CASE 1-6 : ELECTRONIC ARTS IN 1995

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

Introduction EA had become the largest U.S. provider of

entertainment software, with 1994 revenues of over $400 million

CEO Probst was concerned about imminent changes in the video game industry

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.

Probst worried that EA might miss out on the new markets if it did not act quickly.

History of the video game industryPhase 1 : The rise and fall of Atari The home video game industry

developed in the early 1970s. Atari Corporation-a Warner

Communications subsidiary-introduced in 1975 a home version of its popular arcade game, Pong.

Systems allowed user to play a single game.

Atari had generated more than $200 million in retail sales by 1976.

Introducing in 1976 the Atari 2600, a programmable video game console with a removable cartridge.

Allowed a user to play several different games on a single platform by switching cartridges.

By 1977, had captured almost 40 percent of the market and industry retail sales increased to $420 million.

History of the video game industryPhase 1 : The rise and fall of Atari

Industry’s rapid growth between 1975 and 1977 led a number of companies to introduce new platforms.

Wholesale revenue dropped and most new entrants abandoned the market.

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.

History of the video game industryPhase 1 : The rise and fall of Atari

Atari’s success was short-lived. There were more than 20 companies

manufacturing video game software. In 1982, consumer deferred hardware

purchased, manufacturers were left with swollen inventories.

Several developers, most hardware manufacturers pulled out of the market, and Atari, teetering on bankruptcy, was divested by Warner.

History of the video game industryPhase 1 : The rise and fall of Atari

History of the video game industryPhase 2 : Nintendo Emerges Nintendo, a Japanese toy manufacturer,

decided to enter the U.S. market in 1985.

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.

Nintendo felt that U.S. companies had limited the potential market by positioning the products too much.

Nintendo entered the market with the 8-bit Nintendo Entertainment system (NES)

Followed the “razors and blades” strategy. Maintained tight control over the number

of games produced for its system. Used both in-house software programmers

and independent licensees to develop games for the NES program.

Included in each cartridge a lockout chip that prevented non-Nintendo applications from working on the NES.

History of the video game industryPhase 2 : Nintendo Emerges

Nintendo aimed to have a wide selection of the most original, creative, and exciting games on the market.

A smash hit product on its hands is Super Mario Bros.

Established a customer service “hotline” staffed by “game counselors”, a “Nintendo Power” magazine.

By 1990, one-third of American homes had the Nintendo system, made Nintendo the largest toy company in the world.

History of the video game industryPhase 2 : Nintendo Emerges

History of the video game industryPhase 3 : Say It, Say It, Sega!

Nintendo failed to realized several key factors.

In 1989, Sega Enterprises, a Japanese arcade manufacturer introduced a 16-bit system called the Genesis.

Its own hit title is “Sonic the Hedgehog”, billed as the fastest game in the market.

Sega revenues were second only to Nintendo.

History of the video game industryPhase 4 : Convergence By 1993, a number of platform

manufacturers had launched next generation machines based on 32 and 64-bit processors.

Consumer electronics companies searched for the next big product, powerful companies in other industries – had begun to form alliances to build multimedia systems.

Company Founding

EA was formed in 1982 by Trip Hawkins and also recruited Bing Gordon to form Amazing software.

Inspired the name of movie studio United Artists, he renamed the company “Electronics Arts”

Original Business Plan 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.

EA’s business model was based on the Hollywood movie studios.

EA would strive to nurture its software designers through intrinsic and extrinsic

EA built a unique culture that attracted, developed and retained the best production talent in the industry.

Original Business Plan

EA would design software only for PC market

EA would produce applications for a number of PC systems

EA would outsource all manufacturing and assembly of its software, producing in-house only the set of master diskettes, documentation, and packaging

Company Evolution EA first year brought creative success

but sales were slow. Hawkins hired an experienced sales

executive, Larry Probst, established a direct sales force.

EA developed a proprietary tool, the Artist Workstation.

Hawkins recruited celebrities to help design and market EA studio products.

The 1980s : Company Growth and Products EA had developed a sound reputation

for innovative, high-quality games. In 1989, EA was marketing over 100

studio titles and distributing and additional 250 through Affiliated Products.

Sales of EA studios products and Affiliated Label Products produced gross margin of about 70% and 25%

Crisis in 1989

By 1989, cartridges-based home video game systems had emerged as a dominant game platform

Generated sales more than a floppy disk game

Hawkins shifted EA’s focus to the stand alone video game market.

Electronic Arts in the Early 1990sBacking Sega

EA decided to back a Nintendo competitor, Sega Enterprises, and its 16-bit Genesis machine.

EA’s earnings increased rapidly. By 1992, EA had become a clear

leder in 16-bit entertainment software.

Electronic Arts in the Early 1990sFounding 3DO

In 1991, EA spun off the venture as an independent company, later named 3DO

3DO is an advanced home entertainment machine that would leapfrog existing machines

By January 1995, Hawkins estimated that the worldwide installed base of 3DO systems had reached 500,000

Pursuing Educational and Reference Software

In the 1990s, EA decided to broaden its product line, another important market segment that EA was weaker in.

In 1994, EA announced that it would acquire Broderbund Software, made EA shares fell over 20%

Industry TrendsCapital Requirements

Development costs for a 16-bit product ranged from $200,000 to $600,000 per product

Marketing and distribution costs were also expected to rise in the future.

Industry TrendsThe PC Market

The strong growth in PC-based CD-ROM players was estimated to have siphoned off.

Over 5 million American households were expected to own “multimedia capable” PCs by the end of 1994.

Personal computers were still expensive relative ti the Playstations.

Sega and Nintendo applications are not available on PC

Industry TrendsInteractive Media and Online

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

The exploding growth in the online services industry presented new challenged to the home video game industry.