March 28, 2025 • 35 mins
This week, we take a look at the increasing tension between the US and Europe and the future of defense spending. Plus, New Balance CEO Joe Preston on how he’s kept the brand fresh after all these years. Later, a look at the $200 billion video game market.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:20):
This is Wall Street Week. I'm David Weston, bringing you
stories of capitalism, putting new wine into old bottles. We
take a look at one company that has remade itself
successfully more than once, New Balance, and one that doesn't
seem to be able to make the turn Hurts, and
the whole world of gaming is waiting for the sixth
(00:40):
edition of Grand Theft. Auto straus Zelnik of Take two
explains why he left a successful career as a movie
mogul to get on the ground floor of video game creators.
But we start with the story about shock and awe,
something we hear about as a tactic in warfare, but
that usually doesn't come up in public exchanges. Among those
who have been allies for eighty years.
Speaker 3 (01:04):
The EU treat us very very unfairly, very badly.
Speaker 4 (01:07):
We have to rely on our own defense industrial base.
We cannot buy American products when it goes to defense,
because you know, there is a string attached. There is
a double key.
Speaker 2 (01:23):
Zenny mitten Bedows is editor in chief of the Economist
and has a front row seat for the increasingly strained
relations between Western Europe and the United States and how
the Europeans are taking it.
Speaker 5 (01:36):
This is the first time I've been in New York
since the President Trump took over, since the inauguration, and
I'm struck at how relatively little I think people here
are focused on, just how dramatically the perception of the
US actually around the world, but particularly.
Speaker 6 (01:51):
In Europe, has changed.
Speaker 5 (01:52):
But what's happened in the last few weeks has really
shocked Europeans because they have realized that a significant element
of this administration is outright hostile to Europe, doesn't like Europe,
particularly the European Union as a concept. One shouldn't exaggerate
too much from sort of individual moments of theater, because
this is an administration that loves moments of theater. But nonetheless,
(02:13):
that dressing down of President Zelenski in the Oval Office
had a visceral reaction in Europe because it was watched
by everyone I met had watched it, even people who
aren't usually interested in current affairs, and everyone had been
shocked at the treatment of this man, this brave man
speaking in his third language, by the President of the
(02:35):
United States. And those two some powerful examples of I
think a recognition in Europe that actually maybe the United
States is not a country that Europe can rely on.
And the country that created the North Atlantic, the NATO Agreement,
the country that built the post war order, the country
of the United States, there's always been the backbone of
(02:55):
this post war system.
Speaker 6 (02:57):
I think Europeans have just been really shocked.
Speaker 5 (02:59):
And of course things can change, and of course there
can be a change in the relationship with Ukraine and
all of those things, but even if things now go
to a more conventional place, Europe has been shocked and
shocked such that I think every single politician in Europe
is having to think about can we rely on the
(03:19):
United States? Can we really only think about a world
where we spend more and we have a NATO which
is the same except that we spend more, or do
we need to think about having a plan B in
case this really is a country that is hostile to
us and it is outright bent or not having our
interests at heart. And that's a really big shift for Europe,
(03:40):
and I think that it's something that is going to
the upside. I hope is that it will be one
of those moments that galvanizes Europe.
Speaker 2 (03:48):
When you say Europe is shocked, I guess My question
is shocked into action. If you're Europe, what do you
do well?
Speaker 5 (03:54):
That's always the question with Europe, that you can, you know,
you can have a lot of pearl clutching and then
nothing actually happens. But I think you've seen enough already
to take a view that this is different. If you
look at what's happened in Germany, and you know Friedrich Meltz,
the soon to be Chancellor of Germany, very clearly saying
it's five minutes to midnight.
Speaker 6 (04:15):
We will do everything it takes.
Speaker 5 (04:17):
And that's the phrase remember that as associated with Mario Dragi,
who was during the euro crisis president of the European
Central Bank, and he said they would do everything that
it takes to hold the euro together. The same language
Finich Melts very clearly signaling the Germany, which is of
course the biggest economy in Europe and the one that
has been obsessed with its you know, fiscal prudence and
(04:38):
its debt break, would do everything that was necessary to
increase defense spending. And you've seen other countries in Europe,
you know Poland talking about nuclear weapons. You've seen big changes,
and I think this could be one of those moments
where the European commissioners galvanized.
Speaker 6 (04:54):
They're making it easier to you.
Speaker 5 (04:56):
Know, find resources to pay for a very signficant increase
in defense spending.
Speaker 6 (05:01):
And to give you a scale.
Speaker 5 (05:02):
Of it, the European Union countries spend about one point
eight percent of GDP on defense, which is well below,
as President Trump would tell you, the two percent that
they're supposed to, and certainly nowhere near enough if they
can't rely on the United States. How much Europe needs
to spend depends on how you know, darker scenario you
want to paint in terms of the US turning its
(05:24):
back on Europe and the threat posed by Vladimir Putin.
But at the very least, it's the doubling of defense
spending three point five three point six percent of GDP.
Speaker 6 (05:32):
That's a huge.
Speaker 5 (05:33):
Increase in defense spending. And so one question is will
the Europeans actually do it? Because they're slow growing, they're indebted,
they're high tax economies. I think this German shift is
a very very big moment because I think it signals
that the one country that has the capacity to borrow
a lot more is intending to do so.
Speaker 6 (05:51):
The European Union.
Speaker 5 (05:53):
Can as it did during COVID actually issue joint bonds to.
Speaker 6 (05:56):
Pay for this.
Speaker 5 (05:57):
I think you will have more what you call safe
assets in Europe, more commonly issued debt, which investors actually
may well lap up because people will be looking for
a non dollar.
Speaker 6 (06:09):
Asset that is a safe asset.
Speaker 5 (06:11):
So I think you could see a big shift in
European financial markets.
Speaker 6 (06:15):
If this money on defense is spent well and spent.
Speaker 5 (06:18):
Effectively, you could see a kick starting to technological innovation.
Look at drone capability that's being developed in Ukraine. If
the Europeans work with the Ukrainians provide the financial wherewithal
to really kind of develop and scale up that capability,
That's an area where Europe is now at the cutting
(06:39):
edge of military infrastructure. That's one of the reasons why
European defense docks have been soaring, because there is the
potential in Europe.
Speaker 6 (06:47):
To do that. Now, there's a lot there's a ton
of things that could go wrong.
Speaker 5 (06:50):
Never you know, overest never underestimate European country's ability to
think about their parochial interests rather than.
Speaker 6 (06:57):
What makes sense for Europe as a whole.
Speaker 5 (06:59):
One of the consequences of what Donald Trump has done
may well be to unify Europe, to increase its defense
spending substantially, which is of course what he wants, but
actually also to kickstart Europe's economies and to kickstart its
capability of having a financial asset that would over time
be something which might be eventually become an alternative.
Speaker 6 (07:21):
To the dollar.
Speaker 2 (07:23):
Countries in Europe are under pressure to figure out how
to serve their individual interests while addressing a priority for
the whole union. We may, as you say, be seeing
the political will in much of Europe to move forward.
Is there the capacity, and particularly is the capacity in leadership.
You've got to make some tough decisions about where to
(07:44):
get the money and how to spend it you have.
Speaker 5 (07:46):
And I think the easy answer to your question would
be to say, look around Europe and there are only
kind of political pigmies. But actually I think that's and
I've made that argument myself, but that's slightly unfair if
you look at, for.
Speaker 6 (07:59):
Example, Meltz, who.
Speaker 5 (08:03):
I interviewed before the German election, and I asked him
about some of these questions, what did Europe Germany need
to do on defense and so forth? And he was
unwilling to really sort of put his neck out he was.
He was quite cautious, and he's a man who's been
a staunch Atlanticist all his life. And you know, you
could forgive that, I suppose because it was just before
(08:24):
an election and he doesn't want to say anything terribly controversial.
But it made me think, made me worry exactly as
you suggest that is this man someone who can really,
you know, step up if needed. And frankly, what we've
seen since the election, in light of what the President
Trump has done, has actually been.
Speaker 6 (08:39):
I think pretty remarkable.
Speaker 5 (08:42):
Others have real constraints. Emmanuel Markran President of France, I
think loves grand, grandiloquent language and grand gestures and I'm.
Speaker 6 (08:51):
Sure he wants did all of this.
Speaker 5 (08:52):
In fact, to his credit, he was the man who,
you know, a few years ago said to us that
NATO was brain dead and that Europe needed more strictic autonomy.
Speaker 6 (09:01):
He's worried about this for a long time.
Speaker 5 (09:02):
His problem is that he's actually very weak domestically, and
he's the domestic politics within France make it harder for him.
Kiir Istama, Prime Minister of Britain, I think has come
out so far very well. He also is he's trying
to hwe a very difficult line because on the one hand,
(09:24):
Britain traditionally the special relationship with the United States. Our
military is particularly entwined with the United States, are intelligence
so forth, members of the Five Eyes, all of that stuff.
The Brits are very very keen to hug the US close.
But at the same time he has worked very effectively
with Immanuel Marquant in particular on Ukraine. He's very clearly
(09:46):
trying to shape a European response, and I think he's.
Speaker 6 (09:50):
Risen to the occasion.
Speaker 5 (09:51):
Again in the UK's case, in order to fund the
kind of defense expending that we need to do, he
actually needs to do the radical pro growth reforms which
he talked about, but again we worried that the Starma
government would not be sufficiently bold to do. If he
does that, he will also be deserving in the president
with him, we I think more in hope more than expectation.
(10:13):
We put on the cover just a couple of weeks
ago Winston Starmer and had him, you know, dressed in
dress like Winston Churchill its early days. Ask me again
in a few months whether.
Speaker 6 (10:24):
They live up to it. But I think those would
be the three people I would look out for.
Speaker 2 (10:28):
Defense spending is just one part of the bigger European
issue of remaining barriers among member states, including in financial
regulation and capital markets. I'm mindful of the name of
your publication the economists. Can Europe get to where it
needs to go without fundamental reform of the capital markets.
Speaker 6 (10:47):
The simple answer is no in the medium term.
Speaker 1 (10:50):
No.
Speaker 5 (10:50):
Capital markets Union is a kind of you know, aspiration
that the European Union has had for a long time
and has made very little progress on. I think it's essential.
I think the creation of a safe asset that can
be a common asset for investors to hold in Europe
is essential. I think this stuff can come and will
come actually eventually, but you will not have a dynamic
(11:14):
European continent without that.
Speaker 6 (11:15):
I think it's completely essential, but it's not the only thing.
Speaker 5 (11:18):
You know, there's all kinds of other You need a
much more pro growth regulatory environment. You need to have
a European Commission which is much more focused on creating
the conditions for brisk taking, for innovation, for growth that
doesn't think that things needed to be regulated first. I
mean that the attitude towards tech has been very telling.
(11:39):
Right in Europe, where you know, the European Union has
probably got the most aggressive and encompassing tech regulation, but actually,
you know, no major tech company to speak of. That
kind of thing has to be changed, and I don't
want to appear of Panglossian.
Speaker 6 (11:55):
I think it's perfectly.
Speaker 5 (11:57):
Possible that Europe could fail to do what we've been
talking about. But I do think this moment, these last
few weeks have given Europe a sort of a shock
that has had a kind of consequence in Europe that
I wasn't anticipating. There is now a sense of urgency,
there's a sense of what's at stake, which could just
(12:20):
be the galvanizing moment that is needed for this to
really happen.
Speaker 2 (12:25):
Coming up, we look at two companies that have been
around a while and decided they needed a reset, New
Balance which got the reset right, and Hurts, which didn't.
(12:49):
This is a story about renewal companies that have known
great success but face changing tastes and changing markets, companies
that have to rethink what they're doing to success.
Speaker 1 (13:03):
Some do it well in Carol Company, New Balance really
continuing to expand the US manufacturing presence.
Speaker 2 (13:10):
And some get it wrong.
Speaker 3 (13:12):
A pair of finance veterans bought the bankrupt car rental
company Hurts in twenty twenty one and went all in
on electric and it turned out to be a bad bet.
Speaker 2 (13:20):
It was not long ago that New Balance was known
for the ultimate dad sneaker.
Speaker 7 (13:25):
What happened to your feet?
Speaker 2 (13:27):
What do you mean?
Speaker 8 (13:28):
These are my four oh sevens?
Speaker 9 (13:29):
Oh?
Speaker 7 (13:30):
The four oh sevens? Can I see them?
Speaker 10 (13:31):
Yeah?
Speaker 8 (13:32):
He's offered a lot of support, right.
Speaker 2 (13:35):
Well, come on, and now it's a shoe worn by
celebrities and runway models. Joe Preston is the CEO who's
overseen the latest transformation of a company. Dating back to
nineteen oh.
Speaker 11 (13:47):
Six, New Balance was the first athletic brand to have
an NBA player with a million dollar contract. By the
time the late eighties came along, New Balance was struggling.
All of our competitors had moved all of their production
from the US over to Asia, and that in part
put us at a little bit of a competitive disadvantage.
And then in the early nineties we retracted and just
(14:08):
focused on running. We wanted to make sure that we
could carve out a positioning with that new strategy. But
then around two thousand and eight, two thousand and nine.
We knew we needed to get younger, We knew we
needed to get back into sport, and we made an
entry into baseball, and we set this lofty goal of
being number one in baseball within five years. And in
(14:29):
the beginning there was a lot of doubt internally as
to whether whether or not we could do that.
Speaker 2 (14:34):
It wasn't a straight ride up. As New Balance went
through its transition, its global sales fell from an estimated
four point five billion dollars in twenty eighteen, that's the
year Preston took over, down to some three point four
billion dollars in twenty twenty. But then they took off,
hitting seven point eight billion dollars last year, an approximate
seventy three percent increase under Preston's leadership. What caused you
(14:59):
to have a couple of years that were challenged.
Speaker 11 (15:02):
I wouldn't say we were going south, We would going sideways.
We had a rapid growth that was happening internationally, specifically
in North Asia and in Europe and in that head flatline,
and we were not able to take truly advantage of
the brand here in North America, and so we reset
in twenty nineteen to try to put the company in
position for growth, and then obviously COVID hit, which kind
(15:24):
of stalled things a little bit, but we could see
in the back half of twenty twenty that the brand
was beginning to resonate and we've been able to grow
twenty plus percent for four consecutive years.
Speaker 3 (15:35):
There's three key traps that I think are key to
understanding why some firms are better situated to reinvent themselves.
Speaker 2 (15:44):
Ryan Raphaeli is a Harvard Business School professor who teaches
corporate reinvention.
Speaker 3 (15:49):
The first trap is the trap that I call the
identity trap, and this is too tightly coupling the questions
around who we are with a very specific product or surface,
and get so tied to one product or service that
we sort of lose sight of everything else around us.
The second trap is one that I call the architecture trap,
and this is where we think about you have different
(16:11):
products and services on an S curve sort of at
different phases of maturity. And what often happens is in
organizations is they're designed where all the same systems and
structures and incentives are applied to early stage innovations versus
processes of innovation that may be needed for a later stage,
more mature products, and this can often kill out the
(16:33):
early stage. There's a third trap, the collaboration trap.
Speaker 6 (16:37):
And this is a.
Speaker 3 (16:38):
Trap or what you see is that individuals tasked with
innovation at different phases of an s curve often begin
to either not trust each other and you get this
internal resentment that can often kill off innovation for reinvention
that has to happen for the future.
Speaker 2 (16:53):
New Balance successfully skirted those three traps, leading to a
revamp that's allowed the company to expand its footprint, sponsoring
both the New York City and London Marathons and hosting
athletic events at their own Boston track.
Speaker 11 (17:06):
Today will mark the opening of the New Balance Nationals.
We'll have six thousand of the best track and field
high school athletes in the country that come to campus
here and come to this brand new facility.
Speaker 7 (17:19):
But this is a revenue raiser for you.
Speaker 2 (17:21):
Does is work?
Speaker 9 (17:22):
Not really?
Speaker 1 (17:22):
Now?
Speaker 11 (17:23):
This is you know, this is an opportunity for us
to engage with these young athletes.
Speaker 2 (17:28):
And the athletes are engaging back. Coco Goff Kawhi, Leonard
Bocayosaka and perhaps the biggest of them all Shohei Otani
all New Balance athletes.
Speaker 10 (17:42):
This is all of show Hayes's collection. You can also
see those are his signature cleats.
Speaker 2 (17:47):
Samantha Siciliano is the lead athlete insights researcher at New Balance.
Speaker 10 (17:52):
The collaboration with the athletes is key for us. We
learn so much from them and it's stuff that we
can use for all of our pros, but it's all
the things that we can use for our community athletes
and make sure that those athletes are getting the best
product possible.
Speaker 11 (18:09):
The reason why that we can enter into these sports
is twofold. One of them is that our product engine
is just so strong, the investment that we may continually
into product and innovation, and through our Sports research center,
we can go in and test any different type of
product for any of those sports. And the other element
is as the brand is becoming more widely known, we
(18:30):
have athletes coming to us from these various sports looking
to be part of the brand.
Speaker 2 (18:34):
As you evolve the company, how do you retain some
of the basics and at the same time innovating go
into new places. How do you get that balance right?
Speaker 11 (18:44):
It is seventy thirty seventy meaning making sure we are
retaining the culture that we have here because we believe
it to be a differentiator. Now we're a family owned company,
we're privately held, and how we operate is as important
as the result. And I think we have strengthened our
culture as we have grown.
Speaker 8 (19:03):
But it's a challenge.
Speaker 11 (19:04):
You continue to add people as you get larger, and
you just want to make sure that people are assimilating
and are also contributing to a strong culture that you have.
Speaker 2 (19:13):
New balances sports and Innovation lab is a key part
of the company's architecture, giving it a recipe for some
of its greatest hits.
Speaker 3 (19:21):
So when we think about technological changes most firms, we
can go back to these classic theories of like the
S curve, right, the idea that you have a technology
or a product associated with that it sort of starts
in its infancy, it then starts to move through a
period of growth, and then it eventually matures. And so
for many firms, they're managing these S curves within and
(19:45):
what often happens in processes of reinvention is what you
tend to see is that for established firms, they don't
have the luxury of just managing one of these curves
at a time, and so the challenge for them is
to try to figure out, well, how do you manage
multiple curves with product and services that sit at different
phases of those s curves simultaneously and keep the whole
(20:05):
thing running. It's one of the core components, right because
you're having to think about not only what do you
need to do to make yourself successful today and appease
your current customer base, but also what's the next thing
that will potentially drive growth and revenue in the years ahead.
Speaker 2 (20:22):
If New Balance was a company that successfully appealed to
both its former and new customer bases, Hurts is far
from it.
Speaker 9 (20:30):
Hurts has the largest ev rental fleet in North America,
charged and ready to go, Let's go.
Speaker 2 (20:39):
The car rental company has gone through countless failed reinventions,
most recently making a bold move to replace much of
its fleet with Tesla electric vehicles.
Speaker 8 (20:49):
We know our corporate travelers want electric vehicles to go
visit their clients and do business in We know our
leisure travelers want electric vehicles. It's a great way for
them to try a lot vehicle without committing.
Speaker 7 (21:01):
As tonal attention to hers.
Speaker 2 (21:02):
The rental call company misses its estimates as it sells
its fleet of Tesla EV's. The company lost two point
nine billion dollars in twenty twenty four on its failed
bet offloading thirty thousand evs. It's market caps slumping from
a peak of sixteen billion dollars in twenty twenty one
to sit at just over one billion dollars today.
Speaker 12 (21:25):
The EV strategy actually was suggested by one of the
private equity partners who bought Hurts out of bankruptcy, and
at the time it seemed like a great idea.
Speaker 2 (21:36):
Yale professor Jacob Thomas studied Hurt's failure to reinvent itself
time and time again. Some of the.
Speaker 12 (21:42):
Reasons that worked against them, I think one of it
was just people didn't know how to drive the cars.
They've treated them badly. The repair, you know, was much
higher than expected. People complained about having not finding charging
stations and then having to pay Hurts for the cars
that were uncharged. The completely unexpected thing that happened is
(22:05):
that Tesla facing demand issues and they're worried about the
federal tax credit. They lowered the prices of their cars,
and so the new car prices fall. They used car
prices fall. It hurts is you know, is in trouble
because it has to make up the difference. So I
think it was just a combination of unexpected things. I
(22:28):
think it was worth I think it was worth trying,
but in hindsight, it was probably something that's going to
cost them a lot.
Speaker 2 (22:36):
Ultimately. Thomas believes luck can contribute to a company's reinvention.
Speaker 12 (22:41):
I think Hurts has had their share of bad luck.
They were doing really well until the pandemic hit. One
could argue that the ev strategy was a good one,
but it didn't work out.
Speaker 3 (22:52):
Luck is about when opportunity meets preparation, and that is
the core to reinvention.
Speaker 2 (23:00):
Pannels of business history are littered with bad luck stories
of corporate reinvention, but for the successful few, like New Balance,
the ability to strategize, innovate, and execute goes beyond just
good luck. As you look out, what do you examine
to figure out this will keep us going as opposed
to that one. I'm not sure that's going to get
(23:20):
us there.
Speaker 11 (23:21):
But we're trying to make sure that the brand is
positioned from a premium standpoint, and when you do that,
you've got to be cognizant that you can grow, but
you've got to have controlled growth. So as we look
out into the future, you know, trying to maintain a
growth rate that we've had in the past few years
is not the first thing that we're looking at.
Speaker 6 (23:40):
It's the quality of growth.
Speaker 11 (23:42):
And so as we look forward, we know that sport
continues to be an area that we can develop. A
parel is a big opportunity, but all of it's under
this guise of making sure that we are following a
distribution strategy.
Speaker 7 (23:55):
And today when you win.
Speaker 2 (23:57):
That coming up, the two hundred billion dollar market of
video gaming is about to get a new version of
its most popular game ever, Grand Theft Auto six. We
talked to the man bringing it to you, Strauszelnik of
Take two. That's next on Wall Street reading. This is
(24:27):
a story about the power of play, how video games
can entertain us, connect us, and bring out our competitive side.
Speaker 7 (24:40):
It's highly social, it's highly engaging.
Speaker 6 (24:43):
I love video games.
Speaker 12 (24:46):
Last of Us Part one and two, The Witcher, God
of War.
Speaker 2 (24:52):
The video game industry has grown into a nearly two
hundred billion dollar global market, larger than film, television, and
music combined, and is projected to grow around six percent annually.
Speaker 1 (25:04):
The really big hits of today, the Call of Duties,
the Fortnites, the esports football clubs, the Grand Theft Autos
like they just keep becoming more and more dominant.
Speaker 2 (25:14):
In addition to being an avid gamer himself, Doug Krutz
is the senior Media, Entertainment and Gaming Analyst at t
D Cowen. He's been following the industry trends for decades
and has witnessed one game in particular, outshine the Rest.
Speaker 1 (25:28):
GTA five has sold over two hundred million units life
to date, which is far and away the most at
any video game has ever sold.
Speaker 7 (25:36):
It's not even close.
Speaker 1 (25:37):
Has probably generated ten billion dollars in revenue Life to
date lines alone, but it's.
Speaker 2 (25:43):
Pretty as Rockstar Games, a subsidiary of video game holding
company Take two Interactive, released Grand Theft Auto five back
in twenty thirteen.
Speaker 7 (25:54):
Today, it's still the standard bearer for the industry even
though it was launched so many years ago, and that
it's kind of astonishing in a business where the technology
is continuing to change at a pretty steep rate.
Speaker 2 (26:06):
Straus Zelnik is the chairman and CEO of Take two,
which is also behind successes like NBA two K, Borderlands
and Red Dead Redemption. But all eyes are on its
next installment of the Grand Theft Auto series, GTA six,
set to be released this fall.
Speaker 7 (26:25):
The anticipation for that title may be the greatest anticipation
I've ever seen for an entertainment property. And I've been
around the block a few times.
Speaker 2 (26:32):
It's been twelve years, now, why does it take that
long to come up with six?
Speaker 7 (26:36):
We set an intention actually to rest our intellectual property.
So some of our competitors come to market very regularly,
maybe even annually. We think you need to create enormous
anticipation on the one hand, On the other hand, it
takes a long time to develop these big, robust experiences.
Rockstar Game Seeks perfection.
Speaker 2 (26:56):
Take two is a major publisher and developer of Triple
A title, a classification used within the industry for high
profile games with high budgets.
Speaker 7 (27:06):
Luckily we have the balance sheet for it. It's one
of the reasons that's standing up a company in a
garage today will be awfully difficult. So in a way,
the incremental costs have enhanced the barriers to entry to
benefit companies like ours, we have team sizes that are
as small as twenty people in the mobile space and
(27:26):
as large as thousands of people in the console space.
Speaker 2 (27:29):
Even after spending all that money and time developing a game,
how does a company know if it will be a
hit or a miss.
Speaker 7 (27:38):
You would look at the sales of the last iteration,
or in the case of new intellectual property, you sort
of get a sense of what you think that thing
looks like and compare it to other similar releases. We
have consumers come in and play the games along the
way and give us feedback. In the movie business, there
is testing, but what do you test. You can't really
test before you have a rough cut. To have a
(27:58):
rough cut, you've shot the entire thing.
Speaker 6 (28:02):
I only wait then you get through.
Speaker 7 (28:04):
This is by sticking together, being a team.
Speaker 2 (28:11):
Like movie studios, gaming companies also market their product by
releasing trailers before game debuts. To date, the trailer for
Grand Theft Auto six has racked up more than two
hundred and forty five million views on YouTube. What's the
revenue stream look like? How do you get your money?
Speaker 7 (28:28):
In the case of console and PC, there's a free
to play business, but that is largely a business where
you purchase a unit and then you often have the
opportunity to engage in an ongoing basis after the original
purchase through a multiplayer, for example, experience, and that would
be also monetized in game.
Speaker 1 (28:45):
The question is how much in game revenue can it generate.
GTA five currently probably generates around half a billion dollars
a year in game revenue. Now that's a lot of money,
but it's less than half of what Call of Duty generates.
It's probably less than what EA Sports Football Club generates,
and it's maybe fifteen percent of what Fortnite generates. I
(29:06):
do think that GTA six online will be bigger and
better than GTA five, and it will probably be more successful.
And the only question is you know how much more successful.
Speaker 2 (29:16):
But Strauss isn't putting all his eggs in one basket.
In twenty twenty two, Take two acquired mobile gaming giant
Zinga in an eleven billion dollar deal.
Speaker 7 (29:27):
What was the most expensive acquisition that had been done
in the interactive entertainment businesses, eclipsed quickly by the Microsoft
Activision deal, but at the time it was a big deal,
and certainly a big deal for US. Mobile represents fifty
percent of our netbookings. It's a very successful business and
we have new hits. Our goal on the mobile side
is to have the number one market share mobile. We're
(29:48):
not there yet, we're heading in that direction.
Speaker 2 (29:52):
About one hundred and ninety million people between the ages
of five and all the way up to ninety play
video games in the United States. Approximately three billion people
play worldwide. So how did the video game industry become
the behemoth in the entertainment sector that it is today.
Speaker 1 (30:10):
It goes back in some ways to the nineteen sixties
when some people were fiddling around with electronic equipment and
seeing what they could do with it. From a commercial
point of view, it really started in sort of the
mid to late seventies with the Magnavox. The Atari twenty
six hundred was one of the first kind of mainstream consoles.
(30:30):
The next big thing was the launch of the Nintendo,
the original Nintendo entertainment system back in the mid eighties,
which really took off and made video games sort of
a permanent feature of the entertainment landscape. It's gone from
being sort of PC focused and then console focused, and now,
of course we've got the mobile game industry, which is
(30:51):
actually a majority of the industry now, in part because
everybody owns a mobile device.
Speaker 2 (30:55):
In twenty twenty, the pandemic shut down the world, which
further fueled the market. And while lockdowns hurt businesses like
restaurants and tourist attractions, the video game industry got a
major boost, even for a short while.
Speaker 1 (31:10):
The industry grew well over thirty percent in twenty twenty,
and there was some sort of residual growth in twenty one,
and then people came back out of their houses again.
It a lot of firms sort of saw the increased
demand and chased it. Maybe unwisely, people were chasing talent,
and again I think that that led to overinvestment, and
then when things moderated, you know, a lot of people
(31:31):
got caught off base.
Speaker 2 (31:32):
It is estimated that globally more than fourteen thousand video
game workers were laid off in twenty twenty four, up
from roughly ten thousand the year before.
Speaker 7 (31:42):
One of the things I'm probably most proud of in
my career, given I don't really have any creative talent
at all myself, is that I seem to have some
ability to figure out who's really talented and somehow convince
them to work within our system, and then most importantly,
then to pursue their passions. They're genuine creative passions. One
(32:04):
of the questions I'm often asked is does generative AI
mean that you know, someone sitting at home can ask
chat GPT fourteen to you know, make a GTA competitor
code at giving the marketing materials, you know, and more
off to the races. I don't believe for a minute
that that's going to happen. There's no evidence that tool
sets allow people to win creatively. To the contrary, I think,
(32:29):
you know, these are phenomenal digital tools and the more
mundane tasks will be done more automatically.
Speaker 2 (32:35):
Still, thirty percent of game developers believe generative AI is
having a negative effect on the industry, according to a
recent report. But the Game Developers Conference. In contrast to
the Triple A gaming companies like Take two, independent developers
create their own games with significantly less funding. They flock
to the annual GDC in San Francisco to show off
(32:58):
their latest projects and maybe even attract some investors.
Speaker 9 (33:02):
Feeling inspired by other developers is a big part of GDC.
For me, I think it is possible to take more
risks and smaller studios. The budget is smaller, so there's
less of a monetary risk. The folks that start these
smaller studios are usually looking to tell a story that's
unique and different.
Speaker 2 (33:20):
Sharon Kahn is the lead producer at Visai Games, a
small independent studio that swept up awards last year for
its game Venba.
Speaker 9 (33:29):
The winner is Venba Nba Vega, and the beftter goes to.
Speaker 7 (33:36):
Venba.
Speaker 9 (33:40):
I remember when we first started working on it, there
was a bit of a joke that, oh, maybe we'll
win the grand prize of the IGFs, but I don't
think anyone really expected it. You're essentially playing in the
role of an Indian immigrant mother. Her and her husband
come to Toronto and they start a new life. They
end up getting pregnant and having a kid right as
(34:00):
they're like about to think about going back because they're
struggling financially in Canada. And the story just goes through
the relationship Venba has with her son, and it's told
through food and cooking. It's probably going to get people
to call their mom.
Speaker 2 (34:16):
The game has been quite successful, making over two times
its budget back in sales and exceeding one million dollars
in revenue. But before a game can thrive, independent developers
often need funding to bring their vision to life.
Speaker 9 (34:30):
It was really difficult to get support at that time
because Venbo was considered too risky and too weird. We
made a trailer for this event called Wholesome Games Direct,
and the trailer ended up blowing up, and that's when
we started getting contacted by various publishers and funding sources.
We managed to get funding directly from platforms such as Microsoft, Xbox,
(34:52):
and Sony, and so we decided not to go with
a publisher, and that, along with an Ontario Creates Fund,
which is like a government brant in Canada, we were
good to go for the rest of production, whether it's.
Speaker 2 (35:06):
A small independent release or a big studio one. Video
games do more than just entertain players. They help connect
users to other people, cultures, and even imaginary lens.
Speaker 7 (35:18):
Our focus around here is to be of service to
our consumers, to engage them and captivate them and delight them.
If we get that right, then the numbers will take
care of themselves.
Speaker 2 (35:32):
That does it for us here at Wall Street Week,
I'm David Weston. This is Bloomberg. See you next week.
For more stories of capitalism,
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:20):
This is Wall Street Week. I'm David Weston, bringing you
stories of capitalism, putting new wine into old bottles. We
take a look at one company that has remade itself
successfully more than once, New Balance, and one that doesn't
seem to be able to make the turn Hurts, and
the whole world of gaming is waiting for the sixth
(00:40):
edition of Grand Theft. Auto straus Zelnik of Take two
explains why he left a successful career as a movie
mogul to get on the ground floor of video game creators.
But we start with the story about shock and awe,
something we hear about as a tactic in warfare, but
that usually doesn't come up in public exchanges. Among those
who have been allies for eighty years.
Speaker 3 (01:04):
The EU treat us very very unfairly, very badly.
Speaker 4 (01:07):
We have to rely on our own defense industrial base.
We cannot buy American products when it goes to defense,
because you know, there is a string attached. There is
a double key.
Speaker 2 (01:23):
Zenny mitten Bedows is editor in chief of the Economist
and has a front row seat for the increasingly strained
relations between Western Europe and the United States and how
the Europeans are taking it.
Speaker 5 (01:36):
This is the first time I've been in New York
since the President Trump took over, since the inauguration, and
I'm struck at how relatively little I think people here
are focused on, just how dramatically the perception of the
US actually around the world, but particularly.
Speaker 6 (01:51):
In Europe, has changed.
Speaker 5 (01:52):
But what's happened in the last few weeks has really
shocked Europeans because they have realized that a significant element
of this administration is outright hostile to Europe, doesn't like Europe,
particularly the European Union as a concept. One shouldn't exaggerate
too much from sort of individual moments of theater, because
this is an administration that loves moments of theater. But nonetheless,
(02:13):
that dressing down of President Zelenski in the Oval Office
had a visceral reaction in Europe because it was watched
by everyone I met had watched it, even people who
aren't usually interested in current affairs, and everyone had been
shocked at the treatment of this man, this brave man
speaking in his third language, by the President of the
(02:35):
United States. And those two some powerful examples of I
think a recognition in Europe that actually maybe the United
States is not a country that Europe can rely on.
And the country that created the North Atlantic, the NATO Agreement,
the country that built the post war order, the country
of the United States, there's always been the backbone of
(02:55):
this post war system.
Speaker 6 (02:57):
I think Europeans have just been really shocked.
Speaker 5 (02:59):
And of course things can change, and of course there
can be a change in the relationship with Ukraine and
all of those things, but even if things now go
to a more conventional place, Europe has been shocked and
shocked such that I think every single politician in Europe
is having to think about can we rely on the
(03:19):
United States? Can we really only think about a world
where we spend more and we have a NATO which
is the same except that we spend more, or do
we need to think about having a plan B in
case this really is a country that is hostile to
us and it is outright bent or not having our
interests at heart. And that's a really big shift for Europe,
(03:40):
and I think that it's something that is going to
the upside. I hope is that it will be one
of those moments that galvanizes Europe.
Speaker 2 (03:48):
When you say Europe is shocked, I guess My question
is shocked into action. If you're Europe, what do you
do well?
Speaker 5 (03:54):
That's always the question with Europe, that you can, you know,
you can have a lot of pearl clutching and then
nothing actually happens. But I think you've seen enough already
to take a view that this is different. If you
look at what's happened in Germany, and you know Friedrich Meltz,
the soon to be Chancellor of Germany, very clearly saying
it's five minutes to midnight.
Speaker 6 (04:15):
We will do everything it takes.
Speaker 5 (04:17):
And that's the phrase remember that as associated with Mario Dragi,
who was during the euro crisis president of the European
Central Bank, and he said they would do everything that
it takes to hold the euro together. The same language
Finich Melts very clearly signaling the Germany, which is of
course the biggest economy in Europe and the one that
has been obsessed with its you know, fiscal prudence and
(04:38):
its debt break, would do everything that was necessary to
increase defense spending. And you've seen other countries in Europe,
you know Poland talking about nuclear weapons. You've seen big changes,
and I think this could be one of those moments
where the European commissioners galvanized.
Speaker 6 (04:54):
They're making it easier to you.
Speaker 5 (04:56):
Know, find resources to pay for a very signficant increase
in defense spending.
Speaker 6 (05:01):
And to give you a scale.
Speaker 5 (05:02):
Of it, the European Union countries spend about one point
eight percent of GDP on defense, which is well below,
as President Trump would tell you, the two percent that
they're supposed to, and certainly nowhere near enough if they
can't rely on the United States. How much Europe needs
to spend depends on how you know, darker scenario you
want to paint in terms of the US turning its
(05:24):
back on Europe and the threat posed by Vladimir Putin.
But at the very least, it's the doubling of defense
spending three point five three point six percent of GDP.
Speaker 6 (05:32):
That's a huge.
Speaker 5 (05:33):
Increase in defense spending. And so one question is will
the Europeans actually do it? Because they're slow growing, they're indebted,
they're high tax economies. I think this German shift is
a very very big moment because I think it signals
that the one country that has the capacity to borrow
a lot more is intending to do so.
Speaker 6 (05:51):
The European Union.
Speaker 5 (05:53):
Can as it did during COVID actually issue joint bonds to.
Speaker 6 (05:56):
Pay for this.
Speaker 5 (05:57):
I think you will have more what you call safe
assets in Europe, more commonly issued debt, which investors actually
may well lap up because people will be looking for
a non dollar.
Speaker 6 (06:09):
Asset that is a safe asset.
Speaker 5 (06:11):
So I think you could see a big shift in
European financial markets.
Speaker 6 (06:15):
If this money on defense is spent well and spent.
Speaker 5 (06:18):
Effectively, you could see a kick starting to technological innovation.
Look at drone capability that's being developed in Ukraine. If
the Europeans work with the Ukrainians provide the financial wherewithal
to really kind of develop and scale up that capability,
That's an area where Europe is now at the cutting
(06:39):
edge of military infrastructure. That's one of the reasons why
European defense docks have been soaring, because there is the
potential in Europe.
Speaker 6 (06:47):
To do that. Now, there's a lot there's a ton
of things that could go wrong.
Speaker 5 (06:50):
Never you know, overest never underestimate European country's ability to
think about their parochial interests rather than.
Speaker 6 (06:57):
What makes sense for Europe as a whole.
Speaker 5 (06:59):
One of the consequences of what Donald Trump has done
may well be to unify Europe, to increase its defense
spending substantially, which is of course what he wants, but
actually also to kickstart Europe's economies and to kickstart its
capability of having a financial asset that would over time
be something which might be eventually become an alternative.
Speaker 6 (07:21):
To the dollar.
Speaker 2 (07:23):
Countries in Europe are under pressure to figure out how
to serve their individual interests while addressing a priority for
the whole union. We may, as you say, be seeing
the political will in much of Europe to move forward.
Is there the capacity, and particularly is the capacity in leadership.
You've got to make some tough decisions about where to
(07:44):
get the money and how to spend it you have.
Speaker 5 (07:46):
And I think the easy answer to your question would
be to say, look around Europe and there are only
kind of political pigmies. But actually I think that's and
I've made that argument myself, but that's slightly unfair if
you look at, for.
Speaker 6 (07:59):
Example, Meltz, who.
Speaker 5 (08:03):
I interviewed before the German election, and I asked him
about some of these questions, what did Europe Germany need
to do on defense and so forth? And he was
unwilling to really sort of put his neck out he was.
He was quite cautious, and he's a man who's been
a staunch Atlanticist all his life. And you know, you
could forgive that, I suppose because it was just before
(08:24):
an election and he doesn't want to say anything terribly controversial.
But it made me think, made me worry exactly as
you suggest that is this man someone who can really,
you know, step up if needed. And frankly, what we've
seen since the election, in light of what the President
Trump has done, has actually been.
Speaker 6 (08:39):
I think pretty remarkable.
Speaker 5 (08:42):
Others have real constraints. Emmanuel Markran President of France, I
think loves grand, grandiloquent language and grand gestures and I'm.
Speaker 6 (08:51):
Sure he wants did all of this.
Speaker 5 (08:52):
In fact, to his credit, he was the man who,
you know, a few years ago said to us that
NATO was brain dead and that Europe needed more strictic autonomy.
Speaker 6 (09:01):
He's worried about this for a long time.
Speaker 5 (09:02):
His problem is that he's actually very weak domestically, and
he's the domestic politics within France make it harder for him.
Kiir Istama, Prime Minister of Britain, I think has come
out so far very well. He also is he's trying
to hwe a very difficult line because on the one hand,
(09:24):
Britain traditionally the special relationship with the United States. Our
military is particularly entwined with the United States, are intelligence
so forth, members of the Five Eyes, all of that stuff.
The Brits are very very keen to hug the US close.
But at the same time he has worked very effectively
with Immanuel Marquant in particular on Ukraine. He's very clearly
(09:46):
trying to shape a European response, and I think he's.
Speaker 6 (09:50):
Risen to the occasion.
Speaker 5 (09:51):
Again in the UK's case, in order to fund the
kind of defense expending that we need to do, he
actually needs to do the radical pro growth reforms which
he talked about, but again we worried that the Starma
government would not be sufficiently bold to do. If he
does that, he will also be deserving in the president
with him, we I think more in hope more than expectation.
(10:13):
We put on the cover just a couple of weeks
ago Winston Starmer and had him, you know, dressed in
dress like Winston Churchill its early days. Ask me again
in a few months whether.
Speaker 6 (10:24):
They live up to it. But I think those would
be the three people I would look out for.
Speaker 2 (10:28):
Defense spending is just one part of the bigger European
issue of remaining barriers among member states, including in financial
regulation and capital markets. I'm mindful of the name of
your publication the economists. Can Europe get to where it
needs to go without fundamental reform of the capital markets.
Speaker 6 (10:47):
The simple answer is no in the medium term.
Speaker 1 (10:50):
No.
Speaker 5 (10:50):
Capital markets Union is a kind of you know, aspiration
that the European Union has had for a long time
and has made very little progress on. I think it's essential.
I think the creation of a safe asset that can
be a common asset for investors to hold in Europe
is essential. I think this stuff can come and will
come actually eventually, but you will not have a dynamic
(11:14):
European continent without that.
Speaker 6 (11:15):
I think it's completely essential, but it's not the only thing.
Speaker 5 (11:18):
You know, there's all kinds of other You need a
much more pro growth regulatory environment. You need to have
a European Commission which is much more focused on creating
the conditions for brisk taking, for innovation, for growth that
doesn't think that things needed to be regulated first. I
mean that the attitude towards tech has been very telling.
(11:39):
Right in Europe, where you know, the European Union has
probably got the most aggressive and encompassing tech regulation, but actually,
you know, no major tech company to speak of. That
kind of thing has to be changed, and I don't
want to appear of Panglossian.
Speaker 6 (11:55):
I think it's perfectly.
Speaker 5 (11:57):
Possible that Europe could fail to do what we've been
talking about. But I do think this moment, these last
few weeks have given Europe a sort of a shock
that has had a kind of consequence in Europe that
I wasn't anticipating. There is now a sense of urgency,
there's a sense of what's at stake, which could just
(12:20):
be the galvanizing moment that is needed for this to
really happen.
Speaker 2 (12:25):
Coming up, we look at two companies that have been
around a while and decided they needed a reset, New
Balance which got the reset right, and Hurts, which didn't.
(12:49):
This is a story about renewal companies that have known
great success but face changing tastes and changing markets, companies
that have to rethink what they're doing to success.
Speaker 1 (13:03):
Some do it well in Carol Company, New Balance really
continuing to expand the US manufacturing presence.
Speaker 2 (13:10):
And some get it wrong.
Speaker 3 (13:12):
A pair of finance veterans bought the bankrupt car rental
company Hurts in twenty twenty one and went all in
on electric and it turned out to be a bad bet.
Speaker 2 (13:20):
It was not long ago that New Balance was known
for the ultimate dad sneaker.
Speaker 7 (13:25):
What happened to your feet?
Speaker 2 (13:27):
What do you mean?
Speaker 8 (13:28):
These are my four oh sevens?
Speaker 9 (13:29):
Oh?
Speaker 7 (13:30):
The four oh sevens? Can I see them?
Speaker 10 (13:31):
Yeah?
Speaker 8 (13:32):
He's offered a lot of support, right.
Speaker 2 (13:35):
Well, come on, and now it's a shoe worn by
celebrities and runway models. Joe Preston is the CEO who's
overseen the latest transformation of a company. Dating back to
nineteen oh.
Speaker 11 (13:47):
Six, New Balance was the first athletic brand to have
an NBA player with a million dollar contract. By the
time the late eighties came along, New Balance was struggling.
All of our competitors had moved all of their production
from the US over to Asia, and that in part
put us at a little bit of a competitive disadvantage.
And then in the early nineties we retracted and just
(14:08):
focused on running. We wanted to make sure that we
could carve out a positioning with that new strategy. But
then around two thousand and eight, two thousand and nine.
We knew we needed to get younger, We knew we
needed to get back into sport, and we made an
entry into baseball, and we set this lofty goal of
being number one in baseball within five years. And in
(14:29):
the beginning there was a lot of doubt internally as
to whether whether or not we could do that.
Speaker 2 (14:34):
It wasn't a straight ride up. As New Balance went
through its transition, its global sales fell from an estimated
four point five billion dollars in twenty eighteen, that's the
year Preston took over, down to some three point four
billion dollars in twenty twenty. But then they took off,
hitting seven point eight billion dollars last year, an approximate
seventy three percent increase under Preston's leadership. What caused you
(14:59):
to have a couple of years that were challenged.
Speaker 11 (15:02):
I wouldn't say we were going south, We would going sideways.
We had a rapid growth that was happening internationally, specifically
in North Asia and in Europe and in that head flatline,
and we were not able to take truly advantage of
the brand here in North America, and so we reset
in twenty nineteen to try to put the company in
position for growth, and then obviously COVID hit, which kind
(15:24):
of stalled things a little bit, but we could see
in the back half of twenty twenty that the brand
was beginning to resonate and we've been able to grow
twenty plus percent for four consecutive years.
Speaker 3 (15:35):
There's three key traps that I think are key to
understanding why some firms are better situated to reinvent themselves.
Speaker 2 (15:44):
Ryan Raphaeli is a Harvard Business School professor who teaches
corporate reinvention.
Speaker 3 (15:49):
The first trap is the trap that I call the
identity trap, and this is too tightly coupling the questions
around who we are with a very specific product or surface,
and get so tied to one product or service that
we sort of lose sight of everything else around us.
The second trap is one that I call the architecture trap,
and this is where we think about you have different
(16:11):
products and services on an S curve sort of at
different phases of maturity. And what often happens is in
organizations is they're designed where all the same systems and
structures and incentives are applied to early stage innovations versus
processes of innovation that may be needed for a later stage,
more mature products, and this can often kill out the
(16:33):
early stage. There's a third trap, the collaboration trap.
Speaker 6 (16:37):
And this is a.
Speaker 3 (16:38):
Trap or what you see is that individuals tasked with
innovation at different phases of an s curve often begin
to either not trust each other and you get this
internal resentment that can often kill off innovation for reinvention
that has to happen for the future.
Speaker 2 (16:53):
New Balance successfully skirted those three traps, leading to a
revamp that's allowed the company to expand its footprint, sponsoring
both the New York City and London Marathons and hosting
athletic events at their own Boston track.
Speaker 11 (17:06):
Today will mark the opening of the New Balance Nationals.
We'll have six thousand of the best track and field
high school athletes in the country that come to campus
here and come to this brand new facility.
Speaker 7 (17:19):
But this is a revenue raiser for you.
Speaker 2 (17:21):
Does is work?
Speaker 9 (17:22):
Not really?
Speaker 1 (17:22):
Now?
Speaker 11 (17:23):
This is you know, this is an opportunity for us
to engage with these young athletes.
Speaker 2 (17:28):
And the athletes are engaging back. Coco Goff Kawhi, Leonard
Bocayosaka and perhaps the biggest of them all Shohei Otani
all New Balance athletes.
Speaker 10 (17:42):
This is all of show Hayes's collection. You can also
see those are his signature cleats.
Speaker 2 (17:47):
Samantha Siciliano is the lead athlete insights researcher at New Balance.
Speaker 10 (17:52):
The collaboration with the athletes is key for us. We
learn so much from them and it's stuff that we
can use for all of our pros, but it's all
the things that we can use for our community athletes
and make sure that those athletes are getting the best
product possible.
Speaker 11 (18:09):
The reason why that we can enter into these sports
is twofold. One of them is that our product engine
is just so strong, the investment that we may continually
into product and innovation, and through our Sports research center,
we can go in and test any different type of
product for any of those sports. And the other element
is as the brand is becoming more widely known, we
(18:30):
have athletes coming to us from these various sports looking
to be part of the brand.
Speaker 2 (18:34):
As you evolve the company, how do you retain some
of the basics and at the same time innovating go
into new places. How do you get that balance right?
Speaker 11 (18:44):
It is seventy thirty seventy meaning making sure we are
retaining the culture that we have here because we believe
it to be a differentiator. Now we're a family owned company,
we're privately held, and how we operate is as important
as the result. And I think we have strengthened our
culture as we have grown.
Speaker 8 (19:03):
But it's a challenge.
Speaker 11 (19:04):
You continue to add people as you get larger, and
you just want to make sure that people are assimilating
and are also contributing to a strong culture that you have.
Speaker 2 (19:13):
New balances sports and Innovation lab is a key part
of the company's architecture, giving it a recipe for some
of its greatest hits.
Speaker 3 (19:21):
So when we think about technological changes most firms, we
can go back to these classic theories of like the
S curve, right, the idea that you have a technology
or a product associated with that it sort of starts
in its infancy, it then starts to move through a
period of growth, and then it eventually matures. And so
for many firms, they're managing these S curves within and
(19:45):
what often happens in processes of reinvention is what you
tend to see is that for established firms, they don't
have the luxury of just managing one of these curves
at a time, and so the challenge for them is
to try to figure out, well, how do you manage
multiple curves with product and services that sit at different
phases of those s curves simultaneously and keep the whole
(20:05):
thing running. It's one of the core components, right because
you're having to think about not only what do you
need to do to make yourself successful today and appease
your current customer base, but also what's the next thing
that will potentially drive growth and revenue in the years ahead.
Speaker 2 (20:22):
If New Balance was a company that successfully appealed to
both its former and new customer bases, Hurts is far
from it.
Speaker 9 (20:30):
Hurts has the largest ev rental fleet in North America,
charged and ready to go, Let's go.
Speaker 2 (20:39):
The car rental company has gone through countless failed reinventions,
most recently making a bold move to replace much of
its fleet with Tesla electric vehicles.
Speaker 8 (20:49):
We know our corporate travelers want electric vehicles to go
visit their clients and do business in We know our
leisure travelers want electric vehicles. It's a great way for
them to try a lot vehicle without committing.
Speaker 7 (21:01):
As tonal attention to hers.
Speaker 2 (21:02):
The rental call company misses its estimates as it sells
its fleet of Tesla EV's. The company lost two point
nine billion dollars in twenty twenty four on its failed
bet offloading thirty thousand evs. It's market caps slumping from
a peak of sixteen billion dollars in twenty twenty one
to sit at just over one billion dollars today.
Speaker 12 (21:25):
The EV strategy actually was suggested by one of the
private equity partners who bought Hurts out of bankruptcy, and
at the time it seemed like a great idea.
Speaker 2 (21:36):
Yale professor Jacob Thomas studied Hurt's failure to reinvent itself
time and time again. Some of the.
Speaker 12 (21:42):
Reasons that worked against them, I think one of it
was just people didn't know how to drive the cars.
They've treated them badly. The repair, you know, was much
higher than expected. People complained about having not finding charging
stations and then having to pay Hurts for the cars
that were uncharged. The completely unexpected thing that happened is
(22:05):
that Tesla facing demand issues and they're worried about the
federal tax credit. They lowered the prices of their cars,
and so the new car prices fall. They used car
prices fall. It hurts is you know, is in trouble
because it has to make up the difference. So I
think it was just a combination of unexpected things. I
(22:28):
think it was worth I think it was worth trying,
but in hindsight, it was probably something that's going to
cost them a lot.
Speaker 2 (22:36):
Ultimately. Thomas believes luck can contribute to a company's reinvention.
Speaker 12 (22:41):
I think Hurts has had their share of bad luck.
They were doing really well until the pandemic hit. One
could argue that the ev strategy was a good one,
but it didn't work out.
Speaker 3 (22:52):
Luck is about when opportunity meets preparation, and that is
the core to reinvention.
Speaker 2 (23:00):
Pannels of business history are littered with bad luck stories
of corporate reinvention, but for the successful few, like New Balance,
the ability to strategize, innovate, and execute goes beyond just
good luck. As you look out, what do you examine
to figure out this will keep us going as opposed
to that one. I'm not sure that's going to get
(23:20):
us there.
Speaker 11 (23:21):
But we're trying to make sure that the brand is
positioned from a premium standpoint, and when you do that,
you've got to be cognizant that you can grow, but
you've got to have controlled growth. So as we look
out into the future, you know, trying to maintain a
growth rate that we've had in the past few years
is not the first thing that we're looking at.
Speaker 6 (23:40):
It's the quality of growth.
Speaker 11 (23:42):
And so as we look forward, we know that sport
continues to be an area that we can develop. A
parel is a big opportunity, but all of it's under
this guise of making sure that we are following a
distribution strategy.
Speaker 7 (23:55):
And today when you win.
Speaker 2 (23:57):
That coming up, the two hundred billion dollar market of
video gaming is about to get a new version of
its most popular game ever, Grand Theft Auto six. We
talked to the man bringing it to you, Strauszelnik of
Take two. That's next on Wall Street reading. This is
(24:27):
a story about the power of play, how video games
can entertain us, connect us, and bring out our competitive side.
Speaker 7 (24:40):
It's highly social, it's highly engaging.
Speaker 6 (24:43):
I love video games.
Speaker 12 (24:46):
Last of Us Part one and two, The Witcher, God
of War.
Speaker 2 (24:52):
The video game industry has grown into a nearly two
hundred billion dollar global market, larger than film, television, and
music combined, and is projected to grow around six percent annually.
Speaker 1 (25:04):
The really big hits of today, the Call of Duties,
the Fortnites, the esports football clubs, the Grand Theft Autos
like they just keep becoming more and more dominant.
Speaker 2 (25:14):
In addition to being an avid gamer himself, Doug Krutz
is the senior Media, Entertainment and Gaming Analyst at t
D Cowen. He's been following the industry trends for decades
and has witnessed one game in particular, outshine the Rest.
Speaker 1 (25:28):
GTA five has sold over two hundred million units life
to date, which is far and away the most at
any video game has ever sold.
Speaker 7 (25:36):
It's not even close.
Speaker 1 (25:37):
Has probably generated ten billion dollars in revenue Life to
date lines alone, but it's.
Speaker 2 (25:43):
Pretty as Rockstar Games, a subsidiary of video game holding
company Take two Interactive, released Grand Theft Auto five back
in twenty thirteen.
Speaker 7 (25:54):
Today, it's still the standard bearer for the industry even
though it was launched so many years ago, and that
it's kind of astonishing in a business where the technology
is continuing to change at a pretty steep rate.
Speaker 2 (26:06):
Straus Zelnik is the chairman and CEO of Take two,
which is also behind successes like NBA two K, Borderlands
and Red Dead Redemption. But all eyes are on its
next installment of the Grand Theft Auto series, GTA six,
set to be released this fall.
Speaker 7 (26:25):
The anticipation for that title may be the greatest anticipation
I've ever seen for an entertainment property. And I've been
around the block a few times.
Speaker 2 (26:32):
It's been twelve years, now, why does it take that
long to come up with six?
Speaker 7 (26:36):
We set an intention actually to rest our intellectual property.
So some of our competitors come to market very regularly,
maybe even annually. We think you need to create enormous
anticipation on the one hand, On the other hand, it
takes a long time to develop these big, robust experiences.
Rockstar Game Seeks perfection.
Speaker 2 (26:56):
Take two is a major publisher and developer of Triple
A title, a classification used within the industry for high
profile games with high budgets.
Speaker 7 (27:06):
Luckily we have the balance sheet for it. It's one
of the reasons that's standing up a company in a
garage today will be awfully difficult. So in a way,
the incremental costs have enhanced the barriers to entry to
benefit companies like ours, we have team sizes that are
as small as twenty people in the mobile space and
(27:26):
as large as thousands of people in the console space.
Speaker 2 (27:29):
Even after spending all that money and time developing a game,
how does a company know if it will be a
hit or a miss.
Speaker 7 (27:38):
You would look at the sales of the last iteration,
or in the case of new intellectual property, you sort
of get a sense of what you think that thing
looks like and compare it to other similar releases. We
have consumers come in and play the games along the
way and give us feedback. In the movie business, there
is testing, but what do you test. You can't really
test before you have a rough cut. To have a
(27:58):
rough cut, you've shot the entire thing.
Speaker 6 (28:02):
I only wait then you get through.
Speaker 7 (28:04):
This is by sticking together, being a team.
Speaker 2 (28:11):
Like movie studios, gaming companies also market their product by
releasing trailers before game debuts. To date, the trailer for
Grand Theft Auto six has racked up more than two
hundred and forty five million views on YouTube. What's the
revenue stream look like? How do you get your money?
Speaker 7 (28:28):
In the case of console and PC, there's a free
to play business, but that is largely a business where
you purchase a unit and then you often have the
opportunity to engage in an ongoing basis after the original
purchase through a multiplayer, for example, experience, and that would
be also monetized in game.
Speaker 1 (28:45):
The question is how much in game revenue can it generate.
GTA five currently probably generates around half a billion dollars
a year in game revenue. Now that's a lot of money,
but it's less than half of what Call of Duty generates.
It's probably less than what EA Sports Football Club generates,
and it's maybe fifteen percent of what Fortnite generates. I
(29:06):
do think that GTA six online will be bigger and
better than GTA five, and it will probably be more successful.
And the only question is you know how much more successful.
Speaker 2 (29:16):
But Strauss isn't putting all his eggs in one basket.
In twenty twenty two, Take two acquired mobile gaming giant
Zinga in an eleven billion dollar deal.
Speaker 7 (29:27):
What was the most expensive acquisition that had been done
in the interactive entertainment businesses, eclipsed quickly by the Microsoft
Activision deal, but at the time it was a big deal,
and certainly a big deal for US. Mobile represents fifty
percent of our netbookings. It's a very successful business and
we have new hits. Our goal on the mobile side
is to have the number one market share mobile. We're
(29:48):
not there yet, we're heading in that direction.
Speaker 2 (29:52):
About one hundred and ninety million people between the ages
of five and all the way up to ninety play
video games in the United States. Approximately three billion people
play worldwide. So how did the video game industry become
the behemoth in the entertainment sector that it is today.
Speaker 1 (30:10):
It goes back in some ways to the nineteen sixties
when some people were fiddling around with electronic equipment and
seeing what they could do with it. From a commercial
point of view, it really started in sort of the
mid to late seventies with the Magnavox. The Atari twenty
six hundred was one of the first kind of mainstream consoles.
(30:30):
The next big thing was the launch of the Nintendo,
the original Nintendo entertainment system back in the mid eighties,
which really took off and made video games sort of
a permanent feature of the entertainment landscape. It's gone from
being sort of PC focused and then console focused, and now,
of course we've got the mobile game industry, which is
(30:51):
actually a majority of the industry now, in part because
everybody owns a mobile device.
Speaker 2 (30:55):
In twenty twenty, the pandemic shut down the world, which
further fueled the market. And while lockdowns hurt businesses like
restaurants and tourist attractions, the video game industry got a
major boost, even for a short while.
Speaker 1 (31:10):
The industry grew well over thirty percent in twenty twenty,
and there was some sort of residual growth in twenty one,
and then people came back out of their houses again.
It a lot of firms sort of saw the increased
demand and chased it. Maybe unwisely, people were chasing talent,
and again I think that that led to overinvestment, and
then when things moderated, you know, a lot of people
(31:31):
got caught off base.
Speaker 2 (31:32):
It is estimated that globally more than fourteen thousand video
game workers were laid off in twenty twenty four, up
from roughly ten thousand the year before.
Speaker 7 (31:42):
One of the things I'm probably most proud of in
my career, given I don't really have any creative talent
at all myself, is that I seem to have some
ability to figure out who's really talented and somehow convince
them to work within our system, and then most importantly,
then to pursue their passions. They're genuine creative passions. One
(32:04):
of the questions I'm often asked is does generative AI
mean that you know, someone sitting at home can ask
chat GPT fourteen to you know, make a GTA competitor
code at giving the marketing materials, you know, and more
off to the races. I don't believe for a minute
that that's going to happen. There's no evidence that tool
sets allow people to win creatively. To the contrary, I think,
(32:29):
you know, these are phenomenal digital tools and the more
mundane tasks will be done more automatically.
Speaker 2 (32:35):
Still, thirty percent of game developers believe generative AI is
having a negative effect on the industry, according to a
recent report. But the Game Developers Conference. In contrast to
the Triple A gaming companies like Take two, independent developers
create their own games with significantly less funding. They flock
to the annual GDC in San Francisco to show off
(32:58):
their latest projects and maybe even attract some investors.
Speaker 9 (33:02):
Feeling inspired by other developers is a big part of GDC.
For me, I think it is possible to take more
risks and smaller studios. The budget is smaller, so there's
less of a monetary risk. The folks that start these
smaller studios are usually looking to tell a story that's
unique and different.
Speaker 2 (33:20):
Sharon Kahn is the lead producer at Visai Games, a
small independent studio that swept up awards last year for
its game Venba.
Speaker 9 (33:29):
The winner is Venba Nba Vega, and the beftter goes to.
Speaker 7 (33:36):
Venba.
Speaker 9 (33:40):
I remember when we first started working on it, there
was a bit of a joke that, oh, maybe we'll
win the grand prize of the IGFs, but I don't
think anyone really expected it. You're essentially playing in the
role of an Indian immigrant mother. Her and her husband
come to Toronto and they start a new life. They
end up getting pregnant and having a kid right as
(34:00):
they're like about to think about going back because they're
struggling financially in Canada. And the story just goes through
the relationship Venba has with her son, and it's told
through food and cooking. It's probably going to get people
to call their mom.
Speaker 2 (34:16):
The game has been quite successful, making over two times
its budget back in sales and exceeding one million dollars
in revenue. But before a game can thrive, independent developers
often need funding to bring their vision to life.
Speaker 9 (34:30):
It was really difficult to get support at that time
because Venbo was considered too risky and too weird. We
made a trailer for this event called Wholesome Games Direct,
and the trailer ended up blowing up, and that's when
we started getting contacted by various publishers and funding sources.
We managed to get funding directly from platforms such as Microsoft, Xbox,
(34:52):
and Sony, and so we decided not to go with
a publisher, and that, along with an Ontario Creates Fund,
which is like a government brant in Canada, we were
good to go for the rest of production, whether it's.
Speaker 2 (35:06):
A small independent release or a big studio one. Video
games do more than just entertain players. They help connect
users to other people, cultures, and even imaginary lens.
Speaker 7 (35:18):
Our focus around here is to be of service to
our consumers, to engage them and captivate them and delight them.
If we get that right, then the numbers will take
care of themselves.
Speaker 2 (35:32):
That does it for us here at Wall Street Week,
I'm David Weston. This is Bloomberg. See you next week.
For more stories of capitalism,
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