InvestMacro

By Johanna Weststar, Western University; Louis-Etienne Dubois, Toronto Metropolitan University, and Sean Gouglas, University of Alberta 

Electronic Arts (EA) is one of the world’s largest gaming companies. It has agreed to be acquired for US$55 billion in the second largest buyout in the industry’s history.

Under the terms, Saudi Arabia’s sovereign wealth fund (a state-owned investment fund), along with private equity firms Silver Lake and Affinity Partners, will pay EA shareholders US$210 per share.

EA is known for making popular gaming titles such as such as Madden NFL, The Sims and Mass Effect. The deal, US$20 billion of which is debt-financed, will take the company private.

The acquisition reinforces consolidation trends across the creative sector, mirroring similar deals in music, film and television. Creative and cultural industries have a “tendency for bigness,” and this is certainly a big deal.

It marks a continuation of large game companies being consumed by even larger players, such as Microsoft’s acquisition of Activision/Blizzard in 2023.

Bad news for workers

There is growing consensus that this acquisition is likely to be bad news for game workers, who have already seen tens of thousands of layoffs in recent years.

This leveraged buyout will result in restructuring at EA-owned studios. It adds massive debt that will need servicing. That will likely mean cancelled titles, closed studios and lost jobs.

In their book Private Equity at Work: When Wall Street Manages Main Street, researchers Eileen Appelbaum and Rosemary Batt point to the “moral hazard” created when equity partners saddle portfolio companies with debt but carry little direct financial risk themselves.

The Saudi Public Investment Fund (PIF) is looking to increase its holdings in lucrative sectors of the game industry as part of its diversification strategy. However, private equity firms subscribe to a “buy to sell” model, focusing on making significant returns in the short term.

Appelbaum notes that restructuring opportunities are more limited when larger, successful companies — like EA — are acquired. In such cases, she says, “financial engineering is more common,” often resulting in “layoffs or downsizing to increase cash flow and service debt.”

Financial engineering combines techniques from applied mathematics, computer science and economic theory to create new and complex financial tools. The failed risk management of these tools has been implicated in financial scandals and market crashes.

Financialization and the fissured workplace

The financialization of the game industry is a problem. Financialization refers to a set of changes in corporate ownership and governance — including the deregulation of financial markets — that have increased the influence of financial companies and investors.

It has produced economies where a considerable share of profits comes from financial transactions rather than the production and provision of goods and services.

It creates what American management professor David Weil calls a “fissured workplace” where ownership models are multi-layered and complex.

It gives financial players an influential seat at the corporate decision-making table and directs managerial attention toward investment returns while transferring the risks of failure to the portfolio company.

As a result, game titles, jobs and studios can be easily shed when financial companies restructure to increase dividends, leaving workers with little access to these financial players as accountable employers.

Chasing incentives and cutting costs

The Saudi PIF has stated a goal of creating 1.8 million “direct and indirect jobs” to stimulate the Saudi economy. But capital is mobile, and game companies will likely follow jurisdictions that have lower wages, fewer labour protections and significant tax incentives.

Some Canadian governments are working to keep studios and creative jobs closer to home. British Columbia recently increased its interactive media tax credit to 25 per cent.

The move was welcomed by the chief operations officer of EA Vancouver, who said “B.C.’s continued commitment to the interactive digital media sector…through enhancements to the … tax credit … 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.”

This may buffer Vancouver’s flagship EA Sports studio, but those making less lucrative games or in regions without financial subsidies will be more at risk of closure, relocation or sale. Alberta-based Bioware — developer of games including Dragon Age and Mass Effect — could be at risk.

Other ways of aggressively cutting costs might come in the form of increased AI use. EA was called out in 2023 for saying AI regulation could negatively impact its business. Yet creative stagnation and cutting corners through AI will negatively impact the number of jobs, the quality of jobs and the quality of games. That could be a larger threat to EA’s business and reinforce a negative direction for the industry.

Game players have low tolerance for quality shifts and predatory monetization strategies. Research shows that gamers see acquisitions negatively: development takes longer, innovation is curtailed and creativity is stymied.

Consolidation among industry giants may cause players to lose faith in EA’s product — and games in general, given the many other entertainment options that are available.

Creative control and worker power at risk

Some have raised concerns that the acquisition could affect EA’s creative direction and editorial decisions, potentially leading to increased content restrictions.

While it’s still unclear how the deal will influence EA’s output, experiences in other industries might be a sign of things to come. For instance, comedians reportedly censored themselves to perform in Saudi Arabia.

The acquisition may also have a chilling effect on the workers’ unionization movement. Currently, no EA studios in Canada are unionized. Outsourced quality assurance workers at the EA-owned BioWare Studio in Edmonton successfully certified a union in 2022, but were subsequently laid off. Fears of outsourcing, layoffs and restructuring could discourage future organizing efforts.

On the other hand, the knowledge that large financial players are making massive profits could galvanize workers, especially considering that before the buyout, EA CEO Andrew Wilson was paid about 264 times the salary of the median EA employee.

The deal certainly does nothing to bring stability to an already volatile industry. Regardless of any cash injection, EA remains very exposed.

About the Authors: 

Johanna Weststar, Associate Professor of Labour and Employment Relations, DAN Department of Management & Organizational Studies, Western University; Louis-Etienne Dubois, Associate Professor, School of Creative Industries, The Creative School, Toronto Metropolitan University, and Sean Gouglas, Professor, Digital Humanities, University of Alberta

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By David Ikenberry, University of Colorado Boulder 

For years, I’ve puzzled over a question that seems to defy common sense: If stock markets are hitting records and tech innovation seems endless, why aren’t companies pouring money back into new projects?

Yes, they’re still investing – but the pace of business spending is slower than you’d expect, especially outside of AI.

And if you’ve noticed headlines about sluggish business spending even as corporate profits soar, you’re not alone. It’s a puzzle that’s confounded economists, policymakers and investors for decades. Back in 1975, U.S. public companies reinvested an average of 25 cents for every dollar on their balance sheets. Today, that figure is closer to 12 cents.

In other words, corporate America is flush with cash, but it’s surprisingly stingy about reinvesting in its own future. What happened?

I’m an economist, and my colleague Gustavo Grullon and I recently published a study in the Journal of Finance that turns the field’s conventional wisdom on its head. Our research suggests the issue isn’t cautious executives or jittery markets – it’s about how economists have historically measured companies’ incentives to invest in the first place.

Asking the wrong Q

For decades, economists have relied on a simple but appealing ratio – Tobin’s Q, named after the famous economist James Tobin – to gauge whether companies should ramp up investment.

They calculate this by dividing a company’s market value – what it would take to purchase the firm outright with cash – by its replacement value, or how much it would cost to rebuild the company from scratch. The result is called “Q.” The higher the Q, the theory goes, the more incentive executives have to invest.

But reality hasn’t conformed to fit the theory. Over the past half-century, Tobin’s Q has gone up, yet investment rates have gone down sharply.

Why the disconnect? Our research points to one key culprit: excess capacity. Many U.S. companies already have more factories, machines or service capability than they can use. By not correcting for this issue, the traditional Tobin’s Q will overstate the incentive that companies have to grow.

To see this, consider a commercial real estate company that owns a portfolio of office buildings. In recent years, with the rise of e-commerce and remote work, many of their properties have been running well below capacity. Now suppose a few new tenants start paying rent and begin absorbing a portion of that empty space. Stock prices will rise in response to seeing these new cash flows, which in turn will lead Q to rise.

Traditionally, this increase in Q would suggest that it’s a good time to invest in new buildings – but the reality is quite different with idle capacity still in the system. Why pour money into building another office tower if existing ones still have empty floors?

This key idea is that what matters isn’t the average value of all assets – it’s the marginal value of adding one more dollar of investment. And because capacity utilization has been steadily eroding over the past half-century, many firms see little reason to invest.

That last point may come as a surprise, but the U.S. economy, with all its factories and offices, isn’t nearly as abuzz with activity as it was after, say, World War II. Today, many sectors operate well below full throttle. This growing slack in the system over time helps explain why companies have pulled back on their rate of investment, even as profits and market values climb.

Why has capacity utilization fallen so much over the past half-century? It’s not entirely clear, but what economists call “structural economic rigidities” – things such as regulatory hurdles, labor market frictions or shifts in cost structure – seem to be part of the answer. These factors can drag businesses into a state of chronic underuse, especially after recessions.

Why it matters

This isn’t just an academic debate. The implications are profound, whether you closely follow Wall Street or just enjoy armchair economic policy debates. For one thing, this dynamic might help explain why tax cuts haven’t spurred investment the way supporters have hoped.

Take the 2017 Tax Cuts and Jobs Act, which slashed the top corporate tax rate from 35% to 21% and introduced full expensing for equipment investments. Supporters promised a wave of new investment.

But when my colleague and I looked at the numbers, we found the opposite. In the four years before the tax cuts, publicly traded U.S. firms had an aggregate investment rate, including intangibles, of 13.9%. In the four years after the tax cut, the average investment rate fell to 12.4% – in other words, no evidence of a bump.

Where did those liberated cash flows go? Instead of plowing this newfound cash after the tax cuts into new projects, many companies funneled it into stock buybacks and dividends.

In retrospect, this makes sense. If a company has excess capacity, the incentive to invest should be more muted, even if new machines are suddenly cheaper thanks to tax breaks. If the demand isn’t there, why buy them?

Even with the most generous tax incentives, the core challenge remains: You can’t force-feed investment into an economy already swimming in excess capacity. If companies don’t see real, scalable demand, tax breaks alone aren’t likely to unlock a new era of business spending.

That doesn’t mean tax policy doesn’t matter – it does, especially for smaller firms with real growth prospects. But for the large, well-established firms that make up the lion’s share of the economy, the bigger challenge is demand. Rather than trying to stimulate even more investment, policymakers should prioritize understanding why demand is sagging relative to supply and reducing economic rigidities where they can. That way, the capacity generated by new investment has somewhere useful to go.

About the Author:

David Ikenberry, Professor of Finance, Leeds School of Business, University of Colorado Boulder

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By Peyton McCauley, University of Wisconsin-Milwaukee and Melissa Scanlan, University of Wisconsin-Milwaukee As demand for artificial intelligence technology boosts construction and proposed construction of data centers around the world, those computers require not just electricity and land, but also a significant amount of water. Data centers use water directly, with cooling water pumped through pipes in and around the computer equipment. They also use water indirectly, through the water required to produce the electricity to power the facility. The amount of water used to produce electricity increases dramatically when the source is fossil fuels compared with solar or wind.

A 2024 report from the Lawrence Berkeley National Laboratory estimated that in 2023, U.S. data centers consumed 17 billion gallons (64 billion liters) of water, and projects that by 2028, those figures could double – or even quadruple. The same report estimated that in 2023, U.S. data centers consumed an additional 211 billion gallons (800 billion liters) of water indirectly through the electricity that powers them. But that is just an estimate in a fast-changing industry.

We are researchers in water law and policy based on the shores of Lake Michigan. Technology companies are eyeing the Great Lakes region to host data centers, including one proposed for Port Washington, Wisconsin, which could be one of the largest in the country. The Great Lakes region offers a relatively cool climate and an abundance of water, making the region an attractive location for hot and thirsty data centers.

The Great Lakes are an important, binational resource that more than 40 million people depend on for their drinking water and supports a US$6 trillion regional economy. Data centers compete with these existing uses and may deplete local groundwater aquifers.

Our analysis of public records, government documents and sustainability reports compiled by top data center companies has found that technology companies don’t always reveal how much water their data centers use. In a forthcoming Rutgers Computer and Technology Law Journal article, we walk through our methods and findings using these resources to uncover the water demands of data centers.

In general, corporate sustainability reports offered the most access and detail – including that in 2024, one data center in Iowa consumed 1 billion (3.8 billion liters) gallons of water – enough to supply all of Iowa’s residential water for five days.

How do data centers use water?

The servers and routers in data centers work hard and generate a lot of heat. To cool them down, data centers use large amounts of water – in some cases over 25% of local community water supplies. In 2023, Google reported consuming over 6 billion gallons of water (nearly 23 billion liters) to cool all its data centers.

In some data centers, the water is used up in the cooling process. In an evaporative cooling system, pumps push cold water through pipes in the data center. The cold water absorbs the heat produced by the data center servers, turning into steam that is vented out of the facility. This system requires a constant supply of cold water.

In closed-loop cooling systems, the cooling process is similar, but rather than venting steam to the air, air-cooled chillers cool down the hot water. The cooled water is then recirculated to cool the facility again. This does not require constant addition of large volumes of water, but it uses a lot more energy to run the chillers. The actual numbers showing those differences, which likely vary by the facility, are not publicly available.

One key way to evaluate water use is the amount of water that is considered “consumed,” meaning it is withdrawn from the local water supply and used up – for instance, evaporated as steam – and not returned to the ecosystem.

For information, we first looked to government data, such as that kept by municipal water systems, but the process of getting all the necessary data can be onerous and time-consuming, with some denying data access due to confidentiality concerns. So we turned to other sources to uncover data center water use.

Sustainability reports provide insight

Many companies, especially those that prioritize sustainability, release publicly available reports about their environmental and sustainability practices, including water use. We focused on six top tech companies with data centers: Amazon, Google, Microsoft, Meta, Digital Realty and Equinix. Our findings revealed significant variability in both how much water the companies’ data centers used, and how much specific information the companies’ reports actually provided.

Sustainability reports offer a valuable glimpse into data center water use. But because the reports are voluntary, different companies report different statistics in ways that make them hard to combine or compare. Importantly, these disclosures do not consistently include the indirect water consumption from their electricity use, which the Lawrence Berkeley Lab estimated was 12 times greater than the direct use for cooling in 2023. Our estimates highlighting specific water consumption reports are all related to cooling.

Amazon releases annual sustainability reports, but those documents do not disclose how much water the company uses. Microsoft provides data on its water demands for its overall operations, but does not break down water use for its data centers. Meta does that breakdown, but only in a companywide aggregate figure. Google provides individual figures for each data center.

In general, the five companies we analyzed that do disclose water usage show a general trend of increasing direct water use each year. Researchers attribute this trend to data centers.

A closer look at Google and Meta

To take a deeper look, we focused on Google and Meta, as they provide some of the most detailed reports of data center water use.

Data centers make up significant proportions of both companies’ water use. In 2023, Meta consumed 813 million gallons of water globally (3.1 billion liters) – 95% of which, 776 million gallons (2.9 billion liters), was used by data centers.

For Google, the picture is similar, but with higher numbers. In 2023, Google operations worldwide consumed 6.4 billion gallons of water (24.2 billion liters), with 95%, 6.1 billion gallons (23.1 billion liters), used by data centers.

Google reports that in 2024, the company’s data center in Council Bluffs, Iowa, consumed 1 billion gallons of water (3.8 billion liters), the most of any of its data centers.

The Google data center using the least that year was in Pflugerville, Texas, which consumed 10,000 gallons (38,000 liters) – about as much as one Texas home would use in two months. That data center is air-cooled, not water-cooled, and consumes significantly less water than the 1.5 million gallons (5.7 million liters) at an air-cooled Google data center in Storey County, Nevada. Because Google’s disclosures do not pair water consumption data with the size of centers, technology used or indirect water consumption from power, these are simply partial views, with the big picture obscured.

Given society’s growing interest in AI, the data center industry will likely continue its rapid expansion. But without a consistent and transparent way to track water consumption over time, the public and government officials will be making decisions about locations, regulations and sustainability without complete information on how these massive companies’ hot and thirsty buildings will affect their communities and their environments.

About the Authors:

Peyton McCauley, Water Policy Specialist, Sea Grant UW Water Science-Policy Fellow, University of Wisconsin-Milwaukee and Melissa Scanlan, Professor and Director of the Center for Water Policy, School of Freshwater Sciences, University of Wisconsin-Milwaukee

This article is republished from The Conversation under a Creative Commons license. Read the original article.