Tag Archives: business ethics

Saving video games from publishers

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There’s big money in video games. No one can deny that, especially now that the definition of casual gaming has changed from Wii type games, to games on your phone that mimic some really old school type flash games (bejeweled for example). One of the largest game publisher is EA, they have been notorious for making both amazing games (BF4), amazingly bad games, amazing games with poor execution (SimCity), and amazing cash grabs (Dungeon Keeper iPhone). However, it’s not alone in trying to destroy gaming.

Zynga made a pretty big run at the title and likely helped shape the current state of our gaming industry. They were the original most successful company in facebook for gaming coming up with Mobwars and Farmville. They’ve been replaced with King.com (Candy Crush) now though and have nearly gone out of business. At one point they had a higher valuation than Facebook.

The point of these games is similar to a casino. Keep you coming back and keep you putting money into the machine. They design games to be addicting and put frustrating blockers in your way to entice you to pay money to overcome those obstacles. They technically are “Free-to-play” but they certainly aren’t “free-to-have-fun”. For example, about a year ago Real Racing 3 came out and to unlock everything with cash, it would cost $503!

The article that got me thinking about this topic highlights a 1997 game called Dungeon Keeper which has been released on mobile platforms. In the game you build a dungeon and try to kill heroes that come through and kill your monsters. One of the things you do is dig out spaces for your dungeon, this used to just take a minute or two in game time. Well, EA did it’s little cash grab option with it and now that same space will take roughly 30 hours to mine out unless you pay them money to speed that up! Here’s a video with a nice little summary of the topic.

Now, we know that this hasn’t been limited to mobile games for some time. It’d hit the hardcore gamers in the form of Downloadable content (DLC) and in many cases would be a $15 or so charge to make the game functional on top of the $50-$60 you already paid for the game. In some cases they’ll also charge you for other visual upgrades and stuff like that.

In some cases the companies are doing it because it’s a beloved franchise and they know people will fork over the money for it even if they’ve vowed to never buy from that company again (BF4 after SimCity debacle for instance). This is because they are able to charge monopoly prices being the only game in town.

In other cases, they are able to charge this behavior because of the addictiveness of the game and the pressure of your peers playing the same game. It’s a casino mixed with keeping up with the Joneses mentality. The worst of the worst and company are pulling in as much money as they can on it. In many cases those games are straight up copies from other companies – or at least the game mechanics are the same.

This has made some people discouraged over the future of the gaming business model. I believe that we have some of the most generous people in the world in gaming. You have the Extra-Life fund raising event, HumbleBundle, and a ton of other things like that. There are also really honest folks out there trying to break into the industry, just look at Steam Green Light, Kickstarter Games (check out KBMOD’s Crowdsourced corner), and just the sheer number of new games and apps that have a single price and are honest about their pricing (this link will take you to a list of games that are pay upfront or honest free to play).

Which makes me think that we have two different type of people running gaming companies. We clearly have psychopaths at the head of the company and normal regular people trying to do right by their customers. I think the hardest thing is, we have honest people working for those psychopaths, which is unfortunate.

What can we do as gamers and employees? Well, if you think your CEO is a psychopath leave; it’s going to be an unhealthy work environment in general. Secondly, if we want to see those business models die, educate your friends on how horrible this movement is for gaming in general and point them to cheaper alternatives that aren’t cash grabs. Help inform your friends that aren’t savvy about this. Send them links to games that are better, more fun, and less vile in their pricing schemes.

If you have any recommendations for honest, safe gaming, let me know in the comments!

Intellectual dishonesty in corporate America, CEO Salaries

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Apparently CEOs are upset that the Security and Exchange Commission is going to require calculation of CEO pay based upon median salary of all employees rather than Mean or average. They argue that this would burden them with unnecessarily complex calculations. This of course is an absurd statement. Let’s do a thought experiment to walk through the difference between averages and medians.

You, a friend and Bill Gates get on an elevator, your current net worth is $100,000, your friend’s is $200,000 while Bill Gates is somewhere near $60 Billion. The average net worth of the three of you would be $20 billion, while the median is $200,000.  The difference in ratio between these examples are staggering. In the example of averages, Bill Gates is only 3:1, while in the second example it’s 300,000:1. Major difference correct? This example is specifically designed to highlight the massiveness of the differences between averages and medians.

As you can see in the chart above with a skewed distribution there will be a gap between the median and mean. We hear this routinely when people discuss home prices, they are always discussed in medians, because the average price of a home is positively skewed by millionaires in most cities. Like the one above.
So what would the difference in salaries be if salaries are calculated off of median rather than means? Well, let’s use some real numbers, in 2004 the US the average annual income was: $60,528 while the median was $43,318 (source wikipedia). We’ll look at the extremes for ratio difference compared to these numbers, the JC Penny CEO earned 1795:1 the mean worker, so his salary could have been: $108,647,760 for the Mean compared to $77,755,810 or $31 million less (obviously the mean and median salaries for JC Penny’s employees are lower than the median or mean values for the US). On the lower end the CEO for Agilent Technologies earn a measly 173:1 or (mean) $10,471,344; (median) $7,494,014 or $3 Million more. 
Limiting CEO salaries based on the median means dramatically less money for the CEO. It also highlights disparity in numbers of people that are making really low salaries. I would imagine that for a company like McDonald’s or Wal-Mart the median salary for employees is between 20-30k/year, which would drive down the maximum salary well down if the limit is something like a ratio of 100 (median of 25k*100 = 2,500,000). 
The true concern of the complexity comes from not the new method of calculating the maximum ratio a CEO can earn using medians – especially as it’s built into excel (=average()/=median() ) and nearly all financial tools, but in the complexity of creating compensation packages to get around that law. If the law is strictly implemented where there is absolutely no wiggle room where all stock options, bonuses, and base salary cannot be above some set ratio on the median salary, then the only way to pay CEO’s more is to shift that median up. This would impact profits and most likely profit margins. A way around this would be to outsource manufacturing and exclusively design in the US thus shifting up median salaries. It will be interesting to see how CEOs and leadership address this.
Otherwise they might have to make a lot less money per year and save shareholders a lot of money.

MBAs, Ethics and Morals

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Yesterday on Facebook I started quite the little discussion after posting a discussion about MBA education based on an article on Bloomberg. The author of the article, a professor at the University of Chicago Booth School of Business. Essentially the article argues that the method used to discuss ethics results in amoral education. What this is saying isn’t that they are teaching a lack of morality, it’s that they aren’t teaching the actual moral result of these choices in a way that makes it clear that one option is moral while the other is not.   Without explicitly stating which option is moral or immoral, it can create ambiguity (we know that business people hate uncertainty) and the illusion that either one of the options could be moral.

Why does this cause a problem? First, not many people actually have any education in ethics to begin with. If someone put together a list of 8 must take classes ethics would be somewhere around 100. Ethics courses aren’t easy and they make you really look at how you think about things, figure out why you think that way and try to make you change the way you think. They aren’t always successful, but ethical thinking is like critical thinking, the more exposure you have to it the more you are able to practice it. The second reason why this is a problem, is that many people going into business school may have less scruples, be willing to take advantage of people or are amoral. Not everyone is, but we know from research that business leaders tend to have personality traits of psychopaths. We also know that in games like prisoner’s dilemma business leaders act the most ruthless (same goes for economists). The only question is the direction of causality. Does business school create these types of people, does it exacerbate these personality types or do these people go into business already behaving in these manners? I don’t know the answer to that question.

While I was in the Netherlands I listened to a seminar that discussed the way that ethics is taught within the Dutch military. All new recruits must go through ethics courses and then every so many years they are required to recertify on the ethics course. The goal is to bring in new officers with a sense of ethical norms that can prevent atrocities and allow officers to do the right thing when they need to. Of course the military believes there is a fine line between creating a thinking solider and a solider that ends up in analysis paralysis because they are going through too many ethical situations in their mind. The goal of the education is to ingrain many of these ethical situations so reaction is more instinctual even for the ethical choice.

I believe that there is a similar balance that needs to be considered in business. What are the social norms for ethical behavior in many institutions? Well, I think that this really does depend on the institution and the environment that they are in. I think there are no ethical norms within the big banks, which has been played out over and over again with the sub prime, then LIBOR and now HSBC’s money laundering. Perhaps the ethics are there, it’s just considered ethical to make as much money as you can without getting caught doing something that is obviously screwing someone over. The question becomes, can a truly ethical MBA graduate come into an environment and succeed? I think that they will be able to do well compared to your average person, but they will quickly be out shined by their unethical colleagues.  These are businessmen, they understand incentives well, so they will adjust their behavior based on their incentives. This is a normal and rational thing to do.

Are there ways to instill more ethical behavior at companies? I think there are ways. Some are through legal changes, which lower the bar for what is considered a crime when it comes to fraud and unethical behavior. This would either drive the behavior more underground (likely) or change some of it. Other ways would be through forcing a cultural norm where these companies are punished through lack of investment and loss of business. This one has a coordination issue. Many people have no qualms about ethical issues that would use a service like this. Additionally, the sheer number of firms behaving unethically makes it unrealistic for a person to buy ethically made products. I wrote about this at the Urban Times, noting that Apple is being singled out when the entire industry behaves in this manner.

Ethics needs to be taught at many different levels, it encourages critical thinking and self reflection. Developing ethical leaders in all respects of business and politics should be a goal of all universities. However, ethics courses are being cut and many people just don’t see the value in them.