Gamewashing

This week we talk about Electronic Arts, 3DO, and the Saudi Arabian Public Investment Fund.

We also discuss Jared Kushner, leveraged buyouts, and loot boxes.

Recommended Book: Bandwidth by Dan Caruso

Transcript

Electronic Arts, often shorthanded as EA, was founded in 1982 in California by a former Apple employee named Trip Hawkins, who also went on to found the ill-fated 3DO company, which made video game hardware, and the somewhat more prolific, but also ultimately ill-fated casual game developer Digital Chocolate.

EA, though, has been an absolutely astounding success. It’s business model was predicated on the premise of selling video games directly to retailers, rather than going through intermediaries. This allowed them to gain more market share than their competitors right off the bat, and it helped them glean higher margins than their competitors from each direct sale, too.

EA also established an early reputation for treating its developers really well. They were the first gaming company to feature their developers in advertising and to give them platforms, promoting them as video game artists, basically, and it shared the profits netted from those direct sales with these develops—which in turn meant all the best developers really wanted to work for EA, which led to a beneficial cycle where they created better and better, and more and more financially successful games.

In the late-80s, they started deviating from this model somewhat, scooping up a collection of successful independent game development studios and deviating, at times, from the creative lead’s vision when releasing their games. They also refocused a fair bit of their resources on franchises, like the immensely successful, as it turned out, Madden NFL series, and they branched out into producing games for the console market, including the still-new Nintendo Entertainment System, in 1990.

That same year, EA went public on the NASDAQ, the company got new leadership when Hawkins decided to refocus on his far less successful 3DO hardware startup, and in an interesting twist, the arrival of the Sony Playstation in North America caused EA to drop support for 3DO hardware in the mid-90s so it could refocus on Playstation games, which were a lot more lucrative.

By the mid-90s, EA had an astonishingly large and successful software library, including franchises like the aforementioned Madden games and the FIFA soccer games, but also celebrity-tied games like Shaq Fu, and military shooters like Jungle and Urban Strike.

By the early-2000s, EA was making exclusive licensing deals with the NFL and ESPN, in order to stave off newfound sports game competitors, and it was the only video game company to consistently make a profit, most others experiencing feast and famine cycles, with periodic wins, but a whole lot of losses they had to cover with the profits from those wins. EA, in contrast, had a reliable stable of profit-sources, and it thus had a whole lot of leverage in terms of attracting and retaining talent, but also getting big names and brands on board, for collaborative projects.

What I’d like to talk about today is what happened to EA during and following the 2008 economic crisis, and how and why it recently became an acquisition target for Saudi Arabia.

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In 2008, when the global economy was collapsing, EA suffered a bad holiday sales season and fired 1,100 employees and closed 12 of their facilities early the following year. Later in 2009, the company announced the firing of another 1,500 employees, which was about 17% of their total workforce at the time, and in 2010 they acquired a gaming company that focused on mobile games, which were becoming increasingly popular, now that many people had touch-capable smartphones, which brought hot new franchises like Angry Birds under their brand umbrella.

On the strength of that acquisition and all those downsizings, in early 2011, EA announced that it hit $3.8 billion in revenue in the financial year for the first time, and in early 2012, it announced it surpassed $1 billion in digital revenue during the previous year, which was a huge figure that early in the digital media landscape. It used some of those profits to scoop up another mobile-first gaming company, adding properties like Plants vs Zombies and Peggle to their library.

EA completed another mass-firing in 2013, dismissing 10% of their employees under what they called a reorganization, around the same time they announced an exclusive license with Disney that would allow them to develop Star Wars games.

Their stock value boomed in the following years, as a result of those cost-savings measures, and those new relationships, and emboldened by record-high stock valuations, in the mid-20-teens, the company started releasing big-name games, like Star Wars