Fortnite player hours in May 2026, and more than 75m monthly players touch creator content. Yet the financials are harder to prove out when we relate engagement against the money.

Half of Fortnite’s time now happens in creator islands, and roughly 1/10th of Fortnite’s money reaches the people who make them. The audience behind those hours is not new, though:

• More than 70% of creator content players also play Battle Royale, on Epic’s own reporting.

• The overall base has been flat at roughly 110m monthly players.

• Roblox’s daily audience now outnumbers Fortnite’s monthly one.

On this basis, this is a platform gaining share inside its own shrinking game. This is not necessarily negative, as these are users who are retained in the Epic Games ecosystem rather than leaving Fortnite for a competitor.

Epic’s behaviour over the past year suggests it reads the numbers the same way.

• In November 2025 Epic reweighted the pool to pay creators partly on the V-Bucks players spend around their islands, not on hours alone, tilting it toward spending and player acquisition. Roblox had made the same shift in July 2025 and taken it further, retiring its time-based pool entirely for spend- and acquisition-linked rewards.

• In March 2026 Epic raised the effective V-Bucks price by shrinking the packs, and its stated reason was blunt: “The cost of running Fortnite has gone up a lot and we’re raising prices to help pay the bills.”

Working fewer hours harder is a rational response. It is also not what a platform does when the pivot is producing new spending on its own.

For the valuation, this section sets two drivers: a flat player base of about 110m, and a creator-payout share that plateaus in the low 40s% of the pool as the re-weighting offsets the hours mix.

4. The P&L: Fortnite pays for all of it, and the accounts barely clear a profit

Epic files no accounts, so the profit and loss below is our reconstruction, not a disclosure. Forward bookings are built from Fortnite’s own drivers, store fees sit at Epic’s disclosed average, the creator payouts are the lines Epic does publish, and the cost base is rebuilt from a roughly 4,000-person headcount with sales, marketing and overhead grounded as shares of revenue. So treat this with a pinch of salt and read it as an estimate of the shape, not a filing.

The revenue is Fortnite and little else. Group revenue is four lines:

• Fortnite bookings of about $3.5bn, modelled as roughly 110 million monthly players at about $32 of gross spend, held close to flat.

• Unreal Engine royalties and enterprise seats rising from about $315m to $400m.

• Epic’s 12% cut of third-party store spend, about $50m.

• A small other line near $45m (e.g. ab marketplace fees, merchandise and licensing, not separately disclosed).

Three things actually drive the answer:

• First, Fortnite’s decline/growth rate. At about 90% of revenue it is the largest swing in the valuation: a 15% move in bookings moves Fortnite Core by roughly $1.5bn. How fast the game fades/grows matters more than everything else in the model combined.

• Second, the profit is thin and fragile, because it rests on those two re-grounded cost lines and on a heavy allocation. If marketing or overhead run materially above our 2.5% and 6% of revenue, the modest profit thins or vanishes, and both figures are our estimates, not Epic’s. Additionally, because Fortnite is the majority of the revenue, the model charges it about 88% of the entire cost base, so the industry’s biggest game earns operating margins of just 6-11%.

• Third, and most telling, the platform bet is not where the value is. Fortnite Core at about $3.3bn is only 44% of the $7.5bn equity; net cash of about $3bn, Unreal at $1.5bn and the standalone games at $1.6bn make up the rest, net of the $1.9bn of overhead. More than half of Epic’s equity is cash and side assets, and the platform pivot the entire company is built around contributes approximately nothing. That is the finding section 5 cashes in.

The funding history shows how much the dream has cost. Epic has raised roughly $7.5bn since 2018 from Sony, KIRKBI and Disney among others, paid a $520m FTC settlement, dialled the store’s exclusivity programme down with Sweeney conceding many of those deals “were not good investments”, shut two side modes this year, and raised the V-Bucks price.

Solvency is not in question, since our bridge puts net cash between $2bn and $4bn. The picture is a company trimming everything peripheral, including its own game’s value for money.

5. The Valuation: What the sum of the parts add up to

Private investors have been repricing this story for four years.

The freshest mark is 61% below the peak, and it was struck while the company was telling the world it is building the future of the medium. The question is what the number should be. Our answer is a sum of the parts (SOTP) , each piece on its own honest basis, built from the drivers assembled in sections 2 to 4 and independently re-derived from the inputs up.

• Fortnite Core is worth about $3.3bn because it bears roughly 88% of the group’s costs and so earns only single-digit margins on the industry’s biggest game.

• Unreal Engine gets a band rather than a point because the only hard revenue figures are from court, $124m in 2018 and $97m in 2019, and everything since is single-source estimation. At Unity’s forward multiple the engine is worth about $1.5bn, in a range of $1.1bn to $2.4bn. That $1.5bn multiplies a deliberately narrower base because the P&L includes enterprise seats and marketplace fees the comp should not.

• The platform layer is worth approximately zero, and the zero is the article’s argument expressed as a valuation.

• The creator payout already sits inside Fortnite Core’s cost base, so the platform piece can only be worth what Epic captures beyond Fortnite, and its disclosed economics say that is nothing yet. What a third-party island earns is skimmed first by Epic’s reserve and recapture and then, on a branded island, by the IP holder, and none of those overrides reach Epic.

The entire platform debate compresses into that one assumption. If third-party islands can monetise like Fortnite’s average hour, the layer is worth billions. Epic’s own payout record, at roughly 45% of a Battle Royale hour’s value, sides with the small number, and we book the base case at zero, with the c $0.47bn shown as foregone value rather than Epic’s value.

There is one thing the sum of the parts (SOTP) leaves out, and it is the strongest argument for a higher number. It values what Epic captures in cash, not what Epic owns.

• Unreal is a top-two engine carried at $1.5bn on a 5% royalty that Epic waives on its own store and discounts everywhere else

• Epic Online Services is a 972 million-account identity and anti-cheat graph carried at zero because it earns nothing.

Both are worth far more to the industry than Epic charges for them, and the market pays a premium for that. We credit it as a market premium of about $3bn, added to both the base and the bull, kept separate from the cash-flow pieces and labelled for what it is: not earnings, but the strategic worth of tools Epic under-monetises, value that becomes Epic’s only if it raises its prices or the position is paid for another way.

With the premium, fair value runs from about $10.5bn on the captured base to about $14bn if Fortnite also recovers. The tools are genuinely strategic; Epic simply gives most of that value away, which is the same generosity the rest of the piece describes, now seen from the asset side rather than the income statement.

What the generosity has bought

Epic set out to build a platform with generosity, and the attempt deserves the credit rarity earns: evolving a business model mid-flight is a risk most games companies never take. The accounts say what it has cost so far:

• Two rounds of layoffs.

• Roughly $7.5bn of outside capital consumed.

• A store and a services layer that earn nothing by design.

• A pool whose advertised 40% delivers about 11 cents of the dollar to the people it was named for.

Roblox, the company Epic is trying to become, pays creators 22c, and still posts an operating loss, but its losses buy share in a market it leads. Epic’s generosity buys a pool it mostly pays back to itself, inside a game that is working its audience harder.

For Epic’s shareholders the arithmetic is uncomfortable in a specific way:

• Sony, KIRKBI and Disney bought in at marks between $22.5bn and $31.5bn.

• Tencent's minority stake, once 40% and now reported at anywhere from a quarter to a third after years of dilution, is under a CFIUS review that could force a sale, though Sweeney retains control regardless.

• The freshest price anyone has paid is $12.16bn, although that price was struck in a secondary market, on illiquid shares.

• Our SOTP supports about $7.5bn of that in the cash Epic earns, and $10.5-14bn once the strategic value of the tools it under-monetises is credited.

The mark sits inside that range, a bet that the pool, the free engine and the free services convert into a business before Fortnite stops being able to pay for them.

At his June keynote, Sweeney described Roblox as a centralised platform with a single gatekeeper taking more than 70% of revenue, and pitched an open alliance as the alternative.

The accounting answer to his own pitch is in the waterfall above: the generous open model currently returns a smaller share of the consumer dollar to a third-party creator than the gatekeeper it is measured against, and the company offering it is the one making the cuts. The diagnosis of the industry may well be right. On its own numbers, the cure is not yet a business.

More from The Side Quest

• Roblox: A great company lost on valuation - It owns the most complete stack in interactive entertainment yet profits from it the least, and rising costs are eating into what little is left.

• Microsoft and Xbox: Too small to sell, too strategic to spin - On the numbers, Xbox is worth about $49bn, a rounding error to Microsoft. It won’t be sold, and any separation keeps a grip on the data its games generate.

• AI in Video Games: Own the Loop - why a studio keeps its value only if it owns the content-generating learning loop, not the model. Uses Guild Wars 3 as a worked example.

• AI won’t make AAA games materially cheaper to develop - the productivity gains are real, but two-thirds of the value leaves the P&L to the AI vendors before it reaches the bottom line.

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Appendix

Epic files no accounts, so all of this is a reconstruction from three kinds of source: court disclosures from Apple v. Epic and Epic v. Google, Epic’s own developer documentation, and the prices investors have paid. Each input is tagged D disclosed, E third-party estimate, or I our inference. Figures are rounded and may not sum.

The disclosed lines (the store fee, the 40% pool, the 36.5% creator share, the court revenue figures, the investment marks) are Epic’s or the court’s. The forward paths, the cost base, and every valuation multiple are ours.

A1. Fortnite bookings: the revenue spine

Built bottom-up from Fortnite’s own drivers, roughly 110m monthly players at about $32 of gross spend, held close to flat rather than borrowing a decay curve from other games (I). The path sits above the disclosed engagement trend on purpose: Fortnite hours fell about 29% in 2025 (E, Newzoo) and Sweeney’s March 2026 memo names “the downturn in Fortnite engagement that started in 2025” (D), but revenue holds up better than hours because Epic is raising monetisation intensity. The cross-check ties the model to Epic’s own disclosed payout within about 7%.

A2. The $100 pool waterfall

The advertised 40% delivers about 11 cents of the retail dollar, an effective 15%. In-island sales are 1.7x more generous but tiny: more than $900m of the roughly $1bn paid to date came through the pool, not the storefront. None of the IP overrides reaches Epic, so they lower the creator’s take without raising Epic’s.

A3. The reconstructed group P&L

The flip from a large loss to a modest profit is mostly the sales-and-marketing and G&A re-grounding to 2.5% and 6% of revenue, not headcount. It is our boldest inference, not an Epic-confirmed figure, and if either line runs materially higher the profit thins or vanishes.

A4. Fortnite Core: the DCF

Inputs match our Roblox house DCF exactly. The bear is $0 because the freefall path floors Fortnite at nothing while still loading 88% of org cost on it, a DCF artifact rather than a credible value, which is why the piece shows base and bull only. It is the largest single swing in the valuation.

A5. Unreal Engine

The only hard figures are from court; everything since is single-source estimation. The multiple is deliberately applied to a narrower base than the A3 engine line ($315m rising to $400m), which includes enterprise seats and marketplace fees the comp should not, so the two are not meant to match.

A6. Epic Games Store

Unprofitable in Epic’s own sworn 2023 testimony, and smaller and more loss-making than the breakeven storefront comp, so it carries no positive value.

A7. The UEFN platform layer

The two checks disagree elevenfold, and the whole platform debate compresses into that one assumption. The creator payout already sits inside Fortnite Core’s cost base (A2), so the layer can only be worth what Epic captures beyond Fortnite, and its payout record, at roughly 45% of a Battle Royale hour’s value, sides with the small number. The $5.2bn figure is the monetisation exhibit; it is never summed into the sum of the parts.

A8. The standalone games

Separate free-to-play businesses with their own monetisation, valued standalone rather than blended into the group. Epic discloses no game-level revenue and neither acquisition price.

A9. Sum of the parts, the bridge, and the premium

The net-cash bridge: about $7.5bn raised since 2018, less M&A, the $520m FTC settlement, legal, and cumulative burn, leaving $2-4bn and no debt. The freshest $12.16bn mark sits inside the fair-value range, toward the lower end. There is no bear column, because the freefall path that floors Fortnite Core at $0 is not a credible enterprise value; halving Fortnite still leaves equity near $6bn, zeroing it leaves a floor near $4bn, almost all cash.

• A great business that captures little of its own economy: Roblox owns the only full create-to-distribute stack in gaming, but of every $100 booked only about $10 is left once the app stores, its creators and its own costs are paid, and its rising cost base is eroding even that.

• Cost inflation is the bear case: That cost base (infrastructure, AI compute, R&D, trust and safety) keeps climbing toward 96% of bookings, and the things meant to outrun it don’t as (a) spend per user has been flat near $53 for three years despite the aging-up and (b) AI adds content volume only by adding cost. With few clean levers left, Roblox is even reaching into its own creators, a new toll on their brand deals and a cut of their licensing, to claw back value it cannot earn from the platform itself.

• The price is the problem, not the business: A DCF, on headline cash flow, comes to about $28 a share against a market price near $48. So the price sits above even the generous case, and the new buyback uses cash without moving the per share numbers. Not a buy here, but it could become one only if per-user spend lifts or the cost floor breaks.

Thank you to everyone who has supported me in the first month of The Side Quest. I am truly grateful. If you know someone who might benefit from these articles, please do forward on.

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The Roblox model is available on request.

I’ve had this comment from multiple readers who run money; “Chirag, what is going on with Roblox here? It’s the only name with the full create-to-distribute stack and real platform economics, the aging-up debate cuts against it but they’re now publishing that 40% of users are 16+ and it’s their fastest-growing cohort, and surely AI is a tailwind that lifts both game quality and content volume, so with the stock where it is, is this actually a buy?”

With UGC platforms looking like they’re becoming an increasingly important strategic focus with Tencent pivoting towards UGC experiences and Epic also kicking up the dust on the economics of the model itself, it’s definitely worth a look.

There are four claims, and every one of them is defensible on the surface:

• Roblox does own the whole stack (from the creation tools to the distribution).

• It is aging up.

• AI does help.

• And the stock has fallen hard from its 2025 highs.

So let us take the four pillars one at a time and read the accounts against each. The answer falls out at the end, on the valuation, and it is not the one the price is implying.

1. “Real platform economics” is the problem, not the moat

a) The platform economics leaves Roblox with hardly any cash left

Everyone knows Apple and Google take 30% of in-app purchases on their app-stores, and Roblox has been successful in pushing people towards their web store with a +25% Robux bonus. So if we follow $100 of bookings, and start to track where that leads, the blended platform fee is closer to $16 (16%, nearly half of the 30% headline rate).

Of the $84 that survive the app store, creators receive about 22 through the Developer Exchange, the program that converts the Robux earned inside an experience into cash leaving Roblox itself with roughly $62 of the $100.

It is easy to call that “real platform economics,” and Tim Sweeney, on stage in Chicago, called Roblox “a single keeper that takes more than 70%.” But that only holds if you count the app stores’ slice as Roblox’s own, so it is really two keepers, not one; the only place Roblox alone nears 70% is its web store, where there is no app-store fee to share. It is the most bullish thing you can say about the economics, because once Roblox covers its own costs barely $10 of that $100 is left, and almost none of it is cash that reaches shareholders; on the revenue it actually recognises, the platform runs an operating loss. So why say it? It is a sales pitch for Team Open and their competitor to Roblox, UEFN. Epic pays creators 40% of net (and 100% of V-Bucks in a promo window running to January 2027).

The $62 Roblox keeps is increasingly eaten by its own rising costs:

• R&D from about $23 to $25 by 2028E,

• Infrastructure and Trust & Safety from $17 to $19 by 2028E

The cost floor is climbing into the retained cut faster than the company can leverage it, and it actually leaves little room to give back more to creators.

b) The creator economics can be highly lucrative for top titles

So for the money that does go to the creators, Roblox bands them into three: The Top 10, Top 1000 and the long-tail. It’s worth understanding the economics of this, to see the broader picture if ‘real platform economics’ exist in (a) the broader understanding Epic Games within this universe and (b) how growth/decline across these number of these studios impact the platform economics.

So in conclusion:

• We estimate the Top 10 generate over a third of Roblox bookings

• The next 990 generate about half Roblox bookings

• The remaining 22,500 creators generate just 13.5% of bookings.

Within this, the business models of each studio also vary in their own right and there are two typical types of studios that sit within experiences played on Roblox:

• A solo annuity studio, one durable hit lived off for years, optically keeps almost everything. Bloxburg (acquired by Embracer) runs about an 80% margin on what it actually receives from Roblox, its DevEx, which is roughly 20% of the gross a player spends. There is almost no cost structure, a tiny team and no marketing line, because Roblox’s own discovery does user acquisition for free.

• A levered roll-up, the private-equity operator that buys hits and runs them centrally, keeps far less, we estimate around 29% after tax (Voldex is private, so this is modelled), once you load on payroll, marketing, interest on acquisition debt, and the new brand-deal fee.

Breaking into the top 10 is hard, and a small core, led by Brookhaven and Blox Fruits, has anchored it for the whole period, with Adopt Me and Murder Mystery 2 cycling in and out, while the rest of the slots churn, because of new hits that spike and fade within a quarter or two.

The concentration reported as a feel-good story, the top 1,000 developers averaging $1.3m a year in DevEx (creator earnings, not bookings), is real, but the median creator earns about $1,440. The money is concentrated, and it concentrates in the studios, not with Roblox.

So Roblox built the most complete stack in interactive entertainment and, while perceived to take the largest cut, is the least profitable participant in its own economy.

The new cut of brand-deal money is a tension within Roblox’s own ecosystem

Roblox is also increasingly looking towards their own creators to see if they’re able to take parts of the value chain they haven’t been able to in the past, as seen with the new introduction of a brand-deal toll.

When a brand wants a presence on Roblox, a Nike space, a Gucci world, a Chipotle giveaway, it usually pays the studio directly, with no need for Roblox. Roblox has earned nothing from it beyond whatever extra engagement the activation throws off in its own platform. From 2027 that changes, as Roblox will require branded content to be registered and will charge a fee on it based on visits, not player spend or what the brand paid the creator. This fee is charged per thousand visits, from about $1.50 in the United States down to a few cents across most of the world, falling to a flat $0.10 per thousand after the first month.

The choice of the metric that Roblox is using here to charge creators (visits, not spend) makes sense to them as Roblox's costs scale with how many people show up. So it charges on visits, not on what a creator earns, to cover its own per-user costs. The bill is set by Roblox's costs, not the creator's, so it bites hardest where reach beats revenue. A loss-making platform, taxing profitable creators, on the one number that drives its own costs.

Creators will likely adjust their habits that drive spend over views. They’ll want the brand to sell, not just draw a crowd and build experiences to push towards monetisation, so the traffic that incurs the toll also pays for it. Although not all brands may want this. So the creator is caught between a toll that demands monetisation and a brand that resents it, and the easy exits, charge the brand more or run the activation on UEFN instead, both cost Roblox.

And the brand-deal toll is not the only time Roblox has sought to cut into the value chain. In July 2025 Roblox also launched a licensing platform that sits between creators and the IP owners whose characters and brands they want to build with, and takes a cut of those deals too.

This type of deal is what drives tension in the value chain between creators and the platform. Roblox is looking for another slice of the value, but the only lever it can enforce, a charge on visits, is the one least aligned with how creators earn (the sums are small, a few million a year even for a large roll-up, not a revenue line). A revenue share would align them but Roblox cannot levy one on a private off-platform deal, so it taxes what it can measure instead and reaching for a lever this small and this misaligned shows how few clean ones it has left: a bigger cut or a lower DevEx is exactly what Sweeney attacks it for, and its ad platform is still unproven at scale.

2. The aging-up is real, but spend per user hasn’t shifted

“40% of users are 16+, and it is the fastest-growing cohort.” The growth part is true with the 18+ cohort growing faster than the platform as a whole and drives incremental bookings.

a) The adult base is lower than originally stated

The “40% 16+” is a self-reported figure, and the real self-reported number is closer to 42-44% who say they are 17+ and Roblox has never published a verified “40% 16+” and that figure always skewed old, because a child who wants chat or age-gated content simply enters an older birthdate and nothing checked it.

Roblox is now rolling out actual age verification, a facial-estimation scan, and publishing the verified mix. On the verified base, adults (18+) are only about 26-27%, and that share has ticked down, not up, as more under 13s get checked. Much of what the headline counts as “older” is teenagers, not adults.

So the adult head-count is about a third smaller than the self-reported figure implies. On the dollars, applying the higher spend adults do generate, the adult business is nearer $2.2 to $2.3bn than the $2.7bn a flat 40% read implies. It’s real, and still growing, but smaller than advertised.

b) Roblox’s growth is coming from lower-spending international markets

Bookings per daily user has been essentially flat, around $53, for three years, while daily users nearly doubled.

Roblox reports per-user spend rising in every region (e.g. up about 45% in Europe last quarter, and more of its users are paying, with monthly payers up more than 50% year on year). The bookings per user blend stays flat because the mix keeps shifting to lower-spending international users with about 80% of daily users now sit outside the US and Canada (which generate under 40% of revenue) and that dilution has so far offset the regional gains. The open question is whether the mix eventually drags the blended average higher, or whether international growth keeps capping it.

c) Age verification drives trust

The move to verified age, a facial-estimation scan that Roblox turned on globally in January 2026 to replace a typed-in birthday, does two genuinely valuable things. It earns trust, with parents and with regulators, in a category where trust is the licence to operate. It also gives the company real data: for the first time it knows, rather than guesses, who is on the platform, which is what lets it gate content and communication by age at all.

That gating is why different users now get genuinely different versions of Roblox. From June 2026 the platform splits into tiers: Roblox Kids for ages five to eight, Roblox Select for nine to fifteen, and the full catalogue for age-checked users sixteen and over. The youngest are walled into a curated set of vetted experiences with little or no chat, and access widens as a verified user gets older.

The cost of all this is friction, and friction slows growth. A verification step is one a user can decline, and the tiers give the unverified and the youngest a smaller experience with less to do, so the very top of the funnel the growth story depends on gets a brake on it.

It is not only new sign-ups, either as existing users are re-sorted too, and anyone who declines the check, or is verified younger than the age they had claimed, can find features they used to have, chat above all, taken away. Roblox has already guided daily users to a sequential decline.

The honest counter is that adoption is running well above half of all daily users, so this is a headwind rather than a wall, and the friction may even lift the quality of who remains: verified, age-appropriate, better retained, cleaner with regulators. Fewer but better is not necessarily worse.

Verifying faces, moderating chat by age band, building and policing the Kids and Select tiers, and staffing the appeals behind them is a permanent operating cost, and it sits in the rising Trust & Safety line we have been tracking rather than leveraging away. So age verification is best read as a trade Roblox is making on purpose: a near-term cost and a growth drag, paid for a trust moat and a higher-quality base that, if it works, shows up later.

3. AI could increase content volume, but it will increase the cost floor with it

“Surely AI is a tailwind that lifts both game quality and content volume”. Yes, AI lifts content and generative tools let creators build faster and build more, and more content is, all else equal, good for a platform whose product is content. However, there are two cost mechanisms to this that need to be considered, and one long-term question.

a) Inference for generative tools is a cost Roblox is paying

Roblox’s AI build tools, Cube, the 4D generator and the agentic Studio, are all impacting the supply of games. For an individual creator that is a real gift, a lower bar and a shorter build. But the same tools flood the catalogue with cheap, similar, quickly-made content, which is exactly what shortens the life of any one hit. They help you build and commoditise what you build at the same time.

The problem is that the cost of the tooling and the inference of them, mean Roblox turns from enabling people to generate their own content for the platform to directly funding the content. If you type in ‘make a red sports car’, Roblox is eating that inference cost, which weighs on their Infrastructure cost line.

This only no longer becomes a problem, if the revenue generated by further lowering the barriers to entry outpaces the cost of inference and the R&D costs to train them. However (a) as discussed above, the long-tail of games is high in volume but poor in monetisation (b) as we’ll see below, ongoing hardware inflation makes this equation harder to prove.

b) Global hardware cost increases also impact its training

Roblox doesn’t only eat the cost of inference, it also trains its own models which cost as well. Whilst Roblox has called out there is some pressure as a result of inference costs, and is moving its compute onto owned data centres and its own GPUs, they still face the same hardware inflation costs that the rest of the market does across.

Owning the compute is only relocating the cost from a third-party cloud bill onto Roblox’s own balance sheet, and they’ll still need access to hardware (e.g. memory, GPUs) that the rest of the industry does too, and will also need to pay the 2-6x increase in prices, further increasing Capex forecasts.

c) Cube presents a long-term question

Points (a) and (b) are short-term in nature, and point to scale problems, but there is real value in their tooling (See AI in Video Games: Own the Loop) . Cube (which generates 3D/4D assets) is trained on licensed data, public data (e.g. Objaverse) and the Creator Store assets where people opted-in and is a mid-sized model (273m parameter shape tokeniser on 1.5m objects). It’s also open-sourced, so people can use it on an inference basis with their own frontier models.

The key phrase in the above, is those who have opted-in. Roblox does not simply own the creations on its platform to do with as it likes; the creators do, and Roblox holds a licence to host and run them, not a blanket right to train a generative model on them. Hoovering up the whole catalogue to build a tool that then lets anyone generate similar assets for free would be both a rights problem and a betrayal of the exact people the platform depends on.

So if/how Cube could be trained using the community’s assets, remains an open and complex question.

4. So, is it a buy? Nope

So looking at the four pillars:

• Roblox owns the whole stack, and it is the least profitable thing in its own economy.

• It is aging up, but onto a base a third smaller than advertised, and spend per user has not moved in three years, even as it rises in every region.

• AI lifts the content and the cost floor together.

• So the stock has fallen, but not far enough.

What does valuation look like? First we must start with the cash side of the business. Roblox throws off about $1.4bn of FCF against an operating loss (GAAP) of >$1bn.

• Bookings are cash collected today for Robux that is recognised as revenue over the roughly 27 months a player keeps playing, so a growing deferred-revenue float flatters the cash long before it reaches the income statement. It’s also worth understanding that in the good times, this is positive, but in the bad times it hits the business harder. It only flatters cash while bookings grow, and turns into a drag the moment they stall, which is precisely what the cut to 8 to 12% bookings growth puts in play.

• About 84% of that FCF is stock based compensation added back, a real cost to shareholders that simply is not a cash one. Strip it out and owner FCF, the cash actually left for shareholders, is about $224m, not $1.4bn. This isn’t a new argument, so both valuations are presented here.

• Roblox authorised its first ever buyback (May 2026), up to $1bn/year. The company is spending roughly a billion a year repurchasing stock while owner FCF is barely positive, and on our numbers slightly negative in 2026, so the buyback is funded out of the deferred-revenue float and the cash pile, not out of earnings. It draws the net-cash cushion down from about $5bn toward under $2.5bn over three years, turns book equity negative, and only offsets about a third of the dilution from stock compensation, so the share count still climbs. And at $48 against an intrinsic value nearer $8.65, buying the stock back supports the count but transfers value away from the holders who stay. It is dilution management, not value creation.

At roughly $30.7bn EV, the stock trades at 4x Bookings, 25x headline FCF, and close to nil owner FCF. On a discounted cash flow at a 10.5% cost of capital, headline cash flow is worth about $28 a share and owner cash flow about $8.65, against a market price near $48. As with most DCFs, the majority of the value is being prescribed to the terminal value. The price sits above even the generous version and at more than 5x the conservative one.

For that to be right, one of three things has to happen:

1. Either spend per user finally rises, the aging-up monetising instead of being cancelled by international dilution

2. The cost floor finally leverages.

3. or advertising, which the model holds at zero, becomes a real revenue line.

Yet Bookings per user has been flat at about $53 for three years, and total cost runs near 90% of bookings today, stepping up to about 96% from 2026 as infrastructure, R&D, trust-and-safety and now AI inference climb into the retained cut. Advertising is a higher-margin payer that sits on the same fixed cost base, which is the upside the bull case leans on. The appendix sets out why we hold it at zero; in short, Roblox still calls it an insignificant share of bookings, and even a generous ramp does not move an operating line. The first operating profit, on our model, does not arrive until about 2030, by which point the deferral cushion flattering the cash has thinned.

The child-safety litigation (the private multi district litigation) sits outside these numbers entirely (See: Why Roblox really left Delaware). Roblox carries no provision against it, because it says it cannot reasonably estimate the loss, so the valuation does not price it either.

To be clear, none of this makes the company weak as it owns the complete stack in interactive entertainment, a net-cash balance sheet, and it is still growing. The price is the problem, not the business. At about $48 you are paying a transformation multiple for a company that, on every number it files, has not yet transformed. So the honest answer to the question we were asked is the one the price is not implying - a remarkable company, and, on the numbers, not a buy here. It becomes one if spend per user inflects or the cost floor breaks, and the things to watch are the bookings-to-revenue catch-up and the first sign of the platform fee dropping to the bottom line.

More from The Side Quest

• Microsoft and Xbox: Too small to sell, too strategic to spin - On the numbers, Xbox is worth about $49bn, a rounding error to Microsoft. It won’t be sold, and any separation keeps a grip on the data its games generate.

• AI in Video Games: Own the Loop - why a studio keeps its value only if it owns the content-generating learning loop, not the model. Uses Guild Wars 3 as a worked example.

• AI won’t make AAA games materially cheaper to develop - the productivity gains are real, but two-thirds of the value leaves the P&L to the AI vendors before it reaches the bottom line.

• Why Roblox really left Delaware - reading the Delaware-to-Nevada reincorporation as a move to shield management amid active litigation.

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Appendix

All figures from our Roblox model. FY2025A is tied to the FY2025 10-K; FY2026–28E are modelled. $m unless noted; components are rounded and may not sum to totals. Refresh the share price before publication ($47.94 is ~24 Jun 2026).

A1. Cohort TAM Build

The market is built bottom-up as a user-spend (bookings) market, not a slice of “the games industry.” For each of twenty-two countries and seven age cohorts, we start with the connected population (UN World Population Prospects), keep only the engageable share (the proportion of that age realistically reachable by a UGC platform), and reduce it by an accessibility factor that captures the country’s regulatory friction; that gives the reachable audience. Reachable audience times a per-country ARPU (anchored to ITU connectivity and tilted for purchasing power) times a cohort age-index gives the TAM for each cell, which we sum.

The first table shows that build collapsed to three age bands at the global level - the gross addressable market, c$40.2bn. The second bridges it to the number the model actually uses. Two deductions do the heavy lifting. China is stripped entirely (the Tencent joint venture launched and shut its servers in 2021 and never relaunched, so it is structurally non-addressable, c$5.7bn). An accessibility-friction haircut (c$2.3bn) then reduces the open-but-gated markets - Indonesia’s under-16 gate, Vietnam’s forced local build, the Gulf chat blackout, Russia and Turkey’s conditional re-admissions, and the UK/EU/India age-verification overhang.

The result is c$25bn of addressable user spend ex-China (range $23–26bn on the friction sensitivity). Against FY2025 bookings of $6.8bn, Roblox is c27% penetrated. The net $25bn splits to the three bands (under-13 $9.4bn, 13–17 $5.8bn, 18+ $9.8bn) by applying Roblox’s disclosed US age mix (36 / 38 / 26) to bookings as the cohort anchor. This is deliberately a user-spend TAM: advertising, real-world commerce and any “metaverse” reframing are additive layers on the same audience, excluded from the headline.

Source: UN WPP population; ITU connectivity; per-country ARPU and accessibility factors are the model’s estimates (friction magnitudes are the softest input, carried as the $23–26bn band). The cohort split anchors to the disclosed US age mix.

A2. Cohort TAM

The TAM path turns that market into a bookings forecast by applying a penetration rate to each cohort’s TAM and growing the TAM itself ~4%/yr. The penetration assumptions are the levers, and they say something specific: the two younger bands are already well-penetrated and near saturation, so they grow roughly with the market; the 18+ band is lightly penetrated and is the one cohort with real headroom, so its penetration is the only one rising materially. This is the demand-side view of bookings.

A3. Studio Tiers

The studio path builds the same bookings total from the supply side - the creators who make the experiences - as a cross-check on the demand-side view. Bookings are split into three tiers (the top 10 titles, the next 990, and the long tail of ~22,500 paid creators) and each tier grows at its own rate: the top 10 barely move (mature franchises, +4%/yr), the next 990 are the engine (+18% fading to +6%), and the long tail grows fastest off a small base. The tier shares are anchored to the one hard number Roblox discloses - that the top 1,000 creators averaged $1.3m in DevEx - grossed up by the blended creator take to imply each tier’s bookings.

The shares this implies — top 10 ≈ 37% of bookings, top 1,000 ≈ 87%, long tail ≈ 13% - are the concentration figures the article cites.

A4. 50/50 Blend for Bookings

The demand-side (A2) and supply-side (A3) builds are independent estimates of the same number, so the model uses a 50/50 blend of the two as the bookings it actually runs on - neither view is privileged, and the blend is the single bookings driver feeding everything downstream. Bookings are then converted to GAAP revenue by a recognition ratio that rises from 72% to 88%. That ratio is the deferral story: because a player’s spend is recognised over roughly 27 months, reported revenue lags the cash collected, and the ratio climbing toward 88% is reported revenue catching up to bookings booked in earlier periods.

A5. The operating model

This is the consolidated forecast. Bookings come from the blend in A4; each cost line is a percentage-of-bookings driver (A6); the operating result is revenue less total costs, so the margin is an output, not a typed input. The row that carries the argument is the third: total cost runs at c90% of bookings in FY25 and steps up toward c96%, so even as revenue catches up to bookings, the operating loss only narrows - it does not clear the cost floor inside the window. First GAAP operating profit on this model arrives c2030; that date is a function of the rising cost-floor dials on the Drivers tab, not a disclosure. EPS is the net loss over the fully-diluted share count (A8) - a loss per share in every year.

A6. The cost floor, band by band (per $100 of bookings)

This decomposes where every $100 of bookings goes, and which way each band is moving - it is the heart of the bear case.

• Of $100 booked, the app stores take c$16 and creators c$22, leaving Roblox c$62; but its own four lines (infrastructure and trust-and-safety, R&D, G&A, sales and marketing) consume c$52, and four of the six bands are rising as a share of bookings

• The DevEx rate lifts, the owned-compute and AI-inference build, and the litigation tail in G&A. So the c$10 “left over” on a bookings basis in FY25 compresses to c$4 by FY28, and on recognised revenue the platform runs an operating loss in both years. The 10-K does not publish these percentages; they are the model’s allocation of the disclosed cost totals across the bookings base.

A7. Free cash flow and owner FCF

Free cash flow looks healthy at c$1.3bn, but two adjustments strip it back to what the article calls owner cash.

• First, capex steps up to the top of the guided $470-520m range as Roblox builds its own data centres and buys its own GPUs, so FCF falls even as the business grows.

• Second, and more important, c$1.1bn of that cash flow is stock-based compensation added back, a real cost to shareholders that simply is not a cash one. Strip it out and owner free cash flow - the cash actually left for shareholders - is a fraction of the headline, and dips negative in FY26 as capex peaks. The deferred-revenue float, meanwhile, is genuine negative working capital: players prepay for Robux recognised over c27 months, so a growing bookings book funds the business interest-free - a real edge, but one that flatters cash only while bookings grow.

A8. The share buyback and dilution

The buyback is modelled explicitly through all three statements.

• Roblox authorised up to $1bn a year (a $3bn programme); we run c$2.75bn over three years. The roll-forward shows what it does. It offsets only about a third of the dilution from stock compensation, so the share count still climbs, just more slowly. It is funded from the cash pile rather than earnings (owner FCF is nil) so it draws the net-cash cushion from c$5.2bn toward c$2.4bn and turns book equity negative.

• Because the company is loss-making, retiring shares spreads the loss over fewer of them, so the buyback slightly increases the loss per share. Its payoff is deferred anti-dilution, for if and when profit arrives — not value creation today.

A9. Valuation

The valuation is presented two ways, because the whole question is the quality of the cash flow. Multiples are struck on a 12-month-forward basis.

• On bookings and revenue Roblox looks cheaper forward, because those lines are growing; on free cash flow it looks dearer, because forward FCF falls; and on owner FCF there is barely a multiple to quote, because forward owner cash flow is close to nil.

• The DCF is then run on both headline and owner free cash flow, and the gap between them (about $28 a share versus about $8.65) is the thesis in a single number.

• The DCF is largely terminal value (no GAAP operating profit until c2030), so the multiples carry more weight; the market enterprise value is reached only at a WACC of 9% or below and terminal growth of 5% or above.

• The DCF per share uses the current fully-diluted count: the owner-FCF version already charges 100% of the stock-comp, so the dilution is captured in the cash flow and is not double-counted in the share count.

A10. Scenarios (FY2028)

The scenarios are a deliberately simple overlay (i.e. round bookings CAGRs run against a held fixed-cost floor) to test how sensitive the verdict is to the demand path. They do not tie to the dollar with the base model, and are not meant to; they are a stress-test, not the base case. The point they make is robustness: across bear, base and bull, the operating line stays in the red through 2028 and free cash flow stays positive everywhere, and even the bull only approaches break-even. So “not a buy on the numbers” does not hinge on a single bookings forecast.

A11. Advertising and commerce

Roblox has built an advertising business without yet earning much from it. It runs immersive and video ads, rewarded video in limited release since Q3 2025, a self-serve Ads Manager, and a programmatic deal with Google Ad Manager signed in April 2025; on commerce, it has a Shopify integration and physical-goods APIs. The machinery exists, but a number the company will stand behind does not. Its filings still describe advertising as an “insignificant amount” of bookings, management calls it a long-term opportunity rather than a near-term contributor, and it has guided no ad revenue, ad load or ARPU. The billion-dollar figures in circulation are analyst estimates, not company guidance.

We hold advertising at zero in the base case for that reason: the company does not yet count it, and putting a figure on a stream it calls insignificant would model an expectation rather than the accounts. The economics are attractive if it scales, because brand budgets are a higher-margin payer that sits outside the bookings take-rate, with no app-store cut and no DevEx. The audience caps how fast it can get there. Roughly three-quarters of verified users are under 18 and about 80% sit outside the US and Canada, and child-privacy rules bar behaviourally-targeted advertising to under-13s, so the high-CPM, addressable share is a fraction of the headline user count. Even a generous ramp does not move an operating line running near 96% of bookings within this window. If the company begins to guide ad revenue, this is the assumption to revisit.

A12. Litigation

The child-safety claims against Roblox are consolidated as a multidistrict litigation (MDL No. 3166), about 150 actions and growing. Against them the company carries a $0 provision: it states it is unable to reasonably estimate the loss, so it accrues nothing. The $57m it did reserve in Q1 2026 is for state-Attorney-General cash settlements, where the obligating event has occurred, and four states have settled for around $50m. The number on the balance sheet therefore covers the settled state cases, not the open private MDL, which is the larger unknown.

This is why the litigation sits outside the model. The company cannot estimate the loss, so any figure we inserted would be invented, and an unestimable number should not drive a valuation. It is a genuine tail rather than a base-case cost, and it points the same way as the rest of the analysis: an adverse resolution would draw on the same net-cash cushion the buyback is already running down, and the compliance obligations that follow a settlement are themselves unbudgeted. The case count and the accrual move each quarter, and both are stated as of the latest filing.

A13. Conventions and Inference Register

Disclosed (10-K / 8-K / newsroom): Bookings, revenue, operating and net result, SBC, OCF, capex, deferred revenue, DAU (127m FY25), the age-checked mix (36% U13 / 38% 13–17 / 26% 18+), the DevEx pool ($1.5bn) and top-1,000 average ($1.3m), FY2026 guidance, the $3bn buyback authorisation, and the brand-deal CPM toll.

Modelled: The per-$100 value-chain split (the 10-K gives no percentages), the tier split (37 / 50 / 13.5), the studio P&Ls (Voldex is private), the cohort TAM build, the cost-floor path, the share-count roll-forward, and the DCF.

Inferred / soft: The top-10 ≈ 37% bookings share (2024 US Economic Impact Report basis), the ~$1,440 median creator, and the device mix (Konvoy estimate; Roblox discloses none).

Conventions: $m unless noted; FY columns = sum of the four quarters (flows) or Q4 (balances); cash is the balance-sheet plug; the per-$100 split is on a bookings denominator; multiples are on a 12-month-forward (NTM) basis with trailing shown for reference; owner FCF = FCF less 100% of SBC; EPS is on fully-diluted shares (a pro-forma, not GAAP weighted-average basic, which uses fewer shares and so shows a modestly larger loss per share).

Uncertainty register: First GAAP operating profit (~2030) is an output of the rising-cost-floor dials, not a disclosure; advertising, commerce and the IP-licensing toll are left at zero in the base case (real optionality, not yet sized); the Scenarios tab is a stylised overlay that does not tie to the base model by design.

• A frontier AI model built a complete, playable World of Warcraft style MMO in a weekend, for roughly $1,000 of compute, and Levy Street gave it away, because in the CEO’s words, code is no longer a moat.

• With the code free, the value moved and a community of strangers became the development team, and a memecoin the founders did not launch, and at first possibly a scam, turned into the funding.

• For video game studios the lesson is an old one: AI commoditises the code and the derivative content, and what is left, original IP, creativity, taste and community, may be a head start more than a moat.

I sat down with Levy Street’s Max Polaczuk and Reuben Horne, the team behind World of Claudecraft. The full interview is below:

The base of World of Claudecraft was built on a weekend, on a model that was gone in three days

Max Polaczuk was not trying to build a game. The chief executive of Levy Street, a Wellington AI company, he had been using classic MMOs as a testing ground for reinforcement-learning research, and when Claude Fable 5 launched days earlier, he pointed it at the job of generating a faithful MMO sandbox to train inside. It quickly did, in his words, “a lot more than that.” Over the next two days, with his colleague Reuben Horne, who leads the project, driving much of the build, the model produced three zones running from level 1 to 20, a dungeon in each, procedurally generated terrain and enemies, several character classes and towns, and a soundtrack written programmatically in TypeScript. Levy Street, founded by the team behind Sportsflare, the esports-betting firm Entain acquired in 2023, posted the result to Reddit, and it went viral.

Three days after it launched, Fable 5 was pulled worldwide under a US government directive, and Levy Street, based in New Zealand, lost access to the model that had built the game. The game still runs, but the tool that made it is no longer available. The game is also a near-exact clone, since the character classes, the ability names, the resource bars and the logo silhouette all come straight from vanilla World of Warcraft, over original and openly licensed art. So the weekend did not show that an AI can invent a game. It showed that an AI can reproduce a well-documented one almost for free.

The code was the cheap part, so they open-sourced it

The build used 93 percent of a $200 monthly subscription, which measures how much of a plan they burned rather than what the compute was worth. Metered on the Fable API, Polaczuk reckons the same work would have cost “in the ballpark of around, say, $1,000.” A good deal more has been spent since, across community members supporting the project with their own Claude usage.

Levy Street put the code on GitHub “for no money,” to show what the company can do at the frontier of these models, and putting it in public let people check the claim. “You can check the GitHub, you can see exactly the traces of it,” he said, rather than let anyone wonder whether it really took a weekend to build. The decision mirrors his view that code “no longer might be a moat,” and “we’re less sensitive about our code these days,” a shift since AI changed the role of coding.

The code itself was never worth much: an MMO like World of Warcraft has existed for decades and is exhaustively documented in wikis and fan pages. The model knew it before it started, “such a well-documented thing,” in Polaczuk’s words, its rules and feel “trained into the model.” If the code is the part a model can reproduce, the value is somewhere else.

The players are also developing the game

The repository has drawn about 1,100 GitHub stars and more than 300 forks, and its contributor list has gone from three people at Levy Street to roughly thirty, most of them strangers. One of them, by the team’s account, “has never coded in his life,” and he shipped a working hardcore mode on a feature branch, while another built an arena. A Spanish professional composer joined to write real music over the model’s, and someone else started turning out new weapon art. The people Polaczuk is most interested in are the ones who love games and never learned to build them, who can now watch their taste show up in the game for the first time.

When the code is the cheap part, this human layer is the asset, and numbers on that before (NCsoft: The Importance of Commanders in Guild Wars 2): unpaid player-commanders plausibly generate between 2.5 and 6.5 percent of that game’s annual revenue.

On top of the repository they are wiring a loop. An agent listens to the Discord, and when a feature request or a bug report comes in, it writes the code and tests it end to end against bot players that were themselves vibe-coded. If a trusted human then signs off, the change ships, sometimes within the hour. They are toying with putting that sign-off to a community vote, weighted by the token. A request becomes shipped game with one human in the loop, and that loop, not the code, is what Levy Street is actually trying to own. The case has been made from the other side of the industry (AI in Video Games: Own the Loop): once a model can regenerate the code on demand, the durable asset is the loop a studio owns around it, the evaluations and player data and tuning that compound, while the model underneath stays a swappable rental.

Levy Street reports about 1,000 new users a day and 20,000 to 25,000 registered, with around a hundred players now at the level cap and one who ground for 30 hours straight on launch day, all of it organic, with paid marketing starting shortly. On the live realm, concurrent players run in the dozens against those tens of thousands of registrations.

Yet not everyone welcomed it. In the AI and vibe-coding subreddits the game was a hit, but in r/gaming it was “AI slop,” and by Polaczuk’s account his post was downvoted into the ground and his account banned, with the few who defended it as cool and open-source pushed down alongside him. He is even-handed about it, plenty of gamers are pro-AI, but the loudest voices “weren’t having a bar of it,” and “I can understand why.” That hostility is part of why the two crowds that did show up, the AI builders and the crypto-native players, “had to band together” as the frontier-tech outsiders mainstream gaming wanted no part of.

The audience who came are from the crypto community

At launch, the founders did not launch a crypto token. They put the game out as a showcase, not a business, and then, as it went viral on Twitter as well as Reddit, their phones started going. The messages, in Polaczuk’s telling, were “hey, there’s some money for you, someone’s made a token.” A stranger had spun up a $WOC memecoin off the moment. “No, it’s a scam,” was the first reaction, and they distanced themselves. With no endorsement, the token went to near zero.

What changed their mind was who was playing: “The majority of the players on the server had come from crypto,” Polaczuk said, and he is keen that they were there to play, not just to flip a coin: “they were grinding and grinding.” Grinding, though, is also what a crypto crowd does when it expects a token to reward the effort, and the project’s own Discord points that way, with players pre-farming the game in anticipation of the token being wired in. Whatever the motive, the audience was crypto-native, and with the abandoned token sitting at near zero, one of those players bought it “when it was basically nothing.” The team warmed to it, accepted the creator rewards, and the coin became what crypto calls a community takeover.

Within three days of launch it ran to a fully diluted value of about $2m, and it has been sliding ever since. The sums behind that line are small, because the fees the token has thrown off are modest, the wallet that launched it cleared only a few hundred dollars and was gone within seconds, and the largest connected block of holders, about a quarter of the supply, cannot be tied to anyone on-chain, the team included. “I know some of the top holders personally” in the Discord, Polaczuk said, “but with respect to a connected set of wallets, I’m not too sure.” None of the wallets anyone has traced holds a fortune.

The donate button on the game raised nothing, while the creator rewards let the team pay a dividend to their top community contributors, which Polaczuk calls “a really interesting financing model, kind of like crowdfunding.” The roadmap leans further in. Wallet connection is already live, and the plans after it are PvP prize tournaments, a cosmetics store and player housing, along with an idea of splitting into two servers, one crypto and one not, and confining anything that resembles play-to-earn to the crypto side, gated on what the community wants.

Levy Street’s answer is that none of it is separate. Asked whether the game, the crypto and the firm’s financial-AI work were one strategy or three bets, Polaczuk described a portfolio company that tries a lot, shuts down what fails, and doubles down on what works, with each new model opening “a new capability that you couldn’t quite just do before.” On that account the game is one experiment, the institutional investment-research product another, and the token simply the financing that lets an open-source game pay its contributors. The juxtaposition an outsider notices, a community coin alongside AI sold to financial institutions, is to them just two lines of one portfolio.

Built on Fable 5, which was withdrawn within three days

When the model vanished, the fallout, in Reuben Horne’s account, was real but contained. Losing Fable was “definitely... noticeable”: “I can’t make great music anymore,” he said, the programmatic music having been a Fable specialty, “but now we’ve got a composer,” and rich environment generation was “a bit of a loss” he is “looking forward to being able to do that again.” Against that, “we now have like 30 contributors,” and the game kept producing. “We’re still being able to create new content, new quests, the new raid,” he said, now on other frontier models like GPT-5.5 and Opus 4.8.

The risk is real and was entirely outside their control: the capability a product like this runs on can be deprecated by a vendor, or pulled by a government, on a few days’ notice. But more survived the change than didn’t. Fable was uniquely good at a narrow set of things, the music and the environments, and those are what degraded, while the rest of the work moved to other models without much drama and a community that had formed only after launch absorbed the slack. This was less a bad bet than a reminder that the ground under any frontier-model product can shift without warning, and that what carries you through is what you have built around the model rather than the model itself.

What this means for the video games industry

On the founders’ own account, the model did not invent this game, it reproduced one, and it is far better at reproducing a documented design than at originating a new one. Polaczuk is explicit that they are not chasing a triple-A title: the realistic target is a browser or mobile game, not a prompt that returns “a game,” let alone anything close to an 80 percent version of one. Horne puts the gain in plainer terms, as a tooling edge for “agile teams” that can now do “more with less.”

If that were the whole lesson, listed studios could rest on a distinction their best-known boss has been drawing for a year. Strauss Zelnick, who runs Take-Two, put it plainly in March when he said, “these tools may help you create assets, but that won’t help you create hits.” A hit, he said, “is a completely different animal and does require human engagement and creativity,” and the idea of pushing a button to “generate a hit” is “a laughable notion.” On that reading AI takes the assets, the boilerplate and the derivative, while the original creative leap, the part that makes the money, stays human. World of Claudecraft fits the theory, because a model reproduced the assets of an MMO in a weekend and did not make a hit. Analysis on AAA game development also points to this, with the work AI takes on is the cheap, derivative part, and savings leaves the publisher P&L, going straight to the model and cloud vendors (See: AI won't make AAA games materially cheaper to develop).

Levy Street does not think the clone is the ceiling and their bet is that imitation can spawn originality, since League of Legends started as a clone of DotA and enough iteration carried it somewhere “completely different.” Run that loop with a community feeding requests and “agents cooking in the background,” they argue, and a derivative can end up “something unrecognised, even if the roots are a more standard pattern.”

They hedge the leap when they ask, “is it going to one-shot a completely original game? probably if you drive it... maybe, yet to be seen,” but they are not reserving ideation for people forever, and they expect the machine to get there eventually, while Zelnick is betting it will not. Both cannot be right, and the gap between them is the question for anyone holding a games stock.

The first half of Zelnick’s distinction is already true, because the code and the derivative content are being commoditised in front of us. The second half is where the risk sits. If a community, cheap models and enough iteration can manufacture originality over time, even slowly, then original IP stops being a permanent moat and becomes a head start, one that decays unless its owner keeps extending it. That is a narrower claim than Levy Street’s and a more demanding one than Zelnick’s, because a catalogue is worth holding only for as long as the studio keeps adding to it.

Studio, community, or coin?

Ask Levy Street what World of Claudecraft is and you get four answers:

• It is a showcase for an AI consultancy.

• It is a candidate first title for the “AI-native minigame studio” they might raise money to build.

• It is a community that ships its own features.

• It is the collateral for a memecoin they did not launch.

Polaczuk’s own version is that “it’s all an experiment, I think, at this stage,” run “day by day,” inside a portfolio company that means to keep “doubling down on the winners” and cut the rest.

Once the game costs only about $1,000 and a weekend, the game stops being the business. What is left to be a business is whatever captures the attention the game created, whether a consulting pipeline, a community, a token, a studio, or none of them. Levy Street is running it in the open, the repository public and the receipts on-chain, and they are as unsure as anyone watching which way it resolves.

The weekend settled one question, which is that a faithful clone of a much-loved game is now nearly free to make. Everything since has been the harder question, the one the rest of the industry is walking towards. When the game itself costs almost nothing, what is left that someone will pay for, and who ends up holding it?

More from The Side Quest

• Microsoft and Xbox: Too small to sell, too strategic to spin - On the numbers, Xbox is worth about $49bn, a rounding error to Microsoft. It won’t be sold, and any separation keeps a grip on the data its games generate.

• AI in Video Games: Own the Loop - why a studio keeps its value only if it owns the content-generating learning loop, not the model. Uses Guild Wars 3 as a worked example.

• AI won’t make AAA games materially cheaper to develop - the productivity gains are real, but two-thirds of the value leaves the P&L to the AI vendors before it reaches the bottom line.

• Hyperscalers: The debt that doesn’t look like debt - how Microsoft, Amazon, Alphabet, Oracle and Meta are funding the AI capex boom, and why their reported leverage understates what they actually owe.

• Why Roblox really left Delaware - reading the Delaware-to-Nevada reincorporation as a move to shield management amid active litigation.

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Appendix

A figure-by-figure record. On-chain numbers come from public Solana data; figures Levy Street gave about its own game are attributed to the company and flagged where they cannot be checked from outside; external facts carry a source and a date. All interview quotes were checked against the per-participant audio recording, not the auto-generated transcript. Dollar values are rounded and may not sum.

A1. The model and the build

The game was generated with Claude Fable 5 over about two days in mid-June 2026, then open-sourced. The model was available only briefly; the interview confirms it is no longer accessible and that new content now runs on other frontier models.

A2. The game and its adoption

GitHub figures are public and were pulled directly. The user and player figures are Levy Street’s own and cannot be verified from outside the company; the article attributes them accordingly.

A3. $WOC market value (the chart)

Fully diluted value (FDV) is the token price times the circulating supply of about 999.98m. The mint is renounced and the supply is fully circulating, so FDV approximates market capitalisation. The series is computed from the main WOC/SOL pool’s daily price.

Source: GeckoTerminal, main WOC/SOL pool (PumpSwap), pulled 24 Jun 2026.

A4. $WOC on-chain forensics

The token is a pump.fun fair-launch memecoin: mint renounced, liquidity locked, no presale. A serial token-launcher created it, and the team adopted it after it was abandoned, what crypto calls a community takeover.

A5. The company and external references

A6. Conventions

Data is as of 24 June 2026. Currency is US dollars unless stated, with SOL converted at the prevailing rate over the window. Fully diluted value is the token price times the circulating supply of about 999.98m, used as a proxy for market capitalisation because the mint is renounced and the supply fully circulating. Figures are rounded and may not sum. Disclosed figures (the GitHub API, the raw on-chain exports, the price series) are distinguished inline from the one inferred figure (the wallet cluster) and from Levy Street’s own counts that cannot be checked from outside. “(reported)” marks a figure taken from the press or an on-chain aggregator rather than a filing or a raw export.

• Xbox today is effectively a content business with a break-even hardware business attached. On a DCF basis the math points to about $49bn, or 13x operating profit. That sits below where Nintendo trades (16x) and well below the 21x Microsoft itself paid for Activision. If the reset fails, the bear case is about $35bn; if it works, the bull case is about $66bn. The business earns about 3% today, and the value is a bet on lifting that, so small changes in the assumptions move the answer a long way.

• To Microsoft, $49bn is about half a year’s profit, 1.7% of market value, and a 3% margin against the group’s 46%. Selling Xbox has little to do with the money. It is about focus, about capital for the AI build-out that does move the stock, and about making a subsidised business pay its way.

• Across every scenario, the data is what Microsoft cannot afford to let go. The base case is that it keeps the whole business and fixes it; if it ever restructures, its instinct points to keeping a strategic handle on the data, a minority carve-out or a strategic partner, rather than a clean spin or a sale. That data is where Xbox’s real long-term value to Microsoft lies.

Work with me

On 10 June the executives now running Xbox put three numbers into a staff memo titled “Next 100 Days: Xbox Reset.”

The picture is of a business in poor health, and the people at the top say as much. Satya Nadella has described Microsoft as having “been subsidizing that entertainment” rather than monetising it and the reset arrived with a change of guard: Phil Spencer retired and Xbox president Sarah Bond left. Asha Sharma now runs the division, with Matthew Ball as chief strategy officer and Scott Van Vliet as chief technology officer.

Reports days later that Microsoft was weighing its options, a spin-off, a wholly-owned subsidiary, a joint venture or an outright sale, followed from there. They leave two questions:

1. What is Xbox worth?

2. Does Microsoft gain anything by separating from it?

What is Xbox worth today?

Xbox is two businesses with opposite economics: a publisher, and the console it runs on. It has lost this console generation to PlayStation, outsold by roughly two and a half to one on installed base, and having lost it Microsoft has stopped fighting on hardware terms: it now ships its biggest franchises on PlayStation and leads with Game Pass rather than the box. Layered on top are years of content acquisitions, Activision Blizzard King the largest of them. What remains is a business that is roughly 10% hardware and 90% content.

Valued as a games publisher that gives away a console, a DCF puts Xbox at about $49bn, or 13.5x operating profit. The multiple is struck on operating profit before the non-cash amortisation of the Activision purchase price, which a DCF ignores because it is not cash. Against Nintendo at 16x, that is a real discount, and it is well short of what the content cost: Microsoft paid about 21x for Activision alone.

Put another way, a standalone Xbox would be worth about 30% less than the price Microsoft paid for Activision by itself.

What it is worth is a bet on the reset

Two things swing the valuation: whether the turnaround the management team is betting on lands, and the multiple the business would command. The base case assumes:

1. The reset returns Xbox to a stable state, not a full recovery.

2. Owned franchises such as Elder Scrolls and Fallout become Xbox-first.

3. A new console, Project Helix in whatever form it takes, widens the installed base but earns nothing in the valuation, because it is sold at or near break-even.

4. Game Pass subscriber volume recovers, pricing settles, and a clearer value proposition holds the base.

5. Cost cutting continues, though the model banks only the first wave and leaves the rest to a broader round still to come

The bear and bull cases move those levers in each direction.

$49bn is a rounding error to Microsoft

Before weighing the effort a transformation would take, financially the decision means very little to Microsoft. A sale would convert about half a year of earnings into cash, once, and remove a business contributing roughly half a percent of operating income that Microsoft has been subsidising.

If the proceeds do not matter, the case for separating rests on two things:

• Focus. Gaming consumes leadership attention for a 3% margin business that has only just returned to growth, while the $168bn Microsoft Cloud business grows at 23%.

• Capital. The more than $20bn Xbox absorbed over five years is real money for a company spending about $65bn a year on capital expenditure, most of it the AI build-out. It is immaterial to the balance sheet and still an ineffective use of capital.

So why separate, and how?

The incentives point one way. Inside Microsoft, Sharma, Ball and Booty run a unit worth half a percent of operating income that will never command the chief executive’s time or capital. Spun out, they would run a roughly $49bn public company with their own board and equity. A separation serves them, serves the shareholders who receive the stock, and serves Microsoft, which keeps a handle on the data. A sale serves none of them.

There are five ways to separate, and they differ less in what Xbox is worth, close to $49bn in all of them, than in who ends up holding it and what happens to the Activision goodwill.

It’s worth examining these options against how Microsoft actually behaves, as it typically does not divest: LinkedIn, GitHub and Activision are all still inside it, kept and run from within. And when it reshapes a business it does so by striking strategic deals, the OpenAI partnership and the run of compute and data-centre agreements being the recent template, rather than by handing assets back to shareholders. On that record the five read less as exits than as degrees of a strategic handle Microsoft would keep on the data.

• The two that fit its instincts keep a real handle: a minority carve-out that holds on to control and the data, or a strategic partner brought in to accelerate the AI and distribution play it cares about.

• A clean pro-rata spin, even one that reserves the data licence, keeps only a contract and does nothing strategic for the parent.

• A clean sale keeps nothing, and in any case has no buyer.

1) The strategic routes: keep control, or bring in a partner

a) Minority carve-out IPO

Microsoft floats a minority of Xbox on the public market and keeps the rest. Because it still owns more than half, it keeps control and keeps consolidating the business inside the ‘More Personal Computing’ segment, so the Activision carrying does not move and no write-down is triggered. The float does three smaller things:

• It gives the business its own listed shares, so the people running it are paid in Xbox equity rather than Microsoft equity.

• It puts a public price on the unit, and it raises some cash.

• The Azure relationship and the data arrangements carry on unchanged.

What it does not do is fully separate, which on the strategic logic is the point: Microsoft keeps the majority, the consolidation and the data, and goes on answering for the margin. It is the gentlest of the options and the most in character. Selling a minority for cash is taxable, but at this size the tax is a detail.

b) Anchored spin, with a co-investor

Microsoft distributes most of Xbox to its own shareholders as a stock dividend, keeps a stake below 20%, and brings in one large outside investor to anchor the new company.

The sub-20% retention is what makes the distribution tax-free: the rule rewards handing over control, not keeping it, so the parent has to give up the majority to avoid the tax. The anchor, a strategic partner brought in to accelerate the AI and distribution play rather than a platform rival, takes a block the public market would not absorb in one go, puts a price on the business, and gives the new board a committed backer.

This is the structure that answers the problem that kills a clean sale, because no single party has to buy the whole thing. The cost sits on two lines. Giving up control deconsolidates the business, which is exactly where the write-down question opens, since a spin can be required to mark the Activision carrying at the distribution date. And it depends on finding a willing anchor from a short list, after the one fund large enough to lead it went to Electronic Arts.

2) The minimal route: the data-rights spin

For Nadella, the value of the data that Gaming generates is important to his AI strategy; he argues that the value of token capital will only increase over time (See AI in Video Games: Own the Loop).

Nadella has described the same data two ways inside sixteen months. In early 2025 he called it Microsoft’s version of YouTube, the feedstock for what he termed “a general action model and a world model.” By June 2026 he was calling the business that produces it a subsidy to switch off. Both can be true at once: the data is strategic and the operation that generates it loses money. This structure takes him at both words, keeping the part he calls strategic and letting go of the part he calls a drag. It is the cleanest expression of the idea, even if, on the logic above, not the most likely route for a company that prefers a firmer grip.

The strategic half is worth reading with one eye open, because the man making the case owns the data, the models and the cloud. Owning the games is an edge, not a necessity: the labs leading the world-model race train on public video and simulation without owning a studio, and one of them rebuilt Minecraft without a licence. What Microsoft holds is the cleanest version of a useful input, scarce, consented and already feeding its own model, alongside Minecraft, the environment much of the field runs its experiments in. It is worth keeping cheaply, and not worth contorting the company to hold.

a) A 5-year data license

Microsoft does not need to own the operating business to keep what it wants from it, which is the right to train its AI on the data the games generate. That right is a contract, not a function of how much equity Microsoft holds: it can be reserved in the separation agreement of any spin, or kept through control in a carve-out, and is forfeited only in a clean sale, where the buyer is a rival with no reason to grant it. The data-rights spin is simply the pro-rata spin with that licence reserved. In practice it spins the operating company to its shareholders and, in the separation agreement, takes a fixed-term licence, five years and renewable, priced at arm's length, to keep training it’s world models, Muse among them, on that data: the gameplay telemetry, the player traces, the content corpus. A licence of this kind is worth about $1.5bn capitalised, with the strategic Muse and Azure upside unpriced on top.

Microsoft does not need to own the operating business to keep what it wants from it, which is the right to train its AI on the data the games generate. That right is a contract, not a function of how much equity Microsoft holds: it can be reserved in the separation agreement of any spin, or kept through control in a carve-out, and is forfeited only in a clean sale, where the buyer is a rival with no reason to grant it. The data-rights spin is simply the pro-rata spin with that licence reserved. It can spin the operating company to its shareholders and, in the separation agreement, take a fixed-term licence, five years and renewable, priced at arm's length, to keep training its Muse game model and its Azure systems on that data: the gameplay telemetry, the player traces, the content corpus.

That is an ordinary parent-to-spinoff arrangement a new board can sign, which is what makes it the version that holds up. This is an event that has happened in the past: when eBay spun off PayPal in 2015 the two signed a five-year operating agreement that kept PayPal as eBay’s payments engine, priced and set to taper as the relationship loosened, with eBay still running about a quarter of PayPal’s payment volume at the split and a tenth of it three years on. A fixed-term priced contract between a parent and the company it lets go is plausible, and here the data runs the other way down it. Microsoft ends as the lab still learning from the company it span out, while the studios, the console and the publishing go to shareholders who want them.

b) A perpetual data licence

The maximal version, a perpetual royalty-free claim on everything XBOX spin-out ever produces, is very unlikely. Handing a newly public company’s data to its former parent for nothing transfers value from its new shareholders, and a board and the courts would read it as exactly that. It is also unnecessary, since Microsoft does not need a standing claim on all of it. A bounded licence on the data that matters, Minecraft and Call of Duty (or games with large training datasets) before anything else, secures the prize without the fight. This is similar to the arrangement that I wrote about earlier between Google DeepMind and EVE Online (See AI in Video Games: Own the Loop) which I would argue against for as the spin-out company’s shareholders.

However if they did go down this route, the nearest comparables, text and image deals, run tens of millions of dollars a year, with Reddit’s deal with Google at about $60m, so a games-data licence capitalises to a low-single-digit billions at most.

3) Trade sale

The opposite case for Xbox’s fate deserves stating at its strongest. Nadella’s own words, a business Microsoft has been subsidising and monetises better on YouTube than at home, are how executives describe something they mean to exit.

• The reset, with its layoffs, studio closures and a named 3% accountability margin, is the clean-up that tends to precede a sale.

• The write-down of ABK’s goodwill is non-cash and modest, so won’t be as significant than the coverage assumes.

• The EA deal proves a sovereign-scale buyer can be assembled. Together those make a real case that Microsoft is dressing Xbox for sale.

Together those make a real case that Microsoft is dressing Xbox for sale. The trouble is the price. Xbox is worth about $48.6bn standalone, a buyer would pay an acquisition premium on top, and the Activision deal is carried at about $73bn; a sale books the difference, and that gap closes only as the multiple a buyer pays climbs toward what the deal cost.

A sale clears the carrying only at about 20x, essentially the multiple Microsoft itself paid for Activision, and the only buyers who pay a strategic price like that are the rivals who could fold Xbox into their own platform, exactly the ones a sale is barred from reaching. Yet even getting that far assumes a buyer, and the likelihood of one is low:

• The real constraint on a sale is the buyer, and the usual reading of it is backwards. Antitrust does not block Microsoft from selling the No. 3 console, because offloading it reduces concentration, which is the remedy regulators reach for rather than the harm they prevent. The buyers it would likely stop are Sony, Valve or Nintendo.

• The constraints that bite are the size of the cheque, about $41bn of equity beyond the debt, more than any single fund commits, and a national-security review of a business holding hundreds of millions of players’ data, which gates foreign and sovereign buyers without flatly barring them.

• The one pocket deep enough has just been spent: the $55bn take-private of Electronic Arts, an enterprise value led by a consortium around Saudi Arabia’s Public Investment Fund, shows a sovereign-scale gaming buyout is bankable, and uses up the single buyer shape that works. With that fund committed to EA, the cleared and affordable buyer for Xbox does not currently exist.

So the write-down on a sale is not a verdict on the business; it is a fact about who is allowed to buy it. A clean sale is dominated by any of the routes that keep a handle on the data and trigger nothing extra, a closer call than a confident telling would allow, but it resolves the same way.

Microsoft will most likely keep Xbox

Microsoft most likely keeps Xbox, fixes the margin, and never sells the business, because keeping is what Microsoft does. If it does restructure, the same instinct points to a strategic handle rather than a clean break, a carve-out that holds control and the data, or a strategic partner brought in to accelerate, long before a passive spin and nowhere near a sale. The reports of a separation were never about raising $49bn, a sum Microsoft earns back in a couple of quarters. They are about which part of the business it no longer needs to own outright, the studios, the console and the publishing, and which part it should not let go, the data underneath them. The reset is the first move on either path, and the write-down everyone is waiting for turns out to be the smallest term in the decision.

More from The Side Quest

• AI in Video Games: Own the Loop - why a studio keeps its value only if it owns the content-generating learning loop, not the model. Uses Guild Wars 3 as a worked example.

• AI won’t make AAA games materially cheaper to develop - the productivity gains are real, but two-thirds of the value leaves the P&L to the AI vendors before it reaches the bottom line.

• Hyperscalers: The debt that doesn’t look like debt - how Microsoft, Amazon, Alphabet, Oracle and Meta are funding the AI capex boom, and why their reported leverage understates what they actually owe.

• Why Roblox really left Delaware - reading the Delaware-to-Nevada reincorporation as a move to shield management amid active litigation.

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Appendix

The figures behind the article, each tied to its source and its working. “Disclosed” marks figures from filings or company statements; “inferred” marks the model’s own estimates. Market-linked figures (market capitalisations, peer enterprise values, the goodwill carrying) move over time and are as of mid-June 2026; refresh them at publication. In the tables, c is circa.

A1. The valuation

The DCF is driver-based. Revenue is built from drivers, Game Pass subscribers times ARPU plus other content, and console units times realised price, while costs come from peer-anchored ratios, so the operating margin is an output rather than a typed input. The base case holds the business roughly flat, anchored to the pro-forma c. $23–24bn of gaming revenue, with a modest margin lift as the reset trims marketing and overhead.

• Enterprise value = the present value of FY2027–30 free cash flow (c. $9.7bn) plus the present value of the terminal value (a 12x exit multiple on the FY2030 standalone adjusted EBIT, c. $57bn undiscounted, discounted four years at a 10% WACC to c. $38.9bn) = c. $48.6bn (base)

• The multiple is struck on adjusted operating profit, before the c. $3.07bn/yr non-cash Activision amortisation; on a GAAP basis the FY2026 operating margin is c. 2.3%, which reconciles to the disclosed c. 3% “accountability margin” rather than being forced to it.

• Standalone adjusted EBIT is adjusted operating profit less the standalone dis-synergy (A5); the FY2027 free cash flow also carries the one-time severance (A7).

Scenario range (each case run from its own levers):

A2. Xbox as a share of Microsoft

Microsoft’s figures are disclosed (FY2025 10-K and Q4 earnings); Xbox’s are derived, as shown.

A3. The comparables

One calculation on every row: enterprise value over operating profit before acquisition-related amortisation, so a company carrying heavy fresh purchase-price amortisation (Xbox, after Activision) is measured like one built organically (Nintendo). Each add-back is the company’s own disclosed acquisition-intangible amortisation.

• Workings: Activision $68.7bn ÷ ($3.26bn + $0.011bn) = 21.0x. EA standalone $41.7bn ÷ $1.627bn = 25.6x; the take-private $55bn ÷ $1.627bn = 33.8x. Nintendo’s EV is market cap (¥8.26tn / c. $51.6bn) less net cash (c. ¥2.6tn), c. $35bn, over ¥360bn of FY2026 operating profit. EA’s standalone EV uses the undisturbed $168.32 close of 25 September 2025.

• EV/sales cross-check (why EA’s 34x is not what it looks). The operating-profit lens magnifies thin margins. EA runs a c. 20% operating margin ($1.52bn on $7.46bn of FY2025 revenue) against Activision’s c. 37% ($3.26bn on $8.80bn in FY2021), so a given EV buys less operating profit at EA and the multiple reads higher. On EV over sales, which strips margin out, the two deals converge: Microsoft/Activision is c. 7.8x ($68.7bn ÷ $8.80bn), the EA take-private c. 7.4x ($55bn ÷ $7.46bn). EA did not sell richer than Activision; its 33.8x is the arithmetic of a lower-margin business. The lens cuts the other way for Xbox, whose c. 2x EV/sales reflects the c. 3% margin, which is why the body anchors on operating profit, not sales.

A4. Hardware versus content

Microsoft discloses the gaming total and the year-on-year growth rates, but not the dollar split. The split is inferred.

A5. The five ways to separate

Enterprise value is close to $48.6bn in all five; they differ in who holds the company, the dis-synergy a standalone business carries, and the treatment of the Activision goodwill.

• Trade-sale economics: EV $48.6bn times a 1.30 acquisition premium (for synergies and strategic fit, not control, since Microsoft already owns the business) = c. $63.2bn; less c. $22bn of buyout debt (6x the c. $3.7bn FY2026 adjusted operating profit) = c. $41bn of equity. The write-down is the c. $73bn carrying (A8) less the $63.2bn price = c. $10bn. A minority IPO or spin, at a 12.5% new-issue discount, is c. $42.5bn.

• Dis-synergy has two sourced legs that flex by structure: Azure-at-internal-cost lost on cloud gaming (1.7bn xCloud hours times c. $0.11/hr times the margin given up), and incremental standalone public-company G&A, anchored to disclosed carve-outs (GE HealthCare 0.64% of revenue at a full break, Kenvue 0.39% under a transition-services agreement). The result runs c. $0.09bn (carve-out, Azure intact) to c. $0.25bn (clean sale), immaterial to the enterprise value.

A6. The data-rights licence

The reserved training right is valued small, deliberately, because the point is that keeping it does not strip the spun-out company.

• Value: AI training-data licences run in the tens of millions a year: Reddit’s licence to Google is c. $60m/yr, reported OpenAI publisher deals c. $13–50m/yr (News Corp the largest, c. $250m over five years). Capitalising c. $100m/yr at 15x gives c. $1.5bn, with the Muse and Azure upside unpriced on top. A games-data licence is worth a low single-digit billions at most, though richer multimodal action data could argue for more.

• The five-year template: When eBay spun off PayPal in 2015 the two signed a five-year operating agreement, priced and tapering; eBay still ran c. a quarter of PayPal’s volume at the split and c. a tenth three years on. The Xbox licence runs the other way down the contract (the parent takes data from the spinco), but the fixed-term, arm’s-length, tapering form transfers.

• The tax rule (IRC §355): A tax-free spin requires the parent to distribute control (80% of the vote), so it can keep at most just under 20% (19.9% is the safe convention). This is why the anchored spin keeps Microsoft below 20%, why a majority carve-out is taxable but stays consolidated, and why the two cannot be had at once.

A7. The reset and the restructuring

• The 10 June 2026 memo: a c. 3% accountability margin; more than $20bn of spend over five years (excluding Activision Blizzard King); revenue down c. half a billion dollars over that span.

• Layoffs: 1,900 roles (25 January 2024) plus 650 (12 September 2024) = c. 2,550. The model carries a one-time severance of c. $0.40bn in FY2027 (c. 2,500 heads times c. $160k loaded cost), in net income and free cash flow but not adjusted EBIT.

• Closures (Arkane Austin, Tango Gameworks, Alpha Dog; Tango and Hi-Fi Rush later sold to Krafton) are immaterial; lost revenue from closures and spin-offs is modelled at c. $0.15bn/yr from FY2027, netted into content.

Source: the reset memo (trade press); layoff figures (Microsoft / Spencer memos, Jan and Sep 2024); closures (Booty memo, May 2024; Krafton release, Aug 2024).

A8. The Activision write-down

At acquisition the deal created goodwill of $51.0bn and intangibles of $22.0bn, c. $73bn of carrying value (Microsoft FY2025 10-K; total purchase price $75.4bn). The intangibles amortise (c. $3.07bn/yr, 15-year weighted life), so the live carrying falls and the write-down a sale would crystallise shrinks with it.

Goodwill is tested annually, on 1 May, at the reporting-unit level. Microsoft discloses that the Activision goodwill sits in the More Personal Computing segment and that no impairment has been recorded, but not whether gaming is tested as its own unit or pooled, nor the headroom between fair value and carrying amount. So the structure decides whether a write-down ever surfaces: a sale forces it open, consolidation (keeping it, or a majority carve-out) defers it, and a deconsolidating spin is the contested case, where whether the carrying must be marked at the distribution date is a question for an auditor. The $11.3bn of accumulated goodwill impairment on the balance sheet is legacy, pre-Activision (Nokia and aQuantive), and is not an Activision write-down.

Source: Microsoft FY2025 10-K (Notes 7 and 8). The deconsolidation treatment is genuinely contested and wants an accountant’s read.

A9. The deal record

Microsoft’s gaming acquisitions, and the deals around them, share a pattern: the cheap, patiently run bet over-delivered, while the premium-priced growth or transformation deals mostly disappointed or were written down. Every figure is from the company’s own filings or announcements.

The lesson for Xbox is not that game IP is worthless, Minecraft is proof of the opposite, but that a premium paid on a growth or transformation story is a bet, and the bet often loses. That is the discipline behind valuing Xbox on the cash it generates rather than on what a buyer might hope to do with it.

Sources and notes: Microsoft FY2025 10-K (Activision purchase price $75.4bn; announcement EV $68.7bn at $95.00 a share; goodwill $51,001m in More Personal Computing, no impairment in the May 2023, 2024 and 2025 tests; the $11.3bn of accumulated goodwill impairment is legacy, pre-Activision). Reset figures from the 10 June 2026 memo (trade press). Sony FY2025 Q4, 8 May 2026 (Bungie ¥120.1bn, excluding goodwill). Take-Two FY2024 and FY2025 10-Ks (Zynga goodwill $5,994m; impairments $2,342m plus $3,545m = $5,887m; announced EV $12.7bn against $9.52bn of GAAP consideration at close). Embracer Annual Report 2023/24 (net loss SEK 18,177m; Asmodee impairment SEK 6,770m on the SEK 34.4bn paid). EA press release 29 September 2025 ($210.00 a share, a 25% premium) and Form 8-K, 22 December 2025 (vote 201.5m for / 1.9m against). Metacritic as of 20 June 2026.

A10. Conventions

• Units: $bn, FY2026, CY2026. Non-dollar figures carry the reported amount, a dollar conversion and the rate used (Sony in yen, Embracer in krona).

• Disclosed vs inferred: filings and company statements are disclosed; the model’s estimates (the hardware/content split, the 3%-margin operating income, console units, the dis-synergy legs) are inferred and labelled.

• Refresh at publication: market caps and peer enterprise values move daily, and the goodwill carrying amortises down; live figures are as of mid-June 2026.

• The deal record (A9) sets out the comparable transactions in a single table, with sources beneath it.

• The one contested point: whether a deconsolidating spin must recognise the Activision carrying at the distribution date is an accounting question, not settled here.

A11. What the model does not do

A register of the figures a reader should interrogate, and the judgement behind them.

1. The hardware/content split is inferred. Microsoft discloses the gaming total and the growth rates, not the dollar split; the c. 11% hardware share is the model’s estimate (A4).

2. Console units are not disclosed. Microsoft stopped reporting Xbox console sales, so “lost this generation” rests on third-party estimates: c. 80m PS5 against c. 30m Xbox Series consoles by mid-2025 (VGChartz), roughly two and a half to one, and wider than ten to one in Japan.

3. Game Pass subscribers were last disclosed at 34m (February 2024). Later figures, including the c. $5bn revenue line, are estimates or single statements, not a filed series.

4. The c. 3% margin is the reset memo’s “accountability margin,” an internal, non-GAAP figure quoted in trade press, not a disclosed GAAP segment result; whether it is struck before or after acquisition amortisation is the single biggest swing in the valuation.

5. The dis-synergy is built from precedent carve-out ratios (GE HealthCare, Kenvue), not Xbox-specific disclosure (A5).

6. The spin-versus-sale write-down treatment is genuinely contested and wants an accountant’s read, not an analyst’s (A8).

7. Market-linked figures move. The market cap, the peer enterprise values and the Activision carrying are as of mid-June 2026 and should be refreshed at publication.

• Guild Wars 2’s Commander’s Compendium is a 300-gold in-game item, a meaningful investment by player economy standards, that lets any committed player lead a public squad of up to 50 others. The mechanic has compounded over fourteen years of iteration between ArenaNet’s design choices and what players actually do with them.

• I interviewed five commanders across five game modes to understand why they choose to give up their time to lead as a Commander. Their reasons converged on community service, the discipline of doing the work well, and the social texture each of them keeps alive in the game mode they run.

• No other major MMO sells public player leadership as an in-game item like this. An illustrative model puts the Commander’s layer’s contribution at roughly 2.5-6.5% of NCsoft’s $60-63M annual Guild Wars 2 revenue.

This article could not have been written without the support of the Guild Wars 2 community - the five commanders who gave up their time to talk to me: Velvet on the open-world meta in Dragonfall, Kasa on raids, fractals and strikes, Menhors on jumping puzzle taxi services, Catnoids on scheduled world boss runs and Pleomir on rift hunts.

At 9am on most working days, Menhors logs into Guild Wars 2, walks his character to the chest at the end of whatever jumping puzzle is the Weekly objective that week, and posts a notice in the game’s looking-for-group (LFG) menu. He then leaves the character standing there. Between meetings and tasks at his actual job, he pops back into the game to open portals so other players can teleport directly to the chest, skipping the puzzle and collecting the reward.

He does this for about eight hours a day, five days a week, which is roughly a full-time job. He is paid in tips, sometimes, by the players who use his portal with about one in ten people giving to him. The largest tip he has ever received was 50 gold, sent by a player who went by Santa Claus and ran his own portal taxi service in the winter. The most common tip is 1 gold. The item that lets Menhors run this service in the first place cost him 300 gold.

Menhors is one of five Guild Wars 2 commanders I spoke to. The other four, Velvet, Kasa, Catnoids and Pleomir, do versions of the same work in different parts of the game.

• Velvet runs a 50-player squad through Dragonfall, a high-traffic event map, every day as part of the Dragonfall Farming Community (DFC) that has over 3k members on their Discord channel.

• Kasa commands raids, fractals and strikes for his guild and for groups he finds in the looking-for-group menu.

• Catnoids leads scheduled world boss runs that the regulars treat as a chatroom as much as a fight.

• Pleomir leads rift hunts, multi-map runs for the essences that feed legendary armour crafting, having bought his tag last year after twelve years of playing without one.

All five bought a 300-gold in-game item called the Commander’s Compendium for their own reasons, and chose to keep doing the work every day after. This article is about that work, the system that made it possible, and how much value commanders create for GW2.

Part 1: The Commander’s Compendium

What is it, and why is it important

Mechanically, a commander is a player who has bought the Commander’s Compendium and “tagged up”. The tag puts a marker above their character that other players can see on the world map and from a distance in-game. With the tag active they can build a squad of up to 50 players, organise them into sub-groups of five, send on-screen messages, and drop ground markers. The game gives the commander no special powers beyond visibility and coordination tools, so the leadership is entirely driven by the player and how they use these tools.

The system that exists today is not the system ArenaNet shipped at launch. In August 2012, the company released a simple tag designed for World versus World (the game’s large-scale player-versus-player mode where coordinating dozens of players across a battlefield matters). Players took the tag and used it for cooperative open-world content instead, the kind with no fixed group, where dozens of strangers showing up together to fight a dragon or run a scheduled event could come together.

ArenaNet noticed and made the following changes:

1. In September 2014, the company made the tag unlock account-wide rather than character-only, added colours so multiple commanders could co-lead the same map, and raised the price from 100 to 300 gold.

2. In November 2015, alongside the Heart of Thorns expansion, ArenaNet rebuilt the system in earnest with the Enhanced Squad UI, which added 50-player squads, sub-groups of five, ready checks, on-screen broadcasts, and the supply tracking that makes WvW commanding possible. The system as commanders use it today shipped in those two updates, eighteen months apart.

These changes were important for the commanders I interviewed: “I learned a lot from good ole WvW Coms... that did the first 2-3 years here in GW2” as Catnoids put it. The commander culture was carried from one mode (WvW) to another by the people who had led, and as time went by, by the people who learned to lead from them.

Why the tag worked: two design choices other MMOs did not make

The commander tag worked due to two product decisions that lay at the heart of Guild Wars 2:

1. The first is that GW2 is an open-world that scales with participation. Dragonfall, the map Velvet leads daily, is designed to host squads of up to 50 players. The events scale in difficulty as more players join. Additionally, there are no diminishing returns to the loot as the number of players increases, so players are not competing with each other for loot and is part of why Dragonfall is one of the busiest farming destinations, as with a Commander like Velvet, the efficiency of gaining loot is high. Catnoids’ world boss runs, which spawn on fixed timers across the day and pull together whichever players happen to be online, are another expression of the same design principle. The content is built to welcome a crowd. World of Warcraft’s open world is largely solo or small-group. Final Fantasy XIV’s open events are smaller in scale and less central to the game.

2. The second is the absence of a monthly subscription and is a clear intentional design that dates back to when the original Guild Wars was launched. As players are not spending monthly, and feeling any need to justify the cost of their subscription by playing regularly, casual players will coexist with daily players in a way they do not in subscription games. In World of Warcraft or Final Fantasy XIV, the people with the most time tend to dominate the culture. In Guild Wars 2, the people with the most time, the commanders, are providing a service to the people with the least.

The idea of a Commander system is one that is unique to GW2 - other MMOs do not sell public player leadership as an in-game item.

• World of Warcraft has player leadership inside private guilds.

• Final Fantasy XIV has ad-hoc hunt trains organised in the moment, with no underlying system.

• EVE Online has fleet commanders embedded in corporations and alliances.

Part 2: The five commanders’ duty of care, and what they each get from the role

The interviews span across five commanders who are doing five different kinds of work in five different parts of Guild Wars 2. Commanders do not often communicate with each other, and they tell the story of why they choose to commit time to learning how to be good at the role, often without people teaching them.

Commanders possess a strong duty to their squad

Let’s remind ourselves that the duty of being a commander is self-imposed and unenforced, yet they behave as if they have professional standards and have a strong duty of care to the people they lead.

Kasa tells of a time where one player in his group wasn’t communicating, which led him to replacing them; “when you replace those people the atmosphere actually change by itself, because you took a decision that people secretly wanted but thought their opinion wasn’t worth it, because troublemakers afflict other people mood, leading to more leavers and the end of the squad possibly”. Kasa takes his role seriously enough to put the benefit of the squad over one individual.

This trait is a theme that Velvet, who runs the Dragonfall map, also shows. He practised for a month before ‘tagging up’ because he “wanted to avoid any mistakes”, and on fragile events he will make sure everyone in his squad is in place before beginning; “in events like Cull, which are delicate, we just tag and wait for everyone to arrive on time”.

Whilst there is little communication between Commanders themselves, there is almost an invisible code of conduct. Menhors, who runs Jumping Puzzles (JPs), will do the JP himself, rather than use a taxi from another Commander who’s already completed it as a sign of respect to the time and effort they took to complete it. When with other commanders at the puzzle, Menhors talks about how they assist each other rather than compete by “defending each other from mobs that have aggroed”.

Catnoids, who has played GW2 for many years and runs World Bosses, organises the run around the social element; “be funny, nice and have a good time” and he treats being a Commander as a place where he can meet new people and others can also do the same. Pleomir feels accountable to a promise he made in guild chat: because I put a message in the guild chat about my run, I feel obligated to follow through with the promise.

What each one gets from the role

So what do Commanders get from the role? The answers vary from person to person, including improving themselves, an in-game identity, the feeling of giving back to the community, or the social element.

Kasa gets quality control, and a forcing function for his own improvement; “I like organized and well done runs, if I cannot find them with other people I’d rather do them myself, so it forces me to be better than if I was just joining someone else’s run.” The tag is how he practises.

Velvet gets an identity inside a game whose other content has burned him out. He is blunt about it: I’m burned out on the other content GW2 has. Dragonfall and being a commander there keeps me in this game. Without the role, he says he would not be playing GW2 at all.

Menhors originally started for the money and stayed for something else. He bought the tag for 300 gold, was left with about 100 gold afterwards, and ran his first JP taxi to start recouping the cost. Within a month, the tag had paid for itself, but by then the reason had shifted; “the tome paid for itself in about a month, but by that point I had come to enjoy both the income and the feeling of being useful to people”.

Catnoids builds relationships with others who play the game; “GW2 is my chatroom”, transforming his role into one that puts the social space first above gameplay. Pleomir gets a new way to engage with a game he has played for over a decade; “After 12 years I finally buy the tag. I was excited.”.

Why this matters

The role generates two-sided retention as it retains the players the commanders lead, and it retains the commanders themselves. Commanders provide a duty of care to the squad which keeps players coming back, and the Commanders keep coming back for the reasons mentioned above.

Commanders have a community of practice but without a community for themselves

What surprised me throughout these conversations was how little Commanders talk to each other and there is no group that binds them together with Menhors saying; “Commanders don’t communicate with each other at all. There’s no internal community among them. Or at least I was never invited into one.”

Despite all of this, they hold a strong sense of etiquette between them. Menhors notices during his JPs that commanders don’t stand too close to each other when running services in the same spot. They don’t stand right at the chest itself. They defend each other from monsters that have aggroed onto an AFK commander.

So there is an unwritten code that binds them, and this likely emerges because the role of a Commander naturally demands it, which in turn the players have unspokenly agreed is the right way of doing it. Even when I have played the role of a commander, it surprises me how often players will speak up to aid your leadership, saying “listen to the comm” or “wait for the comm’s instructions”.

New commanders come to replace those who leave

Given the lifespan of Guild Wars 2 (over 14 years), the commanders running this work do not last forever. Some run a route for years and step away or some communities could last a season and end. The Tyrian Education Association (TEA), a teaching guild that for years organised runs of Triple Trouble (a World Boss event that requires three commanders coordinating in real time), is a great example of where new Commanders can learn the system and create a lifecycle to keep these events running. TEA has over 800 members as part of its Discord.

Part 3: Commanders are part of the acquisition and retention loop

Without commanders, the game thins out in places NCsoft can measure

Velvet, Kasa, Menhors, Catnoids and Pleomir are part of what people mean when they describe Guild Wars 2 as one of the most welcoming MMO communities. The phrase, when it shows up in press coverage, is not about the developers’ tone in patch notes and typically always about how new players feel when they pick up the game for the first time. There’s usually a Commander leading, who will help out and teach new players the ropes.

Without commanders, the on-ramp for new players gets steeper. A new player wandering into Dragonfall in the evening with no commander tag in sight is a new player who tries the meta event once, fails, and logs out. For a Live Services team, this would show up in player count metrics.

Without commanders, the social texture lapsed players remember coming back to gets thinner. Many MMO players cycle in and out of the games they love and they come back when an expansion ships or there is a major update. Catnoids, a long-time Guild Wars 2 player who treats the game as his chatroom, is exactly the kind of player whose absence would be felt by the friends who come back to find their familiar runs ended.

Without commanders, the activity density on the map at 9pm on a Tuesday gets sparser, the map looks emptier than it is and other players make the decision to leave too, because the texture of a populated MMO is part of what an MMO is.

The Commander system could be contributing 2.5-6.5% of GW2 annual revenue

Illustrating this in product terms, Commanders are an important part of the ecosystem that drives player acquisition and retention. Based on analysis of available data, I believe it could be contributing between 2.5-6.5% of annual revenue for Guild Wars 2.

Will Guild Wars 3 have a Commander system?

ArenaNet announced Guild Wars 3 in June 2026 for an autumn 2027 beta. In a 16 June philosophy post, game director Colin Johanson committed to preserving the buy-to-play, no-subscription model, and said that Guild Wars 3 doesn’t try to replicate the large-scale gameplay pillars that so uniquely define Guild Wars 2. So the question of whether commander culture has a place in Guild Wars 3 is genuinely open.

Closing

Becoming a Commander is a very conscious choice that costs 300 gold in-game. This article (if you’re a Guild Wars 2 player) is for those people you already know, whether it’s following Velvet into Dragonfall in the evening, Kasa who runs your weekly raid, Menhors who helps you complete your weekly JP or Catnoids who creates a social World Boss event. The cycle continues with Pleomir, the newer commander who is tagged up after twelve years of playing and makes the cycle continue.

The system that lets them do that is in Guild Wars 2. Whether it will also be in Guild Wars 3 is now a question with a partial answer, and the rest of the answer will be visible in the design choices of the next two years. As Pleomir puts it, after a year of running his own squads: “every commander is a normal player and started out just like you”.

More from The Side Quest

• AI in Video Games: Own the Loop - why a studio keeps its value only if it owns the content-generating learning loop, not the model. Uses Guild Wars 3 as a worked example.

• AI won’t make AAA games materially cheaper to develop - the productivity gains are real, but two-thirds of the value leaves the P&L to the AI vendors before it reaches the bottom line.

• Hyperscalers: The debt that doesn’t look like debt - how Microsoft, Amazon, Alphabet, Oracle and Meta are funding the AI capex boom, and why their reported leverage understates what they actually owe.

• Why Roblox really left Delaware - reading the Delaware-to-Nevada reincorporation as a move to shield management amid active litigation.

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Appendix

A1. The Commander layer revenue model

The model counts followers who keep playing because a commander is tagged up. It does not count the commanders themselves, who are retained by the role: Velvet is explicit (Dragonfall and being a commander there keeps me in this game), and Kasa, Menhors and Pleomir describe the same pull. This sits on top of the follower figure, not inside it, and because commanders are a small but high-engagement, high-spending population, folding it in pushes the central case a little higher than the table shows.

How the 42% commander-dependent playtime figure was built

The figure is illustrative. Judgement columns are author estimates, anchored on the qualitative argument in the article.

From cascade to retention delta: roughly 42% of playtime is commander-dependent. Assume that, if the layer vanished, about half of that becomes effectively unavailable or substantially degraded, giving c.21% engagement loss across the active base. Apply an engagement-loss-to-retention-loss translation factor of 0.5 (range 0.4-0.6, the midpoint of Park, Cha, Kwak and Chen, 2017), giving c.10.5pp, rounded to a 5-10pp range with a 7.5pp central case.

A2. The MAU-to-ARPU derivation

NCsoft’s FY2025 GW2 revenue (c.$60-63m USD, from a disclosed KRW 82-86bn divided at the c1,365 KRW/USD 2025 average) divided by the third-party MAU range gives the implied blended revenue per active player.

Central case: $65 per active per year, set as an illustrative central within the $55-80 band rather than read mechanically off a single MAU point.

A3 - A6. ARPU decomposition sanity check

The $65 per-active per-year figure cannot be split into its underlying revenue lines from NCsoft’s disclosure. The decomposition below is inferred from measured expansion SKU pricing and assumed adoption rates. It is a sanity check on the blended $65, not a measurement of how the revenue actually splits.

SKU pricing (measured). The Standard / Deluxe / Ultimate split has been consistent at $24.99 / $49.99 / $74.99 for every Guild Wars 2 expansion since Secrets of the Obscure in August 2023. Deluxe sits at exactly 2.0x Standard, Ultimate at 3.0x.

Central case: roughly $3.38 per MAU per month on gem store and services. That is plausible for a buy-to-play MMO with cosmetic-led monetisation and no subscription.

The communicating-vessels caveat. The Ultimate edition includes a 4,000-gem credit (about $50 of in-game currency). An Ultimate sale therefore reclassifies what would otherwise be a separate gem store purchase as expansion revenue. The expansion bucket and the gem bucket are not independent draws; they leak into each other through the premium SKU’s gem credit. The central $40.50 of implied gem ARPU is the residual after the Ultimate edition’s gem credit has already been counted as expansion revenue. The total $65 is the right top-line figure; the split between buckets is fuzzier than the tables make it look.

A7. What the model deliberately does not do

• It does not assume a steady-state population multiplier compounding the retention delta into a structural population shift. The retention impact is presented as a within-year effect on average active players.

• It does not decompose ARPU into gem store, expansion sales, or other revenue lines as part of the headline calculation. NCsoft does not break that down. The decomposition above is an inferred sanity check, not a measurement.

• It does not treat the MAU estimate as a measurement. The 0.8-1.1m range is third-party and the methodology is not disclosed.

• It does not claim a retention number from data. The 5-10pp range is author judgement, argued through the cascade and the engagement-loss step above.

A8. Uncertainty register

1. The 20m users figure in NCsoft’s IR materials is two-year-old marketing copy carried over from the June 2024 Janthir Wilds press release. It is cumulative since launch, not active, and should be read as such, not as a current disclosure.

2. FY2025 GW2 revenue has a roughly 4% vintage gap between the Q4 2025 and Q1 2026 IR releases, and both are read from stacked-bar charts rather than tabular disclosure. The $60-63m figure is therefore a range, not a single audited number. The Korean DART audited filing is the authoritative source and has not yet been pulled.

3. MAU is not measured anywhere in primary disclosures. The 0.8-1.1m range is third-party tracker estimates with undisclosed methodology and a weak Steam signal, because Guild Wars 2 is launcher-sold.

4. ARPU is modelled (a measured numerator divided by an estimated denominator), not measured. The decomposition into gem store versus expansion versus other is an inferred sanity check.

5. The retention delta is author judgement, not a primary or third-party measurement. The cascade-to-engagement-loss path is one way to argue for the 5-10pp range; a reader who disagrees with the cascade should disagree with the conclusion.

6. The whole model is illustrative and sensitive to its inputs. The point is the order of magnitude, a low-to-mid single-digit share of revenue, not the second decimal place.

A9. Sources

• NCsoft Q4 2025 Earnings Release (10 February 2026): https://ncsoft-brand-web.s3.ap-northeast-2.amazonaws.com/ncsoft/invest/result/20260210/report/4Q25_PT_ENG.pdf

• NCsoft Q1 2026 Earnings Release (13 May 2026): https://ncsoft-brand-web.s3.ap-northeast-2.amazonaws.com/ncsoft/invest/result/20260513/report/1Q26_PT_ENG.pdf

• NCsoft Q3 2025 Earnings Release (11 November 2025): https://irsvc.teletogether.com/ncsoft/pdf/ncsoft2025Q3_eng.pdf

• NCsoft Q4 2024 / FY2024 Earnings Release (12 February 2025): https://ncsoft-brand-web.s3.ap-northeast-2.amazonaws.com/ncsoft/invest/result/20250212/report/4Q24_PT_ENG.pdf

• NCsoft May 2026 IR Presentation (the 20 million users line, slide 18)

• ArenaNet Janthir Wilds press release (PR Newswire, 4 June 2024)

• Guild Wars 3 announcement (PR Newswire, 5 June 2026) and the official guildwars3.com site

• Colin Johanson, Our Guild Wars Philosophy (guildwars3.com, 16 June 2026)

• Colin Johanson interview (PC Gamer, June 2026)

• Seung-Uk Baek interview on Guild Wars 3 vs Aion 2 (PC Gamer, June 2026)

• Massively Overpowered coverage of the announcement (5 June 2026)

• Guild Wars 2 forums thread, is GW3 focussed on small groups? no big open world events? quote from ncsoft exec

• Park, Cha, Kwak, Chen, Achievement and Friends: Key Factors of Player Retention Vary Across Player Levels in Online Multiplayer Games (WWW Companion 2017): https://arxiv.org/abs/1702.08005

• Guild Wars 2 Wiki history pages for the Commander tag and Commander’s Compendium

• ActivePlayer.io and mmo-population.com MAU estimates (third-party, methodology undisclosed)

• Guild Wars 2 expansion SKU pricing pages on guildwars2.com (for the ARPU decomposition sanity check)

• AI is not coming for the game engine, the core that holds the rules and runs the shared world. It is coming for the content around it, the art, writing and testing that are what a studio spends on. The value of that work flows up to a handful of AI labs by default and a studio keeps it only if it owns the loop that produces it.

• Owning that loop, what Nadella calls a studio’s token capital, means owning what the AI learns about its world, while renting a generic model underneath that can be swapped for a better one. Guild Wars 3, NCSoft’s new game on Unreal, is where a studio could get to make that choice.

• The EVE Online deal is what ceding looks like: a loss-making studio sold to its own management for $120m, while Google DeepMind took a minority stake and the right to train on its twenty year, player-driven world. The fight is no longer over who owns the shares, but over who gets to learn.

Work with me

The question is the loop, not the AI model

On 15 June 2026, Satya Nadella set out a distinction that had nothing to do with games and everything to do with what is about to happen to them. Every company, he wrote, will have to build two kinds of capital: human capital, the judgment and pattern recognition of its people, and token capital, “the firm’s AI capability it builds and owns.” The prize is not picking the best model but building a learning loop on top of one, where the two compound. As he put it: “You can offload a task, or even a job, but you can never offload your learning.”

What he calls token capital is made of specific, ownable parts: the evaluations a company writes to encode its own standards, the reinforcement it runs on its own accumulated information, the queryable memory of everything it has done before. Build that, and the generalist model underneath becomes a swappable part; you can change it for a better one and lose nothing, because the expertise that matters has been captured in the loop rather than rented from the model. Fail to build it, and the reverse happens. The work flows through someone else’s model, the learning accrues to them, and your craft is slowly commoditised into it.

That was written about software companies and enterprises, but it is a precise description of what AI is about to do to a game studio. For what it’s worth, AI does not arrive at the deterministic core, the movement, the combat feel, the shared simulation every connected player must agree on; the engine is the safe part. It arrives in the content and tooling stacked around that core, the art, the levels, the dialogue, the testing, the Live Services treadmill that keeps a world fed for years. That layer is what a studio spends its budget on, and as it moves to models, the question Nadella puts to every other industry is the one that now decides a studio’s worth: does it own the loop, or rent the intelligence and let the value flow upward to a few models that, in his words, “eat everything they see”?

We have to be honest here that Nadella is not a neutral witness to this. He runs one of the handful of frontier models he is warning everyone else about, through Microsoft’s stake in OpenAI and its own Muse model for games. He also owns one of the largest libraries of games IP there is, in Activision and Xbox. The platform on which he would prefer every company to build its loop is Azure, so we need to take these words with a pinch of salt.

However, we could apply his view into the video games industry with the Massively Multiplayer Online (MMO) game Guild Wars 3 (GW3), which ArenaNet (NCSoft) announced on 5 June 2026 (its first new game in roughly fourteen years) and built on Unreal Engine 5.

A persistent online world is exactly the kind of game whose content layer AI is about to rework, and a studio in its position has years of its own production history and player data to rework it on. Whether that accumulates into a loop ArenaNet owns, or ends up training a model the studio merely rents, would hypothetically decide how much of GW3’s value it keeps.

Part 1. How a studio keeps its value: it owns the loop

An owned loop works at two levels, and GW3 shows both.

• The first is a single function run as a loop.

• The second is the whole game built as many of those loops feeding one core the studio owns.

The content treadmill becomes a flywheel

A great example of a single function run as a loop is with Live Services: the seasons, events and updates a persistent world needs to keep players paying attention for years after launch. It is the clearest place to see what owning a loop means, because the same grind can be run two ways, and the two pull apart a little further with every cycle.

This is what a Live Services loop could look like for GW3:

• A designer sets the intent, the next event set in Orr, a reason to take players somewhere new (this is the human call about what should exist as content).

• Models the studio has adapted on its own back catalogue generate the candidates, the quests, the encounters, the dialogue, the first-pass art, and so on.

• The studio’s own evaluations (which encode what a thing has to do to feel like Guild Wars rather than generic fantasy) sort that output, and iterate towards what they feel is genuine and authentic to the game with the models.

• What survives ships to the authoritative server and runs in front of players, on the deterministic core which AI never touches. How players then behave (e.g. where they spend time, where they don’t, what they ignore) returns back as information that the studio keeps.

• That information is then used to train the next round’s content generation and sharpen the evaluation, and the loop starts again from a better place than the last.

Each cycle leaves the studio with more of its own production data than the last, with a more exact set of evaluations and models that are tuned a little more tightly to its world. This alters the way in which Live Services content can sharpen development over many years as the data from the asset compounds. Making extremely long-life content that spans over a decade can create a flywheel that becomes a moat.

In order to achieve this, none of this actually requires ArenaNet to train a model of its own. The generation and the learning run on commodity models rented from whichever lab leads the quarter.

So what the studio owns is the wrapper around them: the evaluations, the information, the models adapted on its own back catalogue and the memory of its own world.

• Swap the model underneath for a better one and little is lost, only the model-specific tuning has to be redone, which will look cheap next to the years it took to build the rest.

• Rent that wrapper instead, run the same circuit inside a vendor’s product, and the loop still turns, but the compounding accrues to the vendor: the studio gets this season’s content, and the vendor gets a system that has learned how to make GW3.

The whole game feeds one owned core

Live Services are an example of just one loop, but a game the size of GW3 inherently runs dozens: concept art has a loop, encounter design has a loop, so do dialogue, localisation, the balance pass, and the bug triage, and so on.

If each of these parts of development aren’t communicating effectively, then each method for developing effective loops can be radically different (i.e. each loop could be running a different vendor’s tool that is learning a slice of the game and keeping what it learns). So a studio that decides to use external tools this way ends up renting its own craft back from a dozen suppliers, none of whom hold the whole picture and all of whom improve on its work.

What turns those scattered loops into something the studio owns is a single core beneath them, the thing Nadella called token capital, and for a game it has five parts:

• Models adapted on the studio’s own back catalogue, twenty years of Guild Wars art, systems and writing, so that what they generate starts from the house style rather than the open internet.

• Private evaluations that encode the studio’s taste (i.e. the standing answer to what is good enough and what is unmistakably Guild Wars).

• Agents trained on its own production history and player information (i.e. where the live game’s behaviour from the first loop accumulates).

• A queryable memory of the canon, every faction, location, weapon and story beat, so a generated quest does not contradict twenty years of established world.

• The architecture that holds these together and lets the commodity model beneath them be swapped out for a better one.

A deep IP fails in a particular way under generic AI: the output is fluent and slightly wrong, a sword that is not quite a Guild Wars sword, a character speaking half out of voice, a quest that quietly breaks old lore.

The queryable canon and the taste evaluations are what catch that, and they only work if every loop draws on the same ones. The shared core is also what keeps the functions consistent with one another, the dialogue agent and the quest agent and the art pipeline all answering to a single record of what is true in the world. If you run a dozen rented tools instead and there is no shared record, the world drifts with each function plausibly off in its own direction.

Owned this way, the whole Live Services life of the game feeds one asset. Every season of content, every fixed bug, every million hours of play thickens the same core, and each function improves because the others did. That is the difference between AI making GW3 more itself across a decade and AI scattering the studio’s craft among the suppliers it rents from.

The loop costs before it pays, and few studios can build it

Set against renting, owning the loop looks worse before it looks better. The adapters, the evaluation suites, the information pipelines, the canon memory all have to be built and staffed before one iteration of the cycle can begin to compound, and the compounding only shows after several seasons of play have run through them.

A studio that rents the equivalent tools pays less in year one and ships at much the same quality; the gap opens later, if it opens at all. The financial model in the previous piece (See: AI won’t make video games materially cheaper to develop) put the realised AI uplift at about three points of operating margin, well under the optimistic case once the offsets are counted, because a large part of the gross saving leaves again as tooling spend, paid straight to the vendors whose models do the work. The loop is an investment with a J-curve, not a discount that lands at launch.

Most studios also cannot build it. Studios do employ machine-learning engineers, for matchmaking, anti-cheat, animation and analytics, but building a generative loop is a newer and narrower discipline: evaluation design, reinforcement learning on a studio’s own information, and the data plumbing to feed them. That talent is scarce and expensive and competed for hardest by the labs themselves, and standing up the pipelines to turn raw play into usable information is its own programme of work. This, more than any argument about whether owning beats renting, is why most studios will rent: not because the loop is a bad idea, but because they have no way to staff one. The capability sorts the industry by size, and the lab deal is where that sorting is paid out.

And even a loop built and owned in full sits on ground the studio does not own. The commodity model at the base runs on someone else’s cloud and someone else’s chips, rented by the hour from the handful of firms that operate them. A studio can own every part of the wrapper, the taste, the information, the canon, and still depend on Azure or AWS, and on Nvidia beneath them, for the compute that makes any of it run. Owning the loop is sovereignty on one axis, what the studio knows and keeps. It says nothing about the other, whose platform it all runs on, and that second axis is where the lab deal does its work.

Part 2. The lab deal, and who ends up owning the loop

Every lab deal turns on one question: who keeps the core

A studio that cannot build the loop (which is most of them) gets one another way. It makes a deal with a firm that can, the frontier labs. There are four different ways in which a deal like this could occur, and the most important variable that matters is who owns the core when the deal is done, because that is the asset that compounds, and everything else is effectively terms around it.

The four methods are:

• Supplier deal (studio keeps the core). The lab sells compute and models by the hour; the studio builds its own wrapper on top. This is the swappable-model relationship from earlier, written into a contract, and the loop stays the studio’s.

• Minority stake (studio keeps the core). The lab takes equity and helps fund the work, but the studio still owns and operates the loop. The lab is invested in the outcome without holding the asset.

• Co-development JV (contested). The core is built together and held jointly. Joint ownership of a compounding asset is a fight deferred rather than settled, and the terms of the eventual split tend to favour whoever can walk away first.

• The lab gets to learn (the EVE shape). The studio may keep its equity and its loop and still cede the one thing the lab cannot generate for itself: the right to learn from a real world full of real players.

Where on that spectrum a studio lands is set by its leverage, and leverage here means whether it can say no.

What gives the studio leverage, and pulls the deal left:

• It can fund the game itself, so it does not need the lab’s money and can walk from a bad deal.

• It holds a live world the lab cannot synthesise, and more than one lab wants it, so the asset is contested rather than captive.

• It can build the loop in-house, or credibly begin to, so the lab is a compute supplier and not a partner it depends on.

What gives the lab leverage, and pulls the deal right:

• The studio is losing money, or its owner wants out, so there is a clock on the deal and a floor under the price the studio will accept.

• The studio has no machine-learning or data capability and no path to building one, so the lab is the only way it gets a loop at all.

• The lab has other worlds it could train on, so this studio’s environment is not unique to it, while the studio has nowhere else to

A studio’s strongest card, a unique world full of players, is worth most to a lab exactly when the studio is healthy enough not to have to sell it. The two move together, which is the trap. Distress forces the sale, and distress also strips the card of its value, because a forced seller cannot hold out for the price the asset would otherwise command. So the deals that cede the most loop tend to be struck by the studios whose asset was worth the most, sold cheaply because they had to. Which model a studio can pursue is decided years before the lab ever calls, by whether it stays fundable enough to keep the choice open: a healthy studio with a world the labs want can choose to cede the loop at a price that reflects it; a distressed one does not choose at all.

EVE Online, a twenty-year world, becomes the lab’s training ground

EVE Online is the kind of environment a frontier lab cannot build for itself. For more than twenty years it has run as a single shared universe, one world rather than thousands of copies, where hundreds of thousands of real players run a real economy, fight wars that last months, and build, infiltrate and betray alliances. It is precisely what today’s AI handles worst: long horizons, a world that never resets, thousands of players pursuing their own goals at once, consequences that compound over years. Those are the problems DeepMind has named as the hardest in building capable agents, long-horizon planning, memory, and continual learning, and a world like this exercises all three. A lab can spin up a simulated economy. It cannot spin up twenty years of real people learning to outwit one another inside a single one.

On 6 May 2026, CCP Games, the Icelandic studio behind it, was bought out of its Korean parent, Pearl Abyss, by its own management and a group of long-term investors, for $120m, and rebranded Fenris Creations. Google DeepMind took an undisclosed minority stake in the deal, and with it the right to run an offline copy of EVE on its own servers.

The announcement framed it as a homecoming from a position of strength. The filed accounts describe a managed exit from a loss-making, indebted business. This is the condition from the previous section made concrete: a genuinely rare asset, a twenty-year player-driven world at record revenue, parting cheaply because the entity that held it could not hold out and its owner wanted out.

Access to that world is what changed hands, whether you describe it as an environment to train in or as the behavioural record of everyone who has played. By the spectrum’s equity test this was a minority stake: management kept the company, the IP and the production loop. But the equity is not the core of it and what CCP ceded is the right to learn from that world.

Owning the loop is only half the sovereignty

The spectrum measures one axis: who owns the loop. There is a second, and EVE only sharpens it. Even a studio that keeps its core in full does not own the ground it runs on. The models underneath are rented from a handful of labs, the compute from a handful of clouds, and the engine, in GW3’s case Unreal, is licensed from Epic. A studio can own everything it learns and still depend, at every layer beneath that, on companies it does not control. Sovereignty has two axes, what you own and whose platform you own it on, and almost no one in games holds both.

The owners of that second axis take their cut without owning any studio’s loop. Epic is the clearest case in games: it owns Unreal, the engine a large part of the industry builds on, and keeps extending it by rolling up the tools and middleware around it. GW3 runs on Unreal, so Epic earns from it whether or not ArenaNet ever owns its own loop. A large publisher can avoid that toll by building its own engine, as EA does with Frostbite, but owning an engine for your own use is not the same as owning a platform others build on, and it still leaves the cloud and the models rented. The platform-owner’s position is one no studio reaches by owning its loop.

Nadella’s framing is right about the first axis and quiet about the second. The durable asset is indeed the loop, the thing a studio builds and keeps. But he would also like to own the second axis, the model you rent, the cloud you run on, the platform you build the loop atop. Telling studios to own their loops costs him nothing if they build them on Azure, on the models he supplies, on the terms he sets.

For GW3 the choice is NCSoft’s, and it is the first axis that is still open. NCSoft can fund the game, which means it can keep the loop if it chooses to build one, rather than take the EVE shape because it has to. The second axis is already half decided: the game runs on Unreal, and on whatever cloud and models sit beneath it. The most a studio in its position can do is own what it learns. Whether ArenaNet does is the question the next two years will answer, and it is a choice, not a forecast.

Own the loop, or be commoditised into it

The choice was never whether a studio uses AI because the reality is that every studio will. It is whether it owns what the AI learns or hands that to whoever it rents the model from. Most studios cannot build that capability for themselves, which is why the lab deal exists, and why the deal’s structure, not its label, decides who ends up with the core.

For an investor, this reframes the question to ask of any game in an AI world. Not whether AI will cut its costs, which it will, modestly, but whether the studio is building an asset it owns or renting one it does not. NetEase has built its own AI capability and runs rented models like DeepSeek’s underneath it; CCP, out of money and out of options, did the opposite, and a twenty-year world became someone else’s training ground.

GW3 is a great example of where the choice is still open. NCSoft can fund the game, so it can keep the loop if it decides to build one, and whether it does would be an interesting event to see for GW3. For a player, the same machine reads differently. The world gets livelier, its events quicker to arrive and its characters quicker to respond, and it is paid for partly with the record of how they played.

Appendix

Figures behind the claims in the body, set out so a sceptical reader can rebuild them. Currency figures are in $m and rounded, so rows and columns may not foot exactly. “(reported)” marks a figure drawn from press, deal-coverage or analyst sources rather than a company filing; each is flagged where it sits and re-checked at publication. The cost-model figures in A2 are a model, not anyone’s accounts, and are labelled as such.

A1. The EVE Online deal

This is the article’s worked example of ceding, and the announcement and the accounts tell different stories, so both are set out here. CCP Games, the maker of EVE Online, is held through Pearl Abyss Iceland, a subsidiary of the Korean publisher Pearl Abyss. The group accounts are filed in Iceland and reported in US dollars.

The filed numbers describe a business that grew its top line while its losses widened:

Year-end cash fell from about $33m in 2023 to about $13m in 2024. Net debt rose from about $37m at end-2024 to about $51m at end-2025, against a $50m loan from Pearl Abyss, originally a bank facility converted to a 4.6% intercompany loan in 2023, due October 2026. Source: Pearl Abyss Iceland group accounts (consolidated, audited), filed in Iceland; corroborated by two independent reads (marketsforISK; Nosy Gamer).

The exit math sets the 2026 price against what the asset cost and what it earns:

The $120m equalled 15.4% of Pearl Abyss’s consolidated assets and bought the entire holding, 10,973,763 CCP shares. On the company-level CCP figure the announcement cites, about $70m, the multiple is about 1.7x rather than 1.8x; on an enterprise basis it is higher again once the $50m parent loan is added. The 2018 headline of $425m included a $200m earnout that was never met and never paid, so $225.9m is what changed hands; the $120m is 0.53x that and 0.28x the headline. Source: 2026 deal and consideration split, Pearl Abyss 1Q26 earnings letter (English, 12 May 2026) and the Korean disclosure (KIND) on the disposal; 2018 figures and the impairment, Pearl Abyss 2022 annual report (KIND), via marketsforISK.

The deal mechanics: Pearl Abyss Iceland’s board resolved the sale on 30 April 2026 and it completed on 6 May 2026. Management, led by chief executive Hilmar Pétursson, bought the company out with a group of long-term investors and rebranded it Fenris Creations; advisers were Aream & Co. and Arion Bank on the Fenris side, with LOGOS as legal counsel. Google DeepMind took the undisclosed minority stake that helped finance the buyout, and with it the right to run an offline copy of EVE on its own servers (reported, from the Fenris announcement, not a filing). Pearl Abyss framed the sale as freeing it to fund Crimson Desert and DokeV, and in its own words “determined that selling the shares to the current management would be mutually beneficial after a comprehensive review of mid-to long-term growth strategies”, while keeping “the potential collaboration opportunities open with Fenris Creations” (Pearl Abyss 1Q26 letter). The disposal gain or loss was not in the first-quarter accounts, because the deal closed after the 31 March quarter-end; it falls in Pearl Abyss’s unreported Q2 2026 results, where one analyst put the pre-tax gain at about ₩69bn (reported, an estimate, not a disclosure).

One contradiction is worth holding against the announcement. The Fenris release described a record year for a business that “remains profitable” on revenue above $70m (reported). That $70m is CCP’s company-level revenue, about $70m and roughly flat on the prior year, at which level the entity still lost about $14m; the consolidated group lost $28.8m. “Profitable” holds only at the level of the EVE Online product, not of any filed legal entity. The honest read is record product revenue inside a loss-making, increasingly indebted company that its owner had already written down and wanted out of.

A2. The cost-model anchor: content is most of the spend, the engine is the safe part

The body’s claim, that AI enters the content and tooling around the deterministic core rather than the core itself, and that this is most of what a studio spends on, rests on the production cost model built for the companion piece (See: AI won’t make video games materially cheaper to develop). The model is a triangulated archetype, a third-party AAA single-player title on Unreal Engine 5, 2026 to 2030, not any one studio’s accounts. Its all-in cost is $350m: $250m production and $100m marketing. The production envelope breaks down by function as follows, with each function’s modelled AI compression rate, the share of that function’s cost the model expects AI to take out:

Three readings matter. First, the content and tooling functions where AI bites, art, narrative, audio, QA, localisation, marketing creative and the specialist external work, sum to $141m, about 56% of production; adding internal support takes it to about $174m, roughly 70%. Second, engineering is the single biggest line at $52m, and it is largely the part AI leaves: the game-feel and combat tuning, the authoritative server, the social layer and the senior architecture, with the modelled 12% compression concentrated in tools and glue code rather than the core. So the largest single cost is also the safest, and the exposure is the dispersed content majority around it. Third, the highest compression rates fall on the volume work at the edges, external QA at 30% and marketing creative at 21%, and the lowest on the human-judgment lines, production leadership at 7%. The “most of the spend” claim does not depend on any one function being biggest, which is why the body does not call art the largest line. Source: the AAA AI development cost model built for the companion piece [LINK], Inputs tab; figures are modelled, not filed.

A3. The Nadella post

The opening is anchored on a Satya Nadella post from mid-June 2026 about human capital and token capital.

A4. Guild Wars 3

The live worked example. ArenaNet, owned by the Korean publisher NCSoft, announced Guild Wars 3 on 5 June 2026 at Summer Game Fest, its first new game in roughly fourteen years. It is built on Unreal Engine 5 (listed on its Steam page; reported rather than confirmed by the studio), buy-to-play with no subscription, targeting PC and PlayStation 5, with a beta in late 2027 and launch around 2028. The reveal set it as a prequel in Orr, with the pillars given as the “joy of movement” and action combat. Verify before publication: the report that the game’s existence first surfaced at a hostile NCSoft shareholder meeting in about March 2024 (a single outlet); the specific Orr lore (the Vael spirits, the Seeker mount, the Vaelwardens); and the reveal’s own stance on AI, before any claim is made about how the studio frames AI in the game. The article’s argument does not turn on these details, only on the game being a persistent online world a studio could rework with its own production history and player data; the flags above guard the colour, not the thesis. Source: NCSoft announcement; Massively OP; Inven Global; the Steam listing.

A5. NetEase and DeepSeek

The close uses NetEase as the contrast to CCP: a studio that built its own AI capability and runs rented models underneath it, rather than ceding the loop. The verified footing is that NetEase owns a proprietary AI system and wires external models into its games, with DeepSeek’s R1 one of about six it has used in the MMO Justice Mobile (alongside Alibaba’s Qwen, Baidu’s ERNIE, MiniMax, Moonshot’s Kimi and ByteDance’s Doubao); its 2025 title Sword of Justice runs on NetEase’s own system plus DeepSeek. Chief executive Ding Lei has said models like DeepSeek’s raised game R&D efficiency by about 30%. The article therefore says NetEase rents “models like DeepSeek’s”, illustratively, and makes no claim that it runs its pipeline on DeepSeek alone. It also makes no claim that NetEase holds equity in DeepSeek. DeepSeek’s first external funding round, reported in mid-2026 at about 50bn yuan and a post-money valuation around 350-400bn yuan, has confirmed leads in founder Liang Wenfeng (who keeps control), Tencent and CATL; NetEase has been reported as in late-stage talks but is unconfirmed and has not commented, and the round is reported to have closed. If a NetEase stake is ever confirmed, it becomes the inverse of the EVE case, a healthy games company taking a position up the stack in a lab, and the article would note it; until then NetEase stays on the integration footing only. Source (reported throughout): Reuters, 36Kr and The Next Web on the round; RADII, Webull and Seeking Alpha on the integration.

A6. Conventions and sources

Currency. CCP and Pearl Abyss figures are stated in US dollars; the group reports in dollars, and Korean won amounts are converted at rates near the deal date (the $120m at ₩1,476.10 to the dollar) and are not marked to current spot.

Period basis. CCP’s results are the financial years 2023 to 2025 as filed in Iceland. Pearl Abyss’s “Q1 2026” is the quarter to 31 March 2026; the EVE sale closed on 6 May 2026, after that quarter-end, so its gain or loss lands in the unreported second quarter.

Reported versus filed. Figures marked “(reported)” come from press, deal coverage, company announcements or analyst estimates rather than a financial filing, and are re-checked against the latest reporting before publication. The deal financials and the 2018 and impairment figures are from Pearl Abyss filings and disclosures; the buyout’s framing, DeepMind’s use of an offline copy, the disposal-gain estimate and the EVE revenue records are reported. The cost-model figures in A2 are a model, not accounts. The verify-before-publication items in A3, A4 and A5 are listed in those sections.

Style. British spelling; currency as $Xm and $Xbn; financial years as FY2025 and calendar years as CY2026.

• To pay for AI, the five US hyperscalers have turned to debt, funding a nearly 6x rise in capital spending to roughly $760bn in 2026, and now, at Alphabet, to selling stock for the first time in more than twenty years, with Meta reported to be weighing the same.

• A growing amount of the debt that is being raised also never reaches the balance sheet. Oracle and Meta route the most debt through private-credit vehicles, Amazon and Alphabet fund the buildout on their own books, and Microsoft sits in between.

• Therefore, reported leverage understates the true obligation: the off-balance-sheet debt prices about a percentage point wide of what the parent could borrow directly, and more than $800bn of leases not yet commenced will land on these balance sheets as the data centres come online.

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The cash-return machine has gone into reverse

In the years before the AI buildout, four of these five were returning tens of billions of dollars a year to shareholders through buybacks and, more recently, modest dividends. Amazon was the exception, having always reinvested almost everything it earned. What the buildout has done, in barely two years, is turn the other four into Amazon, and turn Amazon into something without precedent.

The spending is the first half of the shift, which is widely reported. Combined Capex across the five has increased nearly sixfold in five years ($132bn in 2021 to >$760bn in 2026). Nothing in these companies’ histories (i.e. the original cloud buildout), looks like this. Yet, how they are paying for this has substantially changed as a result of just the sheer size of funding required to build this.

The second half of this is how capital allocation has changed as a result. Share buy-backs (SBB), their main instrument for returning cash, has been switched off across most of the group: Alphabet and Meta both repurchased nothing in the CYQ1’26, Amazon has not bought back in years, and Oracle, who used to have a large SBB programme has dwindled to almost nothing. Only Microsoft is still buying back in size. Cohort SBBs fell from $145bn in 2021 to $95bn in 2025, while dividends, even after Alphabet and Meta initiated them haven’t moved substantially as a proportion of Capex.

Re-investing in growth has always been a priority for these companies, so there has always been an expectation that capex would take priority over returning capital to shareholders. By 2025 every one of them was pouring far more into the buildout than it handed back, close to three dollars of capex for every dollar returned. All of that cash will be poured into land, power and silicon and because their own internal cash flow generation is no longer enough, they have turned to the bond market.

A cohort that barely borrowed is now among the market’s largest issuers

Since the end of 2024 the five have added more than $290bn of bonds and finance leases, and the new bonds are now being issued across multiple different currencies globally. Alphabet alone has issued in all six, dollars, euros, sterling, Swiss francs, Canadian dollars and yen, inside a year, including the technology industry’s first hundred-year bond since Motorola sold one in 1997; Amazon made its own Swiss-franc debut alongside its dollar and euro deals, then sold C$14bn of Canadian paper in June 2026, reported as the largest Canadian-dollar corporate bond on record. Meta and Oracle have stayed in dollars, and Microsoft is the instructive outlier, letting its own bonds run down while taking on finance leases instead.

However, the cost of capital has increased sharply since the low-interest era, and also varies according to how the hyperscalers are choosing to build vehicles to fund the build-out (e.g. on/off balance sheet).

When these companies last borrowed in size, in 2020/21, their long bonds priced under 3% and the shortest well under 1% yet the notes sold in 2026 carry coupons near 6% at the long end. It’s even higher still for Oracle which is roughly double the old long-end cost, stretched across maturities that in Alphabet’s case run all the way to 2126. Meta’s own forty-year money tells the story in miniature: it priced at 5.75% in November 2025 and at 6.45% when Meta returned to the market in April 2026, seven-tenths of a point higher half a year later.

The biggest borrowings are increasingly being kept off the balance sheet

Alongside their own bonds, some of these companies have begun financing infrastructure through a structure that does not show up as debt (on/off balance sheet), and how far each has gone is becoming a real divide in the cohort.

The mechanics in which they choose to fund Capex off balance sheet is consistent: a separate vehicle, usually a joint venture (JV) or special purpose vehicle (SPV), owns or develops the data centre, is capitalised with equity from a consortium of sponsors, and raises the bulk of its funding as debt placed privately with credit funds and insurers. The hyperscaler takes a minority stake, signs a long-term lease or capacity agreement for the finished site, and often provides guarantees. Economically it has committed to years of payments that service a pile of debt, but because it neither owns the vehicle outright nor issues the bonds, almost none of that debt appears on its own accounts.

Meta set the template in October 2025 with a joint venture alongside Blue Owl Capital to build its Hyperion campus in Louisiana, a roughly $30bn project in which the vehicle raised about $27bn of debt, anchored by Pimco, while Meta took a 20% equity stake, agreed to lease the finished site, and provided a residual value guarantee worth around $28bn (reported). Within weeks Meta went on to raise a further $30bn in conventional bonds (with Meta’s bond rating untouched). It has since repeated the structure, assembling a roughly $13bn package, again mostly debt, for a second campus in El Paso in May 2026 (reported), which makes the vehicle its standard answer for new sites rather than a one-off. In early June, days after Alphabet’s equity raise, Meta was reported to be weighing tens of billions in fresh equity as well and if it proceeds, it would be the second of the five to fund the buildout with stock.

Microsoft sits in the middle, and its case is the subtlest. It is not building Meta-style lease-back vehicles. Instead it is an equity sponsor in the AI Infrastructure Partnership it formed in September 2024 with BlackRock and its infrastructure arm Global Infrastructure Partners, alongside the Abu Dhabi state fund MGX, a co-investment fund that aims to mobilise up to $100bn once debt is included and whose first deployment was the $40bn purchase of Aligned Data Centers in October 2025 (reported). That fund’s borrowing is not Microsoft’s, but Microsoft’s offtake helps underwrite it, and the same holds for the neocloud operators it leans on, CoreWeave and IREN among them, which raise debt against their Microsoft contracts.

On its own books Microsoft has actually let its bonds run down while piling on finance leases. Microsoft is avoiding the bond market rather than the obligations, but it does so through leases and partnerships rather than the dedicated lease-back vehicles Meta and Oracle use.

Oracle has gone furthest of all, and it has done so as a tenant rather than an owner. The capacity it has promised the Stargate venture, announced in January 2025 with SoftBank, OpenAI and MGX, is being built by outside developers who finance each campus through its own special purpose vehicle and then lease it to Oracle on long contracts. The reported debt across these vehicles now runs to roughly $72bn, spread over campuses in Michigan, Texas, Wisconsin and New Mexico, with the Abilene flagship adding perhaps $15bn more.

The Michigan deal is an example of how costly it can be for a company in Oracle’s shoes: $14bn of bonds, anchored by Pimco after US banks stepped back, priced at 7.5% and maturing in 2045, a rate well wide of anything Oracle pays in its own name (reported). None of this debt is Oracle’s and stays off its own financial statements.

Its own builds sit on its $135bn of on balance sheet borrowing but the leased campuses, and the years of payments that service their debt, do not.

Amazon and Alphabet sit at the other end. Amazon is building its largest AI clusters itself, on its own balance sheet (its Project Rainier cluster for Anthropic ramped up through 2025), and holds its Anthropic relationship as an equity stake and a multi-year cloud commitment rather than a financing vehicle.

Alphabet funds its own buildout through its bonds and, in June 2026, a large equity raise as well; where it touches private credit it does so at the edges, as a guarantor backstopping about $3bn of a partner’s data centre leases, the TeraWulf arrangements of 2025 disclosed in that company’s own filings, and as the chip supplier to a roughly $35bn deal, reported to have closed in early June 2026, that lets Anthropic lease Google’s own TPUs and neither of these deals puts borrowing on Google’s books.

As we can see, the cohort’s way of fundraising isn’t black and white, but more like a spectrum: Oracle and Meta at the off balance sheet end, Amazon and Alphabet at the on balance sheet end, and Microsoft in between.

Keeping the debt off the books is not free. For the private credit deals that Meta and Oracle are doing, they are, to no surprise, more expensive than if they were to raise debt for themselves for ‘general corporate’ purposes. The price for these deals is typically a percentage point (Meta’s JV borrowed at 6.58% in October 2025 against Meta’s own thirty/forty-year bonds near 5.7%, and Oracle’s Stargate financing came at 7.5% against its own long bonds, which had themselves repriced into the high sixes by early 2026).

Part of that is a private-credit markup and part is that the borrower is a weaker, project-level vehicle rather than the parent. A percentage point is not a doubling, but these are investment-grade companies choosing to pay up so the debt lands on someone else’s balance sheet rather than their own.

What they actually owe, and what covers it

What we need to consider at this stage, is adjusting debt metrics to include the obligation the hyperscalers have for all of their off-balance sheet investments and consider how long these obligations last for. Across the group, the not-yet-commenced leases alone come to more than $800bn, and at Microsoft they more than doubled in nine months.

This isn’t alarming by any means, as these deals are done on the basis of a contracted backlog of future revenues or RPOs (Remaining Performance Obligations) that the clients of the data centres are expected to pay.

The exception is Oracle. Its revenue is $67bn a year, a fraction of its peers', yet it has the largest backlog in the group, $638bn. Measured against everything it owes, its cover is the thinnest of the five and there’s customer concentration as nearly half of that backlog reportedly comes from one customer, OpenAI, on a contract reported at $300bn.

Meta is the company the backlog frame does not fit. Alone among the five it does not rent capacity to outside customers, so it reports no backlog at all; it builds for its own apps and advertising, a business that earns more than $200bn a year, and that, rather than a contracted book, is what stands behind its obligation. At its May shareholder meeting Mark Zuckerberg said entering the cloud market was “definitely on the table” if Meta found itself with spare capacity, which would in time give it a backlog of its own.

So the reported balance sheet understates what these companies owe, in places several times over, and the difference is real obligation that has simply not surfaced yet. What keeps that from being a solvency question is the cover behind it, of two kinds: the revenue they have contracted, and the cash flow they already generate. On both measures only Oracle is short.

Conclusion

None of this stays off the books forever. As each data centre comes online, the lease behind it turns into reported debt, and the guarantees turn into real costs if the assets end up worth less than promised. The official measures, though, take years to catch up. S&P, for example, will not count Meta’s joint venture in Meta’s leverage until the leases start in 2029, and only then adds those lease payments to its debt. But the obligation is real today, not in 2029. The risk sits in the years in between, when the company is already on the hook for lease payments that rank ahead of its shareholders, but its reported leverage and credit rating still don’t show them.

Duration mismatch is also part of this equation too with borrowing lengths at 30/40 years and extending up to 100 years, whilst the silicon it’s all funding is being written off on a 5 or 6 year period. So the borrowing will still be outstanding long after the chips it paid for have been retired and replaced. This isn’t uncommon, but notable given that technology moves at such a fast pace.

For now, the funding mix is a more honest account of where each company stands than its earnings release.

If you read this as a shareholder then the question is whether the revenue contracted against the buildout actually arrives, because the claim on residual profits now sits behind a deep and growing stack of senior and quasi-senior commitments, and, at Alphabet, has just been spread thinner by a fresh issue of stock.

If you read it as a creditor the question changes: these companies are now wired into the private-credit and insurance markets through vehicles and guarantees that their own ratings only partly capture. Apollo’s Marc Rowan, among the largest providers of that credit, puts it this way: the hyperscalers “are lending their credit in the form of guarantees and in the form of leases.”

The borrower with the thinnest cover, Oracle, is the one whose obligations lean hardest on a single customer. Its own bondholders have already taken that gap to court, in a suit filed in January 2026 alleging that Oracle’s September bond prospectus called further borrowing something it “may” do when the next $38bn was already being lined up. The debt that does not look like debt is still debt. It has only not arrived yet.

Appendix

Figures are in $bn and rounded to the nearest billion unless shown otherwise, so rows and columns may not foot exactly. "(reported)" marks a figure drawn from press, agency, deal-counsel or rating-agency sources rather than an SEC filing, because the structure sits outside the parent's 10-K.

A1. Capital expenditure and committed obligations

The cohort is the five US hyperscalers driving the build: Microsoft, Amazon, Alphabet, Oracle and Meta. Two figures frame everything that follows: what each spends, and what each has committed to.

Capital expenditure, gross purchases of property and equipment, calendar year. The 2026 column is full-year company guidance; all others are reported actuals. Oracle’s FY2026 ended on 31 May 2026, just before publication: its actual capital expenditure was $55.7bn against the $50bn guide shown. For FY2027 it guides to around $70bn of capex net of customer prepayments and supplier financing, a measure it introduced with these results, or $90bn to $95bn as reported; its CY2026 spending will therefore run above the guide-basis figure shown.

Total committed obligation, net of cash, as of 31 March 2026 (28 February 2026 for Oracle, reflecting its fiscal year):

These are different in kind: the first is annual spending, the second a stock of commitments at a point in time, so they cannot be added together. The build behind the second is set out in A5.

A2. The capital-allocation reversal

Against that capex, the cash the cohort returned to shareholders, through buybacks and dividends, has gone into reverse. Cohort totals, calendar year:

The 2026 buyback and dividend figures are first-quarter actuals, not full-year, because none of the five guides its capital returns; the 2026 capex figure, by contrast, is full-year guidance. The cross-year comparison on the return lines should therefore stop at 2025. Buybacks in particular run off board authorisations, which set a ceiling but commit nothing: Amazon’s $10bn authorisation still had $6.1bn unused at 31 March 2026.

The reversal is staggered. The crossover year is the first in which a company’s capex exceeded its buybacks plus dividends:

In June 2026 Alphabet went past merely halting returns and raised equity, the first of the five to fund the buildout that way and its own first equity sale in more than two decades. The headline figure, $84.75bn, flatters the cash actually raised: it was struck before the underwriters’ over-allotment options were exercised and counts $40bn of at-the-market capacity that Alphabet expects to use mainly to cover the tax on vesting employee shares, about $30bn of it in 2026.

The new money raised in early June came to about $50bn: roughly $20.7bn of Class A and Class C common stock, a $19.25bn 6.25% mandatory convertible preferred, and a $10bn private placement to Berkshire Hathaway, for general corporate purposes including AI compute.

Oracle reached for equity earlier and more quietly, with a $5bn mandatory convertible in February 2026; with its fourth-quarter results on 10 June it went further, guiding to approximately $40bn of debt and equity in FY2027, including its full $20bn at-the-market equity programme, and no further debt in CY2026. Meta is reported to be weighing a raise of its own; Microsoft and Amazon have not. There is a pattern in the instrument, too. Each leaned on the same vehicle: cash now, a fixed coupon in the meantime (6.25% at Alphabet, 6.5% at Oracle), a claim ranking ahead of the common, and the new shares deferred until 2029, a structure the rating agencies treat largely as equity from day one.

Alphabet alone wrapped its issue in privately negotiated capped calls that curb the eventual dilution up to a share price about 50% above where the stock was sold, the sort of hedge usually attached to convertible bonds. Even the equity, then, has been engineered to behave, for its first three years, like debt.

What the two convertibles cost, and what their conversion would dilute:

A mandatory convertible delivers the most shares when the stock is at or below the issue price and the fewest at or above the threshold appreciation price, set 25% above issue for both, so the share and dilution figures are shown as ranges. Alphabet's capped calls offset the conversion dilution up to a share price about 50% above issue, leaving its net dilution near nil in any realistic case; Oracle has no such hedge, so its net equals its gross. The annual EPS drag is the preferred dividend measured against net income, a charge borne every year until the 2029 conversion. Source: Alphabet and Oracle 8-K and 424B5 filings; net income from the companies' 2025 and FY2026 results (Alphabet $132bn; Oracle $17.0bn to common); Meta per Financial Times reporting, 5 June 2026.

A3. The bond-issuance dataset

The debt map plots the fixed-rate senior notes the cohort issued from September 2025 to June 2026, by maturity, coupon, principal and currency, with the 2020-21 issuance shown for contrast. Six currencies appear: US dollar, euro, sterling, Swiss franc, Canadian dollar and yen.

The standout instrument is the first hundred-year bond from a technology issuer since Motorola in 1997:

One reported deal is not disclosed at tranche level, so it is noted but not plotted in full: Amazon’s debut Swiss-franc issue (CHF 2.82bn across six tranches, per-tranche coupons undisclosed). Alphabet’s yen deal is SEC-registered and fully disclosed: ¥576.5bn across seven tranches, coupons from 1.965% to 4.599% (three to forty year). Floating-rate tranches and the neocloud issuers, CoreWeave and Nebius, are excluded. Microsoft does not appear: it issued no senior notes in the window, its last benchmark sale having been in 2017.

A4. The off-balance-sheet vehicles

Every figure here is reported, not filed, with two exceptions noted below: the structures are built to sit outside the parent’s 10-K, so each number comes from a counterparty’s disclosure rather than the issuer’s.

Oracle finances the Stargate campuses it leases through special purpose vehicles, about $72bn of debt across four of them:

The $72bn sums the first three; the Abilene flagship is a separate venture and is additional. Because the figures are struck on different dates by different sources, the total is indicative rather than exact.

Meta uses two vehicles, about $40bn in all. The Hyperion campus in Louisiana carries about $27bn of debt at 6.58% (rated A+), with Meta holding 20% and providing a roughly $28bn residual-value guarantee, the one item here disclosed in Meta’s own 10-K. The El Paso vehicle, about $13bn that Meta tapped Morgan Stanley and JPMorgan to arrange, was reported in early May 2026 and is still being put together. The Hyperion guarantee, at $28bn, is larger than the $27bn of debt it backstops, so Meta’s contingent exposure there exceeds the debt itself. Source: S&P research update, 21 October 2025 (Hyperion); Reuters and Bloomberg (El Paso).

Microsoft is the sponsor of the AI Infrastructure Partnership, formed in September 2024 with BlackRock, Global Infrastructure Partners and MGX. It targets up to $100bn of capacity once debt is included, a ceiling rather than committed capital; its one deployment so far is the $40bn purchase of Aligned Data Centers in October 2025. Source: partner releases; Bloomberg.

Alphabet touches private credit only at the edges. It provides about $3bn of lease backstops for TeraWulf, disclosed in TeraWulf’s own SEC 8-Ks, the second filed item. And it is the chip supplier to a roughly $35bn private-credit financing from Apollo and Blackstone that buys Google TPUs for Anthropic to lease, surfaced on 28 May 2026 and reported to have closed in early June; as a lease financing it would not appear as Alphabet debt even once funded. Source: TeraWulf 8-Ks; Bloomberg and Reuters.

A5. The committed-obligation and coverage build

The total obligation in A1 is built from four layers, net of cash, as of Q1 2026:

The leases-not-yet-commenced line totals about $822bn across the five. One memo adjustment avoids a double count: the off-balance-sheet SPV debt from A4 (Oracle about $72bn, Meta about $40bn) sits inside this line, not on top of it, because the lease payments are what service that debt. Alphabet’s purchase commitments are the one cleanly disclosed component: $332.4bn, of which $138.0bn is short-term (Q1 2026 10-Q).

Two coverage measures sit beside the obligation, and they answer different questions. Revenue coverage tests whether contracted demand stands behind the spend; cash-flow coverage tests whether the company can fund it from operations.

Amazon does not report remaining performance obligations on the same basis as the others: its $364bn is the company's contractual commitments with original terms over one year, which it attributes primarily to AWS, rather than a like-for-like total backlog. Revenue coverage is not meaningful for Meta, which reports no backlog. Oracle is the outlier on both measures, and its free cash flow is negative, so even its 11.7-year cash-flow figure overstates the cash actually available once capex is taken out.

A6. The cost premium

The premium is measured like-for-like: each off-balance-sheet deal's coupon against the same parent's own long-dated bonds priced at about the same time, not against its blended cost of debt.

Measured instead against a blended cost of debt, say about 4% for Oracle against 7.5%, the comparison mixes short-dated averages with long-dated issuance and overstates the gap to roughly a doubling; it is not used here. The like-for-like premium is itself a floor, because the coupon captures the priced spread but not the value of the structural features described in A4.

A7. Conventions

Period basis. Balance-sheet figures are as of 31 March 2026, except Oracle’s, which are as of 28 February 2026, the last quarter it had filed before publication; Oracle’s RPO, revenue and operating cash flow are from its fourth-quarter release for the year ended 31 May 2026, published on 10 June 2026. Capital expenditure and shareholder returns are stated on a calendar-year basis; for Microsoft and Oracle, whose fiscal years end mid-calendar, the calendar figures are built from quarterly data.

Guidance basis. The 2026 capex figure is full-year company guidance, shown at the midpoint where the company guides a range: Alphabet’s $180bn to $190bn appears as $185bn, Meta’s $125bn to $145bn as $135bn. The 2026 buyback and dividend figures are first-quarter actuals, because none of the five issues capital-return guidance. CY2026 revenue is a forecast; Oracle’s, about $80bn, blends its FY2026 actual ($67.4bn) and its FY2027 guidance ($90bn, reaffirmed on 10 June 2026).

Currency. Non-dollar bond principals are converted to US dollars at rates near pricing and are not marked to current spot.

Reported versus filed. Figures marked “(reported)” were re-checked against the latest reporting before publication, and any deal still being arranged rather than closed is flagged as such. All filing-based figures are taken from the companies’ filings on SEC EDGAR.

• The major listed video games publishers are betting on AI to ease a cost crisis. The productivity gains are real, but most flow to AI tool vendors and cloud infrastructure providers. Publishers capture roughly one-third of the gross gain. The other two-thirds leaves the P&L before reaching the bottom line.

• The five-year cost picture is closer to net neutral than to net savings. Year one is cost-additive on a P&L basis and worse still on free cash flow, as capex on on-prem infrastructure and AI tooling adoption costs front-load.

• AI buys margin defence and pays for it on the same line. The realistic outcome is a three-point absolute lift in operating margin (22% to 25%), against the eight-point expansion the bull narrative implies from labour productivity alone. The missing five points are absorbed by AI tooling and internal adoption costs before reaching the publisher’s bottom line. Separately, AI offsets a little over half of the inflation that would otherwise have lifted the annual cost base by about $37m by 2030.

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The full Excel model is available on request.

The industry’s bet

The major listed video games publishers are running out of ways to make the next AAA project work. AAA, the industry shorthand for the largest budgets and most ambitious productions, has seen costs swell from eight to nine figures over the last decade without a corresponding lift in unit sales. EA, Take-Two, CD Projekt Red, Ubisoft, and Embracer have all spent the past two years cutting headcount, cancelling projects, and closing studios. AI has been a recurring topic on each of their earnings calls this year.

Take-Two’s Strauss Zelnick, speaking at the Interactive Innovation Conference in Las Vegas last month, gave the canonical version of the industry’s answer when asked whether the trajectory is sustainable:

“It’s not really sustainable unless you make massive blockbusters. We certainly can’t deal with exponential growth, we probably can’t even deal with linear growth, in production costs.”

Asked whether AI was the only bet, Zelnick added: “No, but I mean, sort of, if you broaden it and you take out the word ‘AI’ and replace with the word ‘technology,’ which I prefer. I would argue it is our bet.”

The thesis here is that the bet does not pay off the way the bull narrative assumes. The productivity gains in specific functions are real and measurable. The technology works. The problem is where the productivity value goes. It does not stay with the publisher.

The bull case doesn’t consider the full picture

The model is built around a stylised example: a third-party AAA narrative title, US-based studio, Unreal Engine 5, five-year cycle running 2026-2030. The full anchoring is in the appendix.

The lifetime P&L bridges from a no-AI baseline through the bull narrative on AI productivity to the realistic with-AI position, with the offsets that absorb most of the gross gain shown explicitly:

The bull case column shows what the P&L would look like if every dollar of gross AI productivity gain flowed straight through to operating profit. The gross labour compression runs to roughly $36m across the project, which lifts operating profit from $106m to $142m. This is the picture the bull narrative on AI in AAA captures.

The offsets column is where most of the gross gain leaves the publisher’s P&L. About $23m of cost gets added back. Operating profit drops from the $142m bull case to the realistic $119m position.

The math on what the publisher captures is straightforward:

• Gross AI productivity gain (bull case): $142m − $106m = $36m

• Realised AI gain (with AI): $119m − $106m = $13m

• Lost to AI tooling, vendor capture, and offsets: $23m

Value creation flows to AI companies

The largest offset is direct, to AI tool vendors and cloud infrastructure providers. Per-developer subscriptions, cloud API consumption for non-subscription workloads, on-prem GPU infrastructure for sensitive code, and specialist tooling add up to roughly $12m across the project. AI tooling spend runs to roughly 5% of production cost. This is a line item that did not exist on the AAA P&L in 2020.

The second offset is adoption friction in the first two years of the project: tool selection, pipeline integration, legal and IP review of AI vendor contracts, and the productivity drag during the period when engineers are learning new tools rather than producing output. Roughly $5m across the project.

The third offset is senior comp inflation. AI-skilled engineers and creative leads are commanding meaningful premiums in 2025-2026 hiring data. The same labour AI is supposed to compress is the labour that gets more expensive at the senior end. Junior and mid-tier roles, where AI productivity gains are largest, are where displacement falls. The retained labour is the senior tier, where AI productivity gains are smallest and where pay pressure is highest. Roughly $5m across the project.

The companies whose P&Ls genuinely change shape because of AAA AI adoption are Anthropic, OpenAI, Microsoft, Cursor, and the specialist tooling vendors. Not the publishers. The bifurcation in vendor pricing models, between per-seat licensing (Copilot, Cursor) and consumption-based pricing (Anthropic API, AWS Bedrock, ElevenLabs usage credits), does not change the structural picture. Bundled or “free” tooling, where it appears, still extracts value through cloud compute and usage credits downstream. The mediator changes, but the value capture continues.

Costs will hit first before the benefit is realised

The lifetime decomposition flattens what the year-by-year breakdown shows: that AI is a net cost in the early years of the project before becoming a net saving in the middle.

The shape across the years:

• Year 1 (2026): Net cost-additive by $2m. Team is small. AI tools are at half-effectiveness because of integration friction. The studio is paying the heavy upfront costs of adoption. AI tooling spend front-loads while productivity gains ramp behind it.

• Year 2 (2027): Roughly break-even. Productivity is at three-quarters effectiveness, but tooling costs have started to grow with first-round contract renewals at 15-20% above baseline.

• Years 3-4 (2028-2029): The productivity sweet spot. Team is at peak headcount, adoption is mature, AI tools are delivering close to their full effectiveness. Most of the lifetime savings come from these two years.

• Year 5 (2030): Compresses again as tooling costs grow another tier and the team shifts from production to finishing. Savings are still positive but smaller.

The cost profile across the project traces a J-curve: getting worse before it gets better. The J shape is the standard pattern for adoption-cost dynamics: front-loaded costs and slow benefits in the early years, payoff arriving later. For publishers running back-to-back AAA cycles, the implication is that the J-curve resets with each new project. The savings accumulated in the back end of one project are partly given back in the front end of the next, particularly when AI tooling pricing has continued to grow in the meantime.

The cash flow J-curve is sharper than the P&L J-curve

The P&L picture is the cleanest way to think about AI’s impact on the publisher, but it understates the cash flow drag in the early years of the project. Two things move on the balance sheet that don’t show up in the P&L view.

Working capital headwind. Working capital terms shift modestly. Outsourcer payables typically run around 43 days (anchored on Keywords Studios' disclosed FY2023 DSO prior to the EQT take-private). AI vendor spend is paid faster, on net 30 industry-standard terms across Anthropic, GitHub Copilot Enterprise, AWS Bedrock, Cursor, and Azure OpenAI invoiced services, and a portion (annual upfront cloud commitments, prepaid credits) sits as prepaid balance on the publisher's books. The net effect is a small permanent working capital drag of a few hundred thousand dollars by mid-project, smaller than the capex impact and not a material driver of the cash flow J-curve.

Capex on on-prem infrastructure. The $2.5m of self-hosted GPU infrastructure (needed for sensitive code that can't run on third-party cloud APIs) is genuine capex. Cash hits years 1-2 as the build-out completes; depreciation hits years 1-4 at roughly $0.6m per year on a 4-year schedule.

The combined cash flow picture. Layering the working capital change, capex, and depreciation add-back on top of the P&L produces this:

Over the full project, the AI net P&L improvement of $13m converts almost dollar-for-dollar to free cash flow. Lifetime FCF is roughly $13m, conversion close to 100%. The year-by-year texture is where the story is, and the dominant driver of the cash flow J-curve being sharper than the P&L J-curve is the front-loaded capex on on-prem GPU infrastructure, not the working capital shift.

Year one cash flow drag is $3m, roughly 50% bigger than the P&L drag of $2m. The capex hit on on-prem GPU infrastructure pulls cash forward outside of P&L recognition. Year two flips to roughly break-even on cash flow versus a modest P&L gain. Years three through five are when cash flow improvement actually arrives.

For investors looking at the AAA publishers’ cash flow statements through 2026-2028, the early-year drag from AI adoption will be visible if they know to look for it. Free cash flow will look worse than reported earnings during the build phase. This is the cash flow version of the treadmill we describe next.

Headcount: same finding in different units

The bull narrative often frames AI’s benefit as letting publishers ship the same game with fewer people, or the same scope with fewer staff-months. This is the same finding as the cost compression in different units. Expressed in labour rather than dollars, the $36m gross gain in the bull-case bridge above is equivalent to roughly 15-20% of internal direct labour over the cycle, on the order of 20-30 full-time equivalents.

The publisher’s choice is between cutting headcount to capture the saving, or holding headcount flat and reinvesting the released capacity as scope. The disclosed evidence so far suggests publishers cut headcount when forced to during 2023-2024, predominantly to unwind pandemic-era overhiring, and have held headcount roughly flat as AI has arrived, with content ambition rising to match. An alternative reading, increasingly common on earnings calls, is that AI is now being cited as the rationale for cuts that would have happened anyway. The model is agnostic on motive; what matters for the publisher P&L is the net result.

Either way, the answer for the publisher P&L is the same. Whether the released capacity becomes reduced cost (smaller team, same scope) or reinvested ambition (same team, bigger scope), the gross gain still gets absorbed by the AI tooling spend, the adoption friction, and the senior comp inflation captured in the offsets column. The publisher residual stays at $13m. AI’s structural effect on AAA studio headcount is the same as its structural effect on AAA studio cost: real, but mostly captured by AI vendors before it reaches the publisher.

AI is margin defence, with a thin slice of margin expansion

AI delivers two things to the AAA publisher: a modest absolute lift in operating profit, $106m to $119m on the lifetime project (three points of margin), and a partial defence against the salary inflation that would otherwise lift the annual cost base by roughly $37m by 2030. Both are real simultaneously. Neither flows to the publisher’s bottom line at the rate the bull narrative implies, because both are paid for in cash on the same line.

Without AI, salary inflation of 3-5% annually compounds against a labour-heavy cost base. Senior creative and engineering roles inflate faster than the general 3% rate. A studio running a $250m AAA programme in 2026 dollars would be running it at roughly $287m by 2030 on a run-rate basis, just from inflation, before any scope creep. With AI compression layered on top, that cost base runs at about $265m by 2030 instead. AI absorbs roughly 60% of the inflation lift that would otherwise have arrived. (This is the annual run-rate cost base; the inflation impact inside the five-year project model is smaller, because spend is weighted by the development ramp rather than spread flat across all five years.)

This is the treadmill. Publishers who adopt AI keep their cost base running close to flat in real terms. Publishers who don’t adopt watch inflation compound unchecked and end the cycle structurally more expensive than their AI-adopting competitors. The competitive dynamic forces adoption regardless of whether any individual publisher captures meaningful margin benefit, because the cost of not adopting is a structural margin disadvantage versus the rest of the industry.

The defence and the absolute lift are the two real benefits. The cost of both shows up on the same cost line that they are meant to protect. The $12m of AI tooling and $10m of non-tooling offsets are not a separate budget; they sit inside the operating cost base that the productivity gain is meant to reduce. The publisher buys defence against inflation and absolute productivity in the same transaction, and pays for both in cash to AI vendors and to internal adoption.

The bull narrative on AI in AAA implies operating margin expansion closer to eight percentage points (22% to 30%) on the gross labour compression alone. The realistic outcome in the model is three points of absolute expansion (22% to 25%) plus prevention of compression that would otherwise have arrived. The missing five points, between the bull narrative and the realised lift, show up as cost increases on the publisher’s P&L: roughly two and a half points to AI tool vendors and cloud infrastructure providers, and roughly two points to internal transition and adoption costs.

When AAA earnings calls in 2027 and 2028 credit AI for stable margins, the structural reality being described is paid-for stability. That is a real benefit, but it is structurally different from the bull narrative of AI driving margin expansion.

What this means for the AI question on earnings calls

The AAA publishers have run out of other levers. The cost of making the largest games has continued to rise faster than unit sales. AI is the productivity input with the largest claimed gains that hasn’t reached steady-state adoption. The competitive dynamic forces participation regardless of whether any individual publisher captures a meaningful share of the gain.

The model suggests that share is small. Publishers are buying AI tooling at growing enterprise pricing, absorbing real adoption costs, and capturing 36% of the gross productivity gain. Two-thirds flows to upstream technology providers. The result is that publishers spend money on AI tools to maintain parity with each other while transferring wealth to AI vendors.

For the AI question on earnings calls, the question worth asking is what specifically is being claimed. The bull narrative on AI in AAA implies margin expansion, on the assumption that gross labour compression flows straight to the operating line. The model suggests two to three points is the realistic absolute lift. The bull narrative conflates the gross labour compression with the net margin lift. The other five points are real productivity gain, but they flow to AI vendors and are absorbed by internal adoption costs before reaching the publisher’s bottom line. The same applies to free cash flow: the AI net P&L improvement converts almost dollar-for-dollar to cash over the lifetime, but the early-year texture is shaped by capex front-loading on on-prem GPU infrastructure rather than by a permanent cash conversion gap.

The companies making structurally new revenue from AAA AI adoption are not the AAA publishers. They are the AI tool vendors and the cloud infrastructure providers. The publishers pay for the tools. The residual they capture is real. It is also small.

Appendix

A1. The example title

A stylised third-party AAA narrative title, US-based studio, Unreal Engine 5, with the following central case:

Component Value All-in title cost (lifetime, with AI) $356m Production cost (lifetime, with AI) $257m Marketing cost (lifetime, with AI) $99m Cycle length 5 years (2026-2030) Peak direct dev headcount 200 Peak total headcount 280 Lifetime revenue $475m Realised revenue per unit (lifetime average) $32 net to publisher Year-one units 9m Operating margin (with AI) 25% ROI on production cost (with AI) 46%

Anchored against three disclosed reference cases. The Last of Us Part II cost Sony $220m to develop over six years with a peak of about 200 staff (Sony FTC accidental disclosure, June 2023). Spider-Man 2 cost $315m all-in over five years with peak headcount of 264 developers and 116 support staff for 380 total (Insomniac ransomware leak, December 2023). Cyberpunk 2077 cost CD Projekt Red $174m development plus $142m marketing for $316m all-in at launch (CDPR investor disclosure).

For a third-party AAA, costs sit between Sony first-party economics (which avoid 30% platform fees on PSN sales and benefit from cross-promotion) and CDPR’s disclosed figures (which understate true cost by roughly 25-50% due to capitalisation choices under IAS 38). Insomniac’s internal model projected 35% ROI on the $215m production-cost base (excluding the c$100m of marketing), implying roughly $75m of profit on the $390m projected lifetime revenue. That works out to a 19% margin on revenue, comparable to the example title’s 22% baseline.

The model is also cost-side only and excludes cycle-time compression. In principle AI could raise throughput by shortening development cycles, but the time required to learn the tools, rebuild pipelines around them, and validate output offsets much of the nominal time saved during the adoption period, and there is no clean evidence yet of an AAA cycle compressed and attributed to AI. Throughput is a separate question from the cost compression modelled here.

This archetype is a third-party publisher on a licensed engine, buying AI tooling rather than building it. First-party publishers (Sony, Microsoft) capture more of the same productivity gain because they avoid the 30% platform fee; engine owners (EA’s Frostbite, Ubisoft’s Snowdrop/Anvil) can amortise AI integration across multiple studios. The 36% capture rate is specific to the third-party, tooling-buyer case.

A2. Sources for productivity claims

• Engineering compression (10-15%) anchored on: Cui, Demirer, Jaffe, Musolff, Peng & Salz (2025), three randomised field experiments at Microsoft, Accenture and an anonymous Fortune 100 company covering ~4,900 developers, which found a ~26% increase in completed tasks among developers given GitHub Copilot, with the largest gains accruing to less-experienced developers. Discounted heavily for AAA-specific friction: proprietary-engine work, performance-critical code, console-memory budgets and NDA constraints are less tractable for current models than the cloud and enterprise code in that sample.

• QA compression (15-25% internal, 25-35% external) anchored on: Nunu.ai Stormforge case study at 30% on a single workflow, discounted for non-AI automation already absorbed.

• Senior comp inflation (8-12% premium for AI-skilled roles) anchored on: 2025-2026 hiring data from Levels.fyi, Ravio, and Aeqium tech-industry compensation reports.

• Layoff baseline anchored on: 11% of game developers laid off in 2024, with two-thirds of AAA respondents reporting layoffs at their company, per GDC State of the Industry 2025 and 2026 reports.

• AI tooling pricing anchored on: Anthropic's published Claude Code enterprise pricing ($150-250 per developer per month); Cursor pricing from $20/month Pro to $200/month Ultra, with enterprise heavy-user spend layering frontier-model usage on top; GitHub Copilot Business ($19/seat) and Enterprise ($39/seat) per month; enterprise SaaS pricing benchmarks from Vendr.

• Working capital and DPO anchors: Working capital and DPO anchors: Keywords Studios’ disclosed days sales outstanding of 42 days (FY2023 annual report, last public disclosure before the EQT take-private in 2024); Anthropic API prepaid-credits model; enterprise SaaS pricing patterns generally.

A3. Compression rates by function

A4. AI tooling and infrastructure cost build

Across the five-year project, AI tooling and infrastructure costs aggregate to approximately $12m:

The figure grows roughly 40% across the project as enterprise SaaS pricing matures and adoption deepens within the studio.

A5. Aggregate offsets

The non-tooling offsets (adoption friction, integration, legal review, skill transition, senior comp inflation) total roughly $10m. The senior comp inflation line is the AI-specialist scarcity premium above the 3.5% blended wage inflation already applied in the base case, not a re-count of it. Combined with the $12m of AI tooling and infrastructure cost in A4, these account for $22m of production cost offsets. A further $1m of offsets falls on marketing cost (localised marketing assets and store creative absorbed by AI marketing tooling spend), bringing the total to the $23m of offsets shown in the lifetime P&L bridge.

A6. Adoption ramp and pricing trajectory

Salary inflation: internal labour is inflated at a 3.5% blended rate (component assumptions: 3% general, 5% senior creative and engineering), and external outsourcing at 2%.

The 1.4× AI tooling pricing factor by 2030 (7-9% a year) is anchored against three forces.

• Negotiated enterprise SaaS renewal escalators run ~3-7% (Vendr); broad SaaS list-price inflation ran into double digits in 2024 (industry trackers).

• AI tooling specifically has moved faster: Cursor launched a $200/month Ultra tier in June 2025, a 10× step over its $20 Pro tier for heavy users, and GitHub shifted Copilot to usage-based billing from June 2026, exposing heavy agentic users to overage costs above the flat seat price.

• The deeper pressure is vendor economics: the major labs and coding-tool vendors remain loss-making (OpenAI guided to c$14bn of losses in 2026; Anthropic reached its first profitable quarter only in Q2 2026; Cursor ran negative gross margins into late 2025), so even as per-token inference costs fall, the direction of travel on price is up, because usage scales faster as AI embeds into pipelines.

The 1.4× sits modestly above negotiated-SaaS escalation and well below the AI-specific moves seen to date.

A7. Cash flow and balance sheet assumptions

Working capital schedule built from three DPO assumptions. Outsourcer payment terms 43 days, anchored on Keywords Studios’ disclosed FY2023 DSO (last public disclosure before EQT take-private in 2024). AI vendor billing terms 30 days, industry standard across Anthropic, GitHub Copilot Enterprise, AWS Bedrock, Cursor, and Azure OpenAI invoiced services. AI vendor prepaid balance 45 days on a blended basis, reflecting ~25% of AI vendor spend on annual upfront commitments and ~75% on monthly billing. The resulting permanent WC drag is roughly $0.3m over the project life. Capex of $2.5m on on-prem GPU infrastructure, depreciated over 4 years on a straight-line basis, dominates the early-year cash flow texture.

Cash flow timing assumptions:

• Working capital builds years 1-3 and remains permanently elevated; modest scale (~$0.3m)

• Cash capex front-loaded years 1-2 ($1.5m / $1.0m)

• Depreciation evenly distributed years 1-4 at $0.625m per year

A8. AI vendor landscape by P&L line

The companies capturing AI productivity value across the AAA P&L cluster by function. The list is not exhaustive; it captures vendors with disclosed funding and adoption signals as of early 2026. How publishers and engine providers actually engage splits into four modes, and only one returns value to the publisher’s own operating line:

• Licensing and integration: Krafton built its Co-Playable Character on NVIDIA’s ACE digital-human suite, shown at CES in January 2025 and shipping in inZOI (”Smart Zoi” NPCs, March 2025) and the PUBG franchise; ACE also powers NPCs in NARAKA: Bladepoint. These are integrations of a vendor’s technology, paid for in licensing and compute.

• Co-development partnerships: EA partnered with Stability AI in October 2025 to co-develop generative models and tools for art and environment workflows, with Stability embedding its 3D research team inside EA. The value created is shared with, and substantially captured by, the vendor.

• Strategic investment: Inworld AI, the best-funded NPC-dialogue vendor, raised over $50m at a $500m-plus valuation in 2023 with Microsoft’s M12 fund among its backers, and counts NetEase among its game partners. The publisher-adjacent money buys a minority stake in the vendor, not ownership of the technology.

• Building in-house: Microsoft Research, with Xbox’s Ninja Theory, built Muse, a “World and Human Action Model” published in Nature in February 2025 and trained on the game Bleeding Edge. Ubisoft built its Ghostwriter dialogue tool (GDC 2023) and NEO NPC prototype (GDC 2024) internally, with NVIDIA and Inworld as technology partners rather than acquisitions.

• Outright acquisition is rarer: Sony acquired Cinemersive Labs in 2026, folding its 2D-to-3D machine-learning team into SIE’s Visual Computing Group. Engine owners bundle rather than buy: Epic integrated its MetaHuman toolset directly into Unreal Engine 5.6 in June 2025 and changed the licence so MetaHumans can be used in Unity, Godot and other engines.

None of these routes hands the productivity gain back to the publisher for free. Licensing and integration pay the vendor in real time. Building a tool in-house capitalises its cost as salaries and compute. Acquiring a vendor capitalises into the purchase price the very value the vendor would otherwise have charged for. Vertical integration changes who books the margin inside the group; it does not, on its own, return the productivity gain to the publisher’s operating line. For the third-party publisher that licenses rather than builds, the capture leaks out as it is created.

• Roblox’s May 2025 move from Delaware to Nevada wasn’t really about the DExit trend or franchise tax savings. It was a defensive governance architecture built to protect management.

• Six specific provisions, including restricted document access, presumed good faith, pre-funded legal defence, harder director removal, statutory authority to refuse a sale, and a solvency-based takeover defence, together raise the cost of holding Baszucki and the board personally accountable.

• The timing isn’t a coincidence. With 146 child-safety lawsuits now active against the company, the protections Nevada offers have become urgent. Baszucki had the votes to install them before his 60.9% voting control expires by 2036.

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In May 2025, Roblox completed one of the more consequential corporate governance moves in recent gaming history. It reincorporated from Delaware to Nevada. The move was framed as part of the broader DExit trend, with companies leaving Delaware in response to its increasingly unpredictable judicial environment, and the official rationale was unremarkable. Nevada offers a “predictable, statute-focused legal environment.” Delaware’s litigation atmosphere had become uncertain. The board had conducted a “rigorous and thoughtful analysis.”

The reincorporation isn’t primarily about Delaware’s litigation climate. It’s a defensive governance architecture designed to protect Roblox’s management and Baszucki personally from the wave of litigation now underway against the company. It was built precisely because Baszucki had the votes today to install protections that will outlast his voting power tomorrow.

What you need to know first

Delaware has been the corporate home of more than 60% of Fortune 500 companies for decades. It earned that position through the most sophisticated body of corporate case law in the US, run by its specialised Court of Chancery, which operates quickly and predictably with rules companies and lawyers have understood for generations.

Then came a series of decisions that spooked the controlled-company world. The most significant was Tornetta v. Musk. In 2024, the Delaware Court of Chancery found that Elon Musk, despite holding only a 21.9% stake in Tesla, exercised sufficient influence over the board to taint the approval process for his $56 billion compensation package. The court rescinded the award. When Tesla’s shareholders voted overwhelmingly to ratify it a second time, the court still said no. The message was unambiguous. In Delaware, shareholder approval isn’t a reliable safe harbour if a judge decides the process was compromised by a controlling influence.

For founders with significant but sub-majority stakes running their own boards, this was existential. Any board decision made while a founder was in the room could potentially be unwound, regardless of how shareholders voted on it.

The exodus began. Tesla went to Texas. TripAdvisor, Dropbox, The Trade Desk, and dozens of others headed to Nevada. By the time Roblox filed its proposal in April 2025, it was the 18th company in that year’s proxy season to propose leaving Delaware.

Now consider Roblox specifically. David Baszucki, co-founder and CEO, holds Class B shares that carry 20 votes per share. Those shares give him approximately 60.9% of total voting power despite owning only around 7% of the economic interest. He is simultaneously CEO, President, Chair of the Board, and the platform’s founder. Today, he can outvote anyone on anything.

But that ends. The Class B shares automatically convert to ordinary Class A shares no later than March 10, 2036, fifteen years from Roblox’s 2021 direct listing. Several earlier triggers can accelerate this, including his death, disability, or voluntary resignation. After conversion, Baszucki goes from 60.9% voting power to roughly 7%. He can no longer outvote institutional pressure or block governance changes. The mechanisms that currently make him untouchable simply expire.

This is the lens through which the Nevada move makes sense. The reincorporation was completed eleven years before the cliff, using voting power that was guaranteed to deliver the outcome. What Baszucki installed are six provisions that defend against the litigation already happening today, and that survive him losing voting control in 2036.

How Nevada law shields Roblox

Activists can no longer credibly threaten the board

The way an activist hedge fund actually wins isn’t usually by removing directors. It’s by threatening to. Build a 5% stake, run a public pressure campaign, line up enough shareholders for a majority vote, and the board starts negotiating. Boards settle, agree to buybacks, change strategy, or quietly negotiate a CEO exit because the threat of removal is real.

Nevada changes the math. Roblox’s own proxy explains it bluntly: in Delaware, directors on a classified board can be removed for cause by a majority vote. In Nevada, the default is two-thirds, with no cause requirement at all.

Two-thirds is the number to focus on. Baszucki currently controls 58.8% of votes himself, which means any activist needs to win essentially every remaining institutional shareholder to clear the threshold.

Even after 2036, when his super-votes expire and his stake drops to roughly 7%, the two-thirds bar persists. An activist owning 10% of post-conversion Roblox would still need to convince holders of another 57% to vote with them, against a board controlling the meeting calendar and proxy machinery. Not impossible, but close enough that the credible threat disappears.

Without that threat, activists lose the leverage they’d normally use to force change. The remaining tools are public pressure and litigation. As we’ll see in the next two provisions, Nevada has tightened both of those routes too.

Plaintiffs cannot access the documents they need

The 146 families now consolidated in the federal MDL against Roblox are trying to prove a specific thing: that Roblox made conscious decisions to deprioritise child safety in favour of growth metrics. That kind of claim lives or dies on internal documents. Board minutes. Budget memos. Slack messages between executives. Presentations showing how moderation spending was weighed against engagement targets.

In Delaware, those documents were potentially accessible. Any shareholder with a credible basis to suspect wrongdoing could demand internal records under Section 220 of the Delaware General Corporation Law. It’s the opening move in most serious activist campaigns and derivative lawsuits. You demand the documents, you read what management actually said internally, and you build your case from there.

In Nevada, that route is essentially closed. The threshold to inspect even basic records is 5% ownership. For financial records, it’s 15%, and those rights don’t apply to public SEC filers anyway, including Roblox. At Roblox’s roughly $40 billion market cap, you’d need around $2 billion of stock just to look at the articles of incorporation.

Plaintiffs are now limited to what Roblox chooses to disclose publicly and what they can extract through federal court discovery, which is a much narrower and more contested process. And there’s a parallel battle going on at the same time. Roblox’s terms of service push user disputes into private arbitration, which keeps internal documents sealed entirely. The arbitration shield is being challenged under a 2022 federal law called the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, and a California court ruled against Roblox in late 2025. If that ruling holds and arbitration falls, federal court discovery becomes the main route for plaintiffs to access internal records. The Nevada inspection rights restrictions exist to make sure shareholder demands don’t become a parallel route.

Forced arbitration was the first wall around Roblox’s internal documents. Nevada’s inspection rights are the second.

The standard for challenging the board rises sharply

When Tesla’s shareholders approved Elon Musk’s compensation package, they did so by overwhelming margins. Twice. The Delaware Court of Chancery rescinded it anyway. Why? Because the court was willing to look past the vote count and ask whether the process by which the board approved the package was genuinely independent. It found that Musk had exerted enough influence over directors who were supposed to be at arm’s length from him that the approval was tainted at the source. Shareholder ratification couldn’t fix it.

That ruling is the single most important piece of context for the Nevada move. It established that in Delaware, a controlling founder can lose even when shareholders are on his side, if a judge concludes the boardroom process was compromised.

In Nevada, the starting point is the opposite. Directors are presumed by statute to have acted in good faith, on an informed basis, in the interests of the corporation. To rebut that presumption, a challenger has to prove intentional misconduct or fraud. Negligence is not enough. Poor judgment is not enough. A founder influencing supposedly independent directors is not enough, unless you can show the influence crossed into deliberate wrongdoing.

For Roblox, this matters in a very specific way. If a derivative shareholder suit argued that Baszucki’s board approved decisions to cut moderation spending because he wanted better profitability metrics for Wall Street, a Nevada court would start by presuming the board acted properly. Plaintiffs would have to prove the board didn’t just make a bad call. They would have to prove the board made a fraudulent or intentionally wrongful one.

Combined with the inspection rights provision we just covered, you can see the closed loop. You need internal documents to prove intent. You can’t get the documents because of the ownership thresholds. The mechanisms ordinary plaintiffs use to hold a board accountable have all been raised just out of reach of anyone who isn’t already a major holder.

The board can legally refuse a sale

In Delaware, once a sale process is triggered, the board has one primary obligation: get the best possible price for shareholders. This is the Revlon doctrine, and it has teeth. A board that rejects a premium offer on vague “long-term value” grounds faces real legal exposure.

Nevada works differently. Directors are explicitly permitted to consider employees, the community, and the long-term interests of the corporation, not just price. None of these factors needs to be the dominant consideration. The board can weigh them all without being required to demonstrate that they maximised shareholder value.

For Roblox, this is substantive. Imagine an activist accumulates a 12% stake in 2027, with the 2036 voting cliff visible on the horizon, and pushes the board to explore a sale. They argue Roblox is worth more to a strategic acquirer than as a standalone company. They might be right. They might even have an interested buyer.

Under Nevada, Roblox’s board can formally and legally reject that pressure. They can cite the 144 million daily users, many of them children, whose community would be disrupted. The 24,500 developers whose livelihoods depend on the platform. The proprietary infrastructure that no acquirer fully understands. The long-term independence of the platform as a creative ecosystem.

A Delaware board making the same argument has to fight uphill. A Nevada board has statutory authority for it. That is not just a theoretical difference. It is a permission slip for management to say no, and have the law on their side when they do.

This provision matters most after 2036. While Baszucki has 58.8% of the vote, he can simply outvote any sale he opposes. Once the Class B shares convert and his voting block drops to roughly 7%, that direct power disappears. The constituency considerations provision is the statutory replacement for it. The protection survives the founder.

Roblox’s losses become a takeover defence

Nevada statute allows a board to resist a change of control if it believes the resulting entity might become insolvent within a reasonable time. On its face, this sounds like a niche provision that would rarely apply. For Roblox specifically, it’s tailor-made.

Roblox ran a $1.07 billion GAAP net loss in fiscal 2025, the company’s largest annual loss in three years. The company has never reported a profitable year since going public in 2021, and consensus expectations put GAAP profitability several years away.

Any meaningful leveraged offer therefore has to absorb a cost structure that has been unprofitable for half a decade, with no near-term path to changing that. The board has a defensible, numbers-backed argument that virtually any leveraged acquisition creates real insolvency risk for the combined entity. And critically, this argument doesn’t require bad faith. It’s just financial analysis.

That makes it almost impossible for a bidder to overcome. They could present their own financial analysis showing the deal works. The board can simply disagree, and a Nevada court is required by statute to presume the board’s assessment was made in good faith. To rebut that presumption, the bidder would have to prove the board didn’t genuinely believe its own analysis, which is a much higher bar than just showing the math could work the other way. The combination is close to a perfect shield against a leveraged takeover.

Like the constituency considerations provision, this one matters most after 2036. While Baszucki controls the vote, he can block any transaction directly. Once the Class B shares convert, the solvency defence is the board’s statutory replacement.

Executive legal bills are paid until the last appeal

Indemnification agreements between companies and their executives are routine. Roblox has them with every officer and director. Each agreement requires the company to advance legal defence costs as litigation arises, before any determination of fault, on the basis of nothing more than an undertaking to repay if the executive ultimately loses.

The question is what triggers the company’s right to stop paying. In most states, including Delaware, that protection ends if the executive’s conduct crosses into “recklessness” or “gross negligence.” A judge looking at a long evidentiary trail and concluding management was recklessly indifferent to a known harm can cut off the funding.

Nevada effectively raised that bar to intentional misconduct. The advancement of expenses continues unless plaintiffs can prove directors actually wanted the harm to happen. Negligence, gross negligence, even recklessness, none of it is enough on its own. The cheques keep flowing through every appeal.

For Baszucki personally, this matters in a very specific way. He is named or potentially named in a meaningful share of the federal MDL cases. Under Nevada, his personal financial exposure to the MDL grinding through years of discovery, motions, trial, and appeals is essentially zero. The company pays. Even if specific decisions are eventually found indefensible, the legal bills only become his to repay if a court finds he intended the underlying harm.

In complex litigation that means five or more years of high-end legal fees on the company’s tab, paid by Roblox shareholders.

So why did Roblox really leave Delaware?

The honest answer is that Nevada gives Roblox’s management a meaningfully stronger defensive position at exactly the moment they need one.

The litigation pipeline is large and growing. The 146 federal cases consolidated in MDL 3166 are working through procedural questions now, but the underlying facts they will test are decisions Roblox made under Delaware governance. Three of the six Nevada provisions respond to that situation directly. Documents become harder to access. The standard for challenging board decisions rises sharply. Executive legal defence is pre-funded regardless of outcome.

The 2036 voting cliff is the second pressure. While Baszucki has 58.8% of the vote, he can outvote anyone on anything. After 2036, when his Class B shares automatically convert, that drops to roughly 7%. The other three Nevada provisions are responsive to that timeline. Director removal becomes nearly impossible. The board can refuse a sale on non-financial grounds. A solvency-based defence is available against leveraged offers.

What makes Roblox’s case worth examining isn’t that any single provision is unusual. Several other companies in the DExit wave have adopted similar provisions. What’s worth examining is the combination, the timing, and the situation the company finds itself in. The structure was installed during an active SEC investigation, with the federal MDL pipeline visibly building, and eleven years before the founder’s voting control expires. Roblox built it when it could be built, with the votes available to build it, against a backdrop of converging external pressure.

The settlement pattern is informative about what Nevada is really protecting against. Roblox has settled with three state AGs, West Virginia, Alabama and Nevada, for $35.8 million combined, with five state actions still active. These cases were brought under state consumer protection statutes seeking civil penalties and operational commitments. They were always going to be settleable for fixed amounts, because that’s how state consumer protection enforcement works. The federal MDL is a fundamentally different category of case. The 146 plaintiffs are individuals seeking compensatory damages for specific harms suffered as children, brought as tort claims rather than regulatory enforcement. Settlement, if it comes, would require the kind of discovery process that produces internal documents and depositions. That’s the pressure point Nevada is designed to constrain.

For investors, the question isn’t whether the structure is legal. It clearly is. The question is whether you’re comfortable owning a company where the standard mechanisms institutional shareholders use to hold management accountable have been systematically tightened, and where the legal costs of any challenge are pre-funded by the company itself.

For the 146 families in the federal MDL, the question is somewhat different.

Appendix

Primary sources: Roblox filings

• Roblox Corporation, Definitive Proxy Statement (DEF 14A), filed April 17 2025. SEC EDGAR

• Roblox Corporation, Form 8-K (reincorporation completion and voting results), filed June 2 2025. SEC EDGAR

• Roblox Corporation, Annual Report on Form 10-K for fiscal year ended December 31 2024 (filed February 18 2025).

• Roblox Corporation, 2026 Proxy Statement and 2025 Annual Report (filed April 16 2026).

• Roblox Corporation, Nevada Articles of Incorporation as filed May 30 2025. q4cdn.com

The Hindenburg report and SEC investigation

• Hindenburg Research, “Roblox: Inflated Key Metrics For Wall Street And A Pedophile Hellscape For Kids”, October 8 2024. hindenburgresearch.com

• Bloomberg coverage of share price reaction (9.4% intraday decline). bloomberg.com

• SEC active investigation confirmed: Game Developer, February 7 2025. gamedeveloper.com

• SEC Case Closing Report obtained via FOIA, dated May 13 2025: Bloomberg, August 15 2025. bloomberg.com (subscription required)

• Hunterbrook Media, full investigative thread on SEC and FTC probes. hntrbrk.com

Federal multidistrict litigation and state actions

• In re: Roblox Corporation Child Sexual Exploitation and Assault Litigation, MDL No. 3166, JPML Transfer Order dated December 12 2025 — primary source citing 79 actions and tag-alongs at MDL formation. jpml.uscourts.gov

• Updated MDL case count (146 as of April 1 2026): King Law Firm docket tracking. robertkinglawfirm.com

• Consumer Notice MDL update (April 2026). consumernotice.org

• Nebraska AG lawsuit, March 2026: NBC News. nbcnews.com

• Los Angeles County lawsuit, February 2026: NBC News. nbcnews.com

Forced arbitration and the EFAA

• Anapol Weiss summary of California EFAA rulings and 800-parent open letter. anapolweiss.com

• ABC News coverage of board letter and arbitration appeal. abcnews.com

• Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (Public Law 117-90). congress.gov

The DExit trend and Delaware case law

• Tornetta v. Musk (Tesla compensation case): Morris James 2025 Delaware case law review. morrisjames.com

• Maffei v. Palkon (TripAdvisor reincorporation): Torys LLP. torys.com

• Delaware SB 21 amendments, March 25 2025: Fenwick & West. fenwick.com

• Nevada Revised Statutes § 78.335 (director removal threshold). law.justia.com

• State of US reincorporation in 2025 — DExit data: Glass Lewis. glasslewis.com

• Harvard Law School Forum on Corporate Governance — “Is DExit Real?”, January 2026. corpgov.law.harvard.edu

• Summary of Nevada, Delaware and Texas corporate law changes: Harvard Law School Forum, July 2025. corpgov.law.harvard.edu