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CASE 1-6 : ELECTRONIC ARTS IN 1995

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We want EA to be the best place in the industry for producers to work. We have created an environment that is much like the movie business in the 1930s. - Bing Gordon,Executive Vice President Entertainment Production

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Introduction <ul><li>EA had become the largest U.S. provider of entertainment software, with 1994 revenues of over $400 million </li></ul><ul><li>CEO Probst was concerned about imminent changes in the video game industry </li></ul><ul><li>Probst wondered whether EA would be able to afford the development costs required to support all of the new platforms, and which standards be should back. </li></ul><ul><li>Probst worried that EA might miss out on the new markets if it did not act quickly. </li></ul>

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History of the video game industry Phase 1 : The rise and fall of Atari <ul><li>The home video game industry developed in the early 1970s. </li></ul><ul><li>Atari Corporation-a Warner Communications subsidiary-introduced in 1975 a home version of its popular arcade game, Pong. </li></ul><ul><li>Systems allowed user to play a single game. </li></ul><ul><li>Atari had generated more than $200 million in retail sales by 1976. </li></ul>

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<ul><li>Introducing in 1976 the Atari 2600, a programmable video game console with a removable cartridge. </li></ul><ul><li>Allowed a user to play several different games on a single platform by switching cartridges. </li></ul><ul><li>By 1977, had captured almost 40 percent of the market and industry retail sales increased to $420 million. </li></ul>History of the video game industry Phase 1 : The rise and fall of Atari

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<ul><li>Industry’s rapid growth between 1975 and 1977 led a number of companies to introduce new platforms. </li></ul><ul><li>Wholesale revenue dropped and most new entrants abandoned the market. </li></ul><ul><li>Atari, which had adopted a “razor and blades” strategy to help its 2600 platform into as many homes as possible, successfully defended itself against two major platform, Mattel and Coleco. </li></ul>History of the video game industry Phase 1 : The rise and fall of Atari

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<ul><li>Atari’s success was short-lived. </li></ul><ul><li>There were more than 20 companies manufacturing video game software. </li></ul><ul><li>In 1982, consumer deferred hardware purchased, manufacturers were left with swollen inventories. </li></ul><ul><li>Several developers, most hardware manufacturers pulled out of the market, and Atari, teetering on bankruptcy, was divested by Warner. </li></ul>History of the video game industry Phase 1 : The rise and fall of Atari

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History of the video game industry Phase 2 : Nintendo Emerges <ul><li>Nintendo, a Japanese toy manufacturer, decided to enter the U.S. market in 1985. </li></ul><ul><li>U.S. industry had failed to realize that it was not the number, but the quality, of software applications that led consumer to adopt one hardware systems over another. </li></ul><ul><li>Nintendo felt that U.S. companies had limited the potential market by positioning the products too much. </li></ul>

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<ul><li>Nintendo entered the market with the 8-bit Nintendo Entertainment system (NES) </li></ul><ul><li>Followed the “razors and blades” strategy. </li></ul><ul><li>Maintained tight control over the number of games produced for its system. </li></ul><ul><li>Used both in-house software programmers and independent licensees to develop games for the NES program. </li></ul><ul><li>Included in each cartridge a lockout chip that prevented non-Nintendo applications from working on the NES. </li></ul>History of the video game industry Phase 2 : Nintendo Emerges

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<ul><li>Nintendo aimed to have a wide selection of the most original, creative, and exciting games on the market. </li></ul><ul><li>A smash hit product on its hands is Super Mario Bros. </li></ul><ul><li>Established a customer service “hotline” staffed by “game counselors”, a “Nintendo Power” magazine. </li></ul><ul><li>By 1990, one-third of American homes had the Nintendo system, made Nintendo the largest toy company in the world. </li></ul>History of the video game industry Phase 2 : Nintendo Emerges

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History of the video game industry Phase 3 : Say It, Say It, Sega! <ul><li>Nintendo failed to realized several key factors. </li></ul><ul><li>In 1989, Sega Enterprises, a Japanese arcade manufacturer introduced a 16-bit system called the Genesis. </li></ul><ul><li>Its own hit title is “Sonic the Hedgehog”, billed as the fastest game in the market. </li></ul><ul><li>Sega revenues were second only to Nintendo. </li></ul>

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History of the video game industry Phase 4 : Convergence <ul><li>By 1993, a number of platform manufacturers had launched next generation machines based on 32 and 64-bit processors. </li></ul><ul><li>Consumer electronics companies searched for the next big product, powerful companies in other industries – had begun to form alliances to build multimedia systems. </li></ul>

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Company Founding <ul><li>EA was formed in 1982 by Trip Hawkins and also recruited Bing Gordon to form Amazing software. </li></ul><ul><li>Inspired the name of movie studio United Artists, he renamed the company “Electronics Arts” </li></ul>

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Original Business Plan <ul><li>Hawkins believed that video game development was similar to movie development and that a professional run organization could add a great deal of value to the software development process. </li></ul><ul><li>EA’s business model was based on the Hollywood movie studios. </li></ul><ul><li>EA would strive to nurture its software designers through intrinsic and extrinsic </li></ul><ul><li>EA built a unique culture that attracted, developed and retained the best production talent in the industry. </li></ul>

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Original Business Plan <ul><li>EA would design software only for PC market </li></ul><ul><li>EA would produce applications for a number of PC systems </li></ul><ul><li>EA would outsource all manufacturing and assembly of its software, producing in-house only the set of master diskettes, documentation, and packaging </li></ul>

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Company Evolution <ul><li>EA first year brought creative success but sales were slow. </li></ul><ul><li>Hawkins hired an experienced sales executive, Larry Probst, established a direct sales force. </li></ul><ul><li>EA developed a proprietary tool, the Artist Workstation. </li></ul><ul><li>Hawkins recruited celebrities to help design and market EA studio products. </li></ul>

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The 1980s : Company Growth and Products <ul><li>EA had developed a sound reputation for innovative, high-quality games. </li></ul><ul><li>In 1989, EA was marketing over 100 studio titles and distributing and additional 250 through Affiliated Products. </li></ul><ul><li>Sales of EA studios products and Affiliated Label Products produced gross margin of about 70% and 25% </li></ul>

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Crisis in 1989 <ul><li>By 1989, cartridges-based home video game systems had emerged as a dominant game platform </li></ul><ul><li>Generated sales more than a floppy disk game </li></ul><ul><li>Hawkins shifted EA’s focus to the stand alone video game market. </li></ul>

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Electronic Arts in the Early 1990s Backing Sega <ul><li>EA decided to back a Nintendo competitor, Sega Enterprises, and its 16-bit Genesis machine. </li></ul><ul><li>EA’s earnings increased rapidly. </li></ul><ul><li>By 1992, EA had become a clear leder in 16-bit entertainment software. </li></ul>

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Electronic Arts in the Early 1990s Founding 3DO <ul><li>In 1991, EA spun off the venture as an independent company, later named 3DO </li></ul><ul><li>3DO is an advanced home entertainment machine that would leapfrog existing machines </li></ul><ul><li>By January 1995, Hawkins estimated that the worldwide installed base of 3DO systems had reached 500,000 </li></ul>

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Pursuing Educational and Reference Software <ul><li>In the 1990s, EA decided to broaden its product line, another important market segment that EA was weaker in. </li></ul><ul><li>In 1994, EA announced that it would acquire Broderbund Software, made EA shares fell over 20% </li></ul>

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Industry Trends Capital Requirements <ul><li>Development costs for a 16-bit product ranged from $200,000 to $600,000 per product </li></ul><ul><li>Marketing and distribution costs were also expected to rise in the future. </li></ul>

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Industry Trends The PC Market <ul><li>The strong growth in PC-based CD-ROM players was estimated to have siphoned off. </li></ul><ul><li>Over 5 million American households were expected to own “multimedia capable” PCs by the end of 1994. </li></ul><ul><li>Personal computers were still expensive relative ti the Playstations. </li></ul><ul><li>Sega and Nintendo applications are not available on PC </li></ul>

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Industry Trends Interactive Media and Online <ul><li>In the mid-1990s, many companies jostled for position in a world where the PC, the telephone, and the television set linked into a full service interactive network </li></ul><ul><li>The exploding growth in the online services industry presented new challenged to the home video game industry. </li></ul>