'The hardest year of our life'

'The hardest year of our life'

By Andy Payne, Mastertronic

July 31st 2014 at 9:23AM

Mastertronic's Andy Payne discusses the publisher's current troubles

It’s been a tough year at Mastertronic. Really tough. We could see and feel the onset of the 38 degrees effect; you know - that point at which avalanches begin.

We knew that the business models we had been supporting were becoming unsustainable for us and some of our partners. The stress in the market is everywhere; indeed, every day we read about another studio, publisher, retailer or service company restructuring their business or, worse still, closing their doors and ceasing to trade. Only last week we found out about two major platforms reducing their staff numbers. This week another publisher has started their process of cutting back running costs and overheads. There is pain everywhere.

Ironically, we have been ‘digital’ for ten years now, starting off by selling our own simulators direct to a huge community of fans which we have worked hard to build over the last 15 years at Just Flight and Just Trains. We had to figure out how to actually sell by download, how to bill the customer and how to deliver great service. We worked all that out and we did it. We still do. Our fans increase in number day in, day out and our digital revenues increase also.

But we had to change. We had to avoid that 38 degree moment. We had to decide not to do things that were sending us towards financial ruin. Yes, we had to ‘leave money on the table’ and walk away from some of the nonsense deals that we were offered.

So, we decided to reduce any reliance on retail packaged goods and thus in February we parted ways with our retail sales team who set themselves up to fulfil the remaining demand from packaged goods retailers. In our opinion, the business models at retail for packaged goods are simply unsustainable for a company like Mastertronic. The high costs of goods on console, coupled with full sale or return terms that most retail partners expect, means it’s an ultra-high risk unless you are in real AAA games; and I would argue that these are few and far between.

The publishing of packaged console games that we selected in the past was no longer economic – if indeed it ever was. All packaged goods console publishing involves payment in advance to platform holders and that puts a terrible pressure on anyone’s cash flow. We got caught in the cross fire of the new gen of consoles pushing the current/old gen out superfast. There just was not the tail that some expected. Furthermore, PC budget games are now sold online digitally, as we all know, and there is no longer a real appetite or indeed the specialist retailers who can sell PC games in sufficient volumes to keep the parties interested, us included. That used to be our core business. It is no longer a core business, let alone ours!

Soon after the sales team peeled out of Mastertronic, we were hit with a load of unexpected and untenable returns and write down request from our retail customers. For those of you who don’t know, write downs are when the retailers of packaged goods decide to seek a credit in order to sell your games at a cheaper rate. It is a system built on trust and over time has been expected by retailers all around the globe. Once one retailer marks your games down, others demand the same treatment. Pretty soon you are handing money back to retailers, sometimes months if not years after you have been paid for them. It is a crazy system and one which serves no purpose to developer or publisher.

These unexpected demands just piled more pressure on our cash flow. A few months back, it was obvious that we needed to reach out to our creditors and seek time and patience from them. It has been both humbling and heartening to experience the support from all of our partners. They will remain nameless, they know who they are, but my word, it has been truly awesome.

Then in early April, our majority shareholder from the Netherlands, decided that they wanted to sell their shares and exit the business. That meant I needed to seek a replacement and rather quickly. There were and are people interested in investing in Mastertronic. We have built a business over the long term and one which has proved that it can adapt, time and again. These talks are on-going I am very pleased to say.

However, one creditor decided to seek legal redress in recent weeks for monies owed to him against a loan he put into the business at the back end of 2013. This loan was being paid back slowly, but the creditor lost patience and decided that he wanted it all back immediately. That was all fair enough; the problem was that Mastertronic could not meet this demand. We simply did not have all the money.

We were threatened with the issue of a Winding Up Order, something that is very, very serious and something we needed to protect ourselves against. We got a little extension in return for a payment against the loan, but we faced being officially wound up on Monday 21st of July at 9am, unless we met the debt in full. Consequently, we decided to take action to protect the business from this hostile threat. With great reluctance went into consultation with our staff last week in order to make redundancies. By Friday 18th of July, in advance of the said Winding Up Order, we had made our decisions, spoken to all creditors and agreed to enter into a Company Voluntary Agreement, commonly known as a CVA.

We were set to defend ourselves the following Monday. At 15.55 on Friday 18th July we received communication from the creditor’s solicitor granting us an extension to pay in full. Sadly, the die was cast. Staff had been informed that they would be made redundant and creditors had been informed of the action we had been forced to take as a result of this threat. Sometimes you simply cannot turn back time.

As you can imagine, I was not impressed at all by this, given that I had asked for more time and was granted just 1 week, which I had stated was too short. To be taken to the brink of being wound up and then suddenly told we were being granted more time, stinks of brinkmanship and it has not impressed me or my remaining team all of whom were told last week that they were under threat of redundancy.

Our CVA offer was formally sent to all our creditors on Friday 25th July. We are set to hold a creditors’ meeting on 11th of August to put it to the vote and hopefully gain assent from the creditors.

The plan we have put together allows us to cut all costs not directly attached to digital development and publishing of games. We will close our Cambridgeshire HQ, exit the lease, exit all physical goods activity and make 40% of our staff redundant, sadly.

To say these are testing times is an understatement, but I do feel confident of our creditors’ support and delivering against what we say we will do in an entirely digital world! Put it this way, If we were making something that was no longer in demand, or had the mainstay of our output suddenly made illegal or un-sellable, we would be hard pressed to convince anyone we could change direction and continue to trade. The only real option would be to close down. We could not take the CVA option, it just would not be allowed. However, the difference with us is that our digital business is extremely healthy, indeed the problem we have encountered has been caused by unexpected historic debts from the area we have exited.

We have no problem trading in the future – it’s the past that is the issue. All those who have supported us down the 26 years and 4 months that we have existed, I can only say a massive thank you, we will use your inspiration to adapt and build a more efficient business. To those loyal people we have made redundant and to those to whom we owe money, I can only say a heartfelt sorry, we will ensure we do our very best to clear the debts we owe as fast as possible. I can promise that the remaining team of awesome people at Mastertronic will give 100 per cent to put things right and we will not compromise to set the record straight and do it the right way.