Split Fiction Boss Hopes AA Games Don't Take Over The Industry Completely

Hazelight boss Josef Fares urged publishers not to abandon AAA development following the commercial success of Sandfall's Clair Obscur: Expedition 33, a 2025 breakout reportedly made for under $10 million and sold below $70, arguing the industry needs both lower-budget 'AA' hits and big-budget blockbusters. Fares noted Hazelight's own budgets have increased (Split Fiction was nearly double the budget of It Takes Two) while still being classified as AA, warned that budgets over ~$100M tend to make stakeholders more risk-averse, and said Hazelight is working on an unannounced title with co-op remaining core to its design philosophy.

Analysis

Market structure: The article signals a bifurcated market: low-cost "AA"/indie breakouts (budgets < $10M) are creating episodic winners, while true blockbuster AAA franchises (budgets > $100M) remain capital-intensive and concentrated with large publishers (MSFT, SONY, TTWO). Winners: engine/middleware providers (Unity (U)), diversified platform owners (MSFT, SONY, NTDOY) and publishers with strong balance sheets able to fund risk (MSFT, TTWO). Losers: small-cap publishers/holding companies that pivot entirely to low-margin AA without scaled distribution (e.g., highly leveraged private studios / weak balance-sheet peers).

Risk assessment: Tail risks include a funding pullback by major publishers if a string of AA flops compresses returns (credit-spread widening for mid-cap publishers by 200–400bp within 6–12 months) or regulatory/antitrust action on platform monetization that compresses margins. Short-term (days/weeks): sentiment-driven re-ratings around breakout indie hits; medium-term (3–12 months): pipeline shifts and capex reallocation; long-term (12–36 months): structural mix between AA and AAA affecting aggregate industry R&D spend and console cycle economics. Hidden dependencies: discoverability (store algorithms), engine licensing terms, and console OEM release calendars drive revenue more than dev budgets alone.

Trade implications: Prefer long exposure to large-cap platform/publisher names and tools providers that win regardless of AA/AAA mix: MSFT (MSFT) and Unity (U) over next 6–18 months; hedge with selective short exposure to over-levered mid-cap publishers or EM-themed games conglomerates with high leverage. Options: buy 9–12 month calls on MSFT/SONY ahead of holiday release windows while selling near-term implied vol to finance. Rebalance away from speculative small-cap gaming names and into entertainment/IP owners and engine vendors.

Contrarian angles: Consensus may over-extrapolate the indie breakout — historically (2012–2016) indie surges led to consolidation and platform-favored winners, not permanent share reallocation. The market may be underpricing the value of scalable IP and AAA network effects (live services, back catalog), so long-duration exposure to strong IP owners could be underowned. Unintended consequence: a rush to AA could increase discoverability risk and worsen monetization per title, amplifying winner-take-most dynamics that favor large-cap owners.

Key Decisions for Investors

• Establish a 1.5% long position in Microsoft (MSFT) and a 1% long position in Sony (SONY) across the portfolio within 30 days to capture platform/IP resilience; target a 12–24 month horizon and consider trimming if either stock outperforms by +25%
• Initiate a 1% long position in Unity Software (U) as a structural play on both AA and AAA development demand; hold 6–18 months and add on pullbacks >15% from entry
• Open a 6–12 month call diagonal on MSFT (buy 12-month ATM calls, sell 2–3 month calls) sized to 0.5–1% notional to monetize expected volatility around holiday releases while financing premium decay
• Establish a 0.5–1% short position in over-levered/volatile mid-cap gaming companies (e.g., speculative public/OTC studios with weak free cash flow); use credit-spread widening >200bp or revenue miss as a stop-trigger within 3–6 months
• Reduce aggregate small-cap gaming/entertainment exposure by 2–4% and redeploy into large-cap publishers and middleware over the next 1–3 months, re-evaluate after major industry events (E3/holiday launches) or if AA conversion rate to hit-rate >10% industry-wide.