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Electronic Arts Inc.

Electronic Arts Inc.


209 Redwood Shores Parkway
Redwood City, California 94065
U.S.A.
Telephone: (650) 628-1500
Fax: (650) 628-1422
Web site: http://www.ea.com

Public Company
Incorporated: 1982 as Electronic Arts
Employees: 7,200
Sales: $2.95 billion (2006)
Stock Exchanges: NASDAQ
Ticker Symbol: ERTS
NAIC: 511210 Software Publishers

Electronic Arts Inc. (EA) remains a global leader in the highly cyclical and competitive game industry, developing and publishing software for an ever changing stream of systems and devices. The company's sports games have been perennial favorites. Games based on Hollywood blockbusters also have contributed to EA's success during the fourth quarter, historically the peak period of sales for the sector. The top U.S. video game publisher is pursuing an increased presence in the Asia-Pacific region and Japan, in online gaming, and in mobile cell phone games.

WINNING COMPUTER GAMES

Electronic Arts was founded in 1982 by three former managers of Apple Computer: William M. (Trip) Hawkins III, who was a marketing director at Apple and at age 26 became head of the new enterprise; William Bingham (Bing) Gordon, who became the company's director of marketing; and Tom Mott. Both Hawkins and Gordon earned M.B.A.s from Stanford University. The decision was made to form a company that specialized in developing and marketing software games for home computers at a dinner with four other friends at Hawkins's home. EA started with a team of 11 people and $5 million in capital from private investors.

EA was flexible from the beginning, developing its software for whatever computer hardware was most popular at the time, usually then producing multiple versions of programs to run on different systems. EA's first product, shipped in May 1983, was a software game for the Atari 800 game player, but shortly thereafter the market shifted to the Commodore system. EA readjusted quickly, and in October 1983 it shipped six more games for the Commodore 64 computer. In 1984 its "Skyfox" computer game, designed for the Apple II computer, became a bestseller. Two years later EA began producing games for the new Commodore Amiga, which turned out to be a very popular computer. By 1990 EA was investing an additional 50 percent of each product's development costs to retool the software so that it could run on a different hardware system.

Games software in the early 1980s was still a very new industry, as personal computers were not yet widespread. Thus, EA took a fresh approach to designing software, modeling the development and production more on the entertainment industry than on the software industry. Instead of hiring computer programmers, EA hired software graphic arts designers and project managers it called producers. Ideas for new computer games often came from freelancers, who proposed game scenarios just as independent scriptwriters submit their scripts to Hollywood studios. If an idea was approved by an in-house committee, the project was assigned to a "producer." Later, more of the ideas were developed in-house, but EA continued to consider its software developers artists.

Like movie studios, EA produced many games to increase the chance of a success. Since 1984 EA had acquired marketing rights to software packages developed by smaller outside companies through its Affiliated Labels program. EA even began contracting celebrities, especially sports stars, whose names and images were added to the software. These have included football star John Madden, basketball players Michael Jordan and Larry Bird, and chess champion Garry Kasparov. NASA's Chuck Yeager was involved in the development of a flight simulation game.

Unlike many of its competitors, who use third-party distributors, EA took the strategic approach of establishing its own sales force. EA's salespeople sold directly to such retailers as Egghead Inc., Toys 'R' Us, Wal-Mart, and Target. In addition to permitting better control over sales and inventory, use of the sales forces helped EA keep better track of consumer trends.

Early on EA began selling its software overseas. In 1986 $1.5 million of its $30 million in revenues were from international sales. In 1987 EA established a manufacturing facility, which later became part of what was known as EA Europe, in Langley, England. EA President and CEO Hawkins had begun to spend more time exploring strategic growth plans, particularly international expansion, and in 1987 much of the day-to-day administration of the company was turned over to his newly hired senior vice-president, Kenneth Zerbe. EA went public in September 1989 with a market capitalization of about $84 million. Sales that year were $63.5 million, and net income had shot up from $1.3 million in 1988 to $4 million in 1989.

Having developed its software to run on a variety of computers, by 1986 EA had become the leading supplier of entertainment software in the United States, but this market was limited. In the late 1980s video game cartridges, which ran on special players connected to television sets, were proving to be a more lucrative industry because most consumers had television sets but not computers at home. In 1989 the video game market was estimated at $3.4 billion in sales, as compared to $250 million for floppy disk computer games. It also comprised mostly children and teenagers, rather than the young adults who used computers. This market was dominated by the Japanese company Nintendo, with its own and compatible cartridges accounting for 80 percent of 1989 U.S. video game sales. Although EA had begun producing software for some cartridge game companies, it did not develop games for Nintendo's systems. EA was unwilling to abide by Nintendo's conditions, which would have involved agreeing not to provide the same games to Nintendo's competitors, such as Sega.

CASHING IN ON VIDEO GAMES

EA made its major move into the video game market by gambling on an unreleased game player from Sega. EA did not merely revise, but designed entirely new games for Sega's Genesis machine, which in 1989 was the first 16-bit video game player available to the U.S. market. The 16-bit players were almost twice as fast as the existing 8-bit machines. For the Genesis player, EA worked on eight to ten projects, each costing about $250,000, for a total product development investment of $2 million to $2.5 million. EA shipped its first games for Sega's Genesis in June 1990, although sales of the machines did not really take off until 1991. Nevertheless, a quarter of EA's 1990 sales were from games for Genesis. The success of the Genesis, in fact, was partly due to the great popularity of EA's sports games. EA was soon producing about 35 percent of the games that could run on Sega's Genesis, allowing EA to get a jump on the software competition in developing games for 16-bit machines.

The success of Genesis spurred ever higher sales for EA. EA's net revenue increased 54.8 percent from $113 million in fiscal year 1991 to $175 million in 1992, largely due to a 215 percent increase in sales of cartridge games for the Sega Genesis, which totaled $77 million in fiscal 1992. The following year, EA's total net revenues were up another 70.4 percent to $298 million, with sales of Sega games up 117 percent to $167 million.

COMPANY PERSPECTIVES


EA has been a leader in its field since the company was founded in 1982. Since its inception, EA has been a creative leader, and today, the company continues to innovate and improve interactive gaming.

It was also in 1990 that EA changed its position and began making games for Nintendo's 8-bit player for the first time. Nintendo did not introduce a 16-bit machine, the Super Nintendo Entertainment System (Super NES), to the United States until June 1991. At this time, however, Nintendo reversed its policy and began letting software developers revise games they sold to competitors to also run on Nintendo machines. Thus, EA suddenly had a broader market for the 16-bit games it had developed for Sega.

In December 1990 Lawrence Probst, who had joined the company as vice-president of sales in 1984, took over Hawkins's post as president. Six months later Probst also assumed the position of CEO, which had been held by Hawkins, who remained as chairman and leading shareholder. In 1991 EA, originally incorporated in California, was reincorporated in Delaware and became Electronic Arts Inc.

EA quickly established itself as the leading independent developer of video games for 16-bit players. In fiscal 1992, EA's sales of software for video game cartridges overtook its sales of software on floppy disks for personal computers for the first time. The following year 56 percent of EA's worldwide revenues were from Sega format games, while 18 percent was from Super NES games.

EA capitalized on its leadership in sports games by introducing the EA SPORTS brand name in 1991. Over the years, EA had purchased licenses for team and league names and logos from the National Basketball Association, the Professional Golf Association, the National Hockey League, the National Hockey League Players Association, and the Major League Baseball Players Association. Some of EA's most popular games were "John Madden Football," "NHLPA Hockey," "Bulls vs. Blazers and the NBA Playoffs," "Lakers vs. Celtics and the NBA Playoffs," and "PGA Tour."

In the early 1990s EA took great strides toward further international expansion. In 1991 EA acquired Vancouver, Canada-based Distinctive Software Inc. and renamed the subsidiary Electronic Arts Canada Inc. This acquisition doubled the company's games developers to about 115 people. In September 1992 EA formed a joint venture with Japan's Victor Musical Industries Inc. The Tokyo-based company, called Electronic Arts Victor Inc., translated and distributed EA's games for the Japanese market and several other Asian countries. During the year following the establishment of EA Victor, EA's sales in Japan increased 140 percent. EA also established a manufacturing facility in Puerto Rico in 1992. Meanwhile, EA Europe had expanded its activities beyond manufacturing to include the translation of EA titles into up to seven languages and their distribution in 31 European and Mediterranean countries. EA Europe also developed original software games itself, and European sales doubled in both 1992 and 1993 before declining in fiscal 1994. International sales accounted for about one-third of EA's revenues in 1993.

In 1992 EA acquired Origin Systems Inc., a leading computer games developer based in Austin, Texas, with net revenues of $121 million. Origin was best known for its Ultima series of fantasy role-playing games in personal computer diskette and CD-ROM formats. These story games complemented EA's offerings in action, flying and driving simulation, and strategy games. EA subsequently diversified into educational games software for children, a category also known as "edutainment." In December 1992 the EA*Kids brand and division was launched to provide software for children aged three to 14. Learning games introduced in 1993 included "Ping and Kooky's Cuckoo Zoo," "Eagle Eye Mysteries," "Peter Pan: A Story Painting Adventure," and "Scooter's Magic Castle." EA*Kids had also created versions of its software for schools. In April of the following year, EA signed an exclusive long-term licensing agreement with the Children's Television Workshop to produce interactive multimedia software featuring the Sesame Street characters. A 1994 plan to merge with Broderbund Software, which was later canceled, would have further expanded EA's involvement in the edutainment field. Part of the reason for EA's move into educational software was the aging of the company, whose employees were having children themselves.

KEY DATES


1982:
Three former Apple Computer managers establish personal computers game business.
1987:
Company establishes manufacturing facility in England.
1989:
Electronic Arts goes public.
1991:
First major success occurs in the video game player market.
1992:
Video game cartridges surpass floppy disk sales during fiscal year.
1993:
International sales represent about one-third of revenues.
2004:
Company enters mobile cell phone game market.

Although EA had usually stayed out of developing hardware for running software games, it did introduce an innovative device in 1993 called a "Four-Way Play Adapter." It was the first device on the market that allowed up to four players, rather than just two, to simultaneously play a competitive game on a Sega Genesis game system. EA also devised special performance-enhancing computer chips inside game cartridges.

An even more significant foray into hardware development was EA's leading role in establishing a joint-venture technology company, 3DO Inc. 3DO was set up to license technology to hardware developers for a next generation of video game players, the 3DO Interactive Multiplayer, which had a 32-bit RISC microprocessor and a double-speed CD-ROM drive. EA was the largest of the original shareholders of 3DO, with approximately a 20 percent share. Other participants included Time Warner Inc.'s Time Warner Enterprises unit, Matsushita Electric Industrial Co., Ltd., MCA, AT&T, and two venture capital firms. EA helped develop 3DO's system software, and Hawkins, who was the driving force behind the venture, became CEO of the new company, while remaining chairman of EA. The 3DO Interactive Multiplayer permitted quality of sound and graphics that was unmatched for video games played on a television set. In 1993 EA was one of the first companies to introduce games for the 3DO format, which it hoped would become the new standard for video games.

In addition to the 3DO CD player, EA began developing more products for the PC and Macintosh CD-ROM formats. Its first CD-ROM games were introduced in 1992. With the emerging base of computers with CD-ROM drives in homes, CD-ROM software was expected to be the fastest growing category in the mid-1990s.

As equipment became more advanced, EA pursued its Hollywood model of entertainment software publishing even further, developing more sophisticated software. In the fall of 1993 EA formed its Advanced Entertainment Group, which brought together animators, musicians, photographers, writers, and filmmakers. Through this venture, live actors were filmed in Hollywood sound stages, and the videotaped performances digitized and integrated into the software. EA also began joint projects with Colossal Pictures, creators of the MTV show Liquid Television. Advanced Entertainment Group Senior Vice-President Stewart Bonn explained in a company brochure: "We want to create a place where artists and craftsmen from various disciplines are inspired to gather and collaborate on exciting new forms and images." The resulting multimedia software combined CD-quality digitized stereo sound, full-motion video, and 3D-modeled animation. The more creative and realistic software helped extend EA's video game market beyond children and teenagers to adults.

To create these highly sophisticated games, EA increased its already deep investment in research and development. In 1994 the company was investing 14 percent of its revenues in research and development, up from around 12 percent the previous two years. EA's innovative development techniques included its Artist Work Station, a computerized means of efficiently designing software and adapting it for multiple platforms. EA also came up with new ways to merge computer animation and live-action video. In 1993 the company formed a special group to oversee software development for the 32-bit hardware format, involving both the creation of entirely new games and the extensive redesign of existing games. Each new game for the 32-bit machine cost over $1 million to develop. Even if the 3DO were not to become the standard, the 32-bit system was expected to be the next trend, as Sega and Nintendo began developing 32-bit game players. Always looking toward the future, EA had other plans in the works, including interactive movies, travel-based entertainment, and access to its software through interactive cable television.

Although, Electronic Arts Inc., by the mid-1990s, ranked among the world's leading publishers of video and computer games software, it remained less well known than video game companies Sega, Nintendo, and Atari which manufactured video game players but produced games only for their proprietary equipment. Electronic Arts continued to focus primarily on software for various manufacturers' computers, video game consoles, or CD-ROM players. The strategy resulted in rapid growth in the expanding world market, with earnings increasing 60 percent annually between 1989 and 1994.

A ROLLER COASTER RIDE

The video game industry hit a two-year slump midway through the final decade of the century. Software companies' transition to more powerful systems was rocky. Limited shelf space for games drove industry consolidation. As 1996 drew to a close, EA, Activision, and Midway Games were the players left most strongly positioned to take advantage of a market resurgence, according to Fortune.

Electronic Arts, the top sports titles seller, brought in $532 million in revenue, for the 1996 fiscal year which ended in March, earning profits of $41 million. Stock traded at a premium to its peer group. To keep ahead of the pack, EA had to continue to produce winning titles on the right platform for the times, as evidenced by the path of 3DO. The EA offshoot failed to find a market for its $700 Multiplayer and ultimately sold the technology.

Electronic Arts, meanwhile, stayed the course. The company invested 18 months and millions of dollars to develop interactive games for Sony PlayStation 2, which became the hottest toy of the 2000 holiday season. Electronic Arts outpaced rival developers, readying six titles for the PS2 launch and three more by the end of the year, according to Fortune. However, the PS2 consoles were hard to come by, depressing EA stock after an initial upsurge. The next generation gaming system offered improved graphics, a port for a dial-up modem or high-speed Internet connection, and the capacity to run a DVD. Electronic Arts planned titles for Microsoft's Xbox and Nintendo's GameCube systems in the pipeline. Industry prognosticators envisioned strong growth for both hardware and software sales over the next two years.

Electronic Arts acquired Pogo.com in 2001. The deal for the casino and parlor card game site, estimated at $50 million, broadened EA's online market beyond its combat role-playing fan base. The software maker's own web site, launched in October 2000, had quickly become the most popular among its peer group, according to Knight-Ridder/Tribune Business News in March 2001. Runner-up Sierra.com was far outstripped in terms of number of players and time spent at the site.

The perspective of many consumers, however, shifted dramatically following the September 11, 2001, terrorist attacks on the United States. Violent games looked less appealing to some. Others saw a downturn in disposable income during the subsequent downturn in the economy.

Nonetheless EA's fourth quarter revenue managed to thump analyst forecasts for fiscal 2002, according to Game Developer. Yet all was not rosy for EA. The online division struggled: employees received pink slips, the costly MAJESTIC offering scuttled, and red it flowed. Meanwhile rival Activision was on track to join EA's exclusive club of $1 billion software game publishers.

Another move proved more favorable than the online endeavor. Back in 1999, when EA chose to focus on creating games for PlayStation 2 forgoing the hot Dreamcast console, the company drew its share of barbs. Yet in 2003, Forbes called the move a smart one. "There are now 42 million PlayStation 2s in homes worldwide; Sega pulled the plug on Dreamcast after selling 4.5 million consoles in 17 months. In the past three years EA's stock has climbed 106 percent to an October high of $72," Dorothy Pomerantz reported in January 2003. Madden NFL remained a perennial bestseller and, for the 2002 holiday season, EA scored a hat trick with Harry Potter, Lord of the Rings, and James Bond games.

Ironically, Hollywood box-office receipts fell short of U.S. sales of game hardware, software, and accessories in 2002. Software sales alone rose 21 percent, according to Business Week Online in March 2003, and EA was a beneficiary of the surge, posting strong revenue and earnings gains.

Still, the online woes continued. Electronic Arts' moneymaker The Sims, launched online in mid-December 2002, failed to produce expected results. Continuing EA.com shortfalls prompted Electronic Arts to consolidate its results beginning in April 2003. EA as a whole kept rolling along. Anticipation of another strong holiday showing drove EA stock to an all-time high in September, according to Business Week Online.

Fiscal 2004 sales hit $2.95 billion. Electronic Arts held a 22 percent share of the North American game market, double the share of closest competitor Nintendo. Not even Microsoft, the world's largest software developer, could overtake EA when it came to its sports game prowess. FIFA Soccer, the best-selling game ever, and Madden football helped EA capture a 60 percent share of the sports game business, according to U.S. News & World Report. The Sims, moreover, ranked as the best-selling PC video game.

Thus, although the industry was entering a slow period in its business cycle, EA was expected to fare well, supported by the ongoing popularity of its titles. The industry's outlook itself appeared bright as younger age groups chose electronic games over television. Furthermore, as the first wave of gamers aged, many were predisposed to spend disposable income on new technology and games for their kids and themselves.

GLOBAL GAME HEATING UP

At the midpoint of the decade, EA continued to seek out avenues of growth. The European market, while well established, afforded possibilities. At the end of 2004, EA acquired nearly 20 percent of French game publisher Ubisoft, although the move was unwelcome. The Asian market, ripe with potential, presented a different kind of dilemma. EA titles were on the shelves in China, for example, but largely due to piracy. The company also held out hope for a significant revenue stream from online gaming, despite its earlier setback. In-game advertising and product placement also showed promise for the industry, which generated just one-sixth as much as television did through the technique. Moreover, EA had not released a game for mature audiences, a significant market segment, since 2000.

Meanwhile, 2005 presented challenges. The industry, waiting out another period of technological transition, also faced higher marketing costs, expensive licensing agreements, and stiff competition, according to a May Los Angeles Business Journal article. Publicly traded EA, Activision, and THQ all suffered downturns in share price. EA, specifically, was tied to game console agreements, which posed a potential financial hindrance as competitors moved into games for mobile phones and handheld devices.

As 2006 began, game publishers were preparing investors for less than stellar 2005 holiday season results, citing shortages of Xbox 360 as one cause for their problems. The New York Times offered another perspective on the industry's situation. Seth Schiesel wrote: "But the bigger picture for investors is that game publishers in the United States are still almost entirely in the same business they have been in for 20 years: selling new games at retail. As a result, the big publicly traded domestic publishers are not participating in any meaningful way in two of the hottest parts of the global video game industry: subscription-based online gaming and trade-ins of used games." European and Asian companies, conversely, had found success in the online sector. In addition, GameStop leveraged the secondary market of used game sales into increased profits and higher share value.

Electronic Arts moved to buy Jamdat Mobile in early 2006 for $680 million. Jamdat, holding 33 percent of the mobile game market, was the producer of winning title Tetris. While the Asian market was on fire, though, phone games had yet to fully engage the North American consumer. The game industry malaise continued through much of 2006. Even so, the industry, including Electronic Arts, hoped the cycle was on the verge of an upswing.

Heather Behn Hedden

Updated, Kathleen Peippo

PRINCIPAL COMPETITORS

Activision, Inc.; Take-Two Interactive Software, Inc.; Vivendi Games.

FURTHER READING

Berry, Kate, "Video Game Makers Find That Hollywood Can Be Tough Town," Los Angeles Business Journal, May 16, 2005, pp. 1+.

Black, Jane, "Can Electronic Arts Keep on Clicking?" Business Week Online, September 10, 2003.

, "EA Gets Its Game On," Business Week Online, March 24, 2003.

Bohner, Kate, "Trip Trips ," Forbes, September 23, 1996, p. 16.

Burstiner, Marcy, "Game Plan Pays Off; Software Maker Plays to Win in Competitive Field," San Francisco Business Times, May 21, 1993, p. 7A.

Carlsen, Clifford, "Electronic Arts Hires Zerbe, Looks to Future," San Francisco Business Times, July 27, 1987, p. 8.

Chakravarty, Subrata N., "The Best Job in the World?" Forbes, March 28, 1994, pp. 5051.

Chmielewski, Dawn C., "Redwood City, Calif.-based Internet Gaming Company Buys Another Firm," Knight-Ridder/Tribune Business News, March 1, 2001.

Cohen, David S., "Jamdat Buy Gets EA into Game," Variety, February 13, 2006, p. B8.

Goldfisher, Alastair, "Electronic Arts Spinoff 3DO Finds New Legs in Video Game Software," Business Journal, August 24, 1998, pp. 3+.

Grant, Linda, "Plugging in to a New Game Plan," U.S. News & World Report, April 25, 1994, p. 74.

Gunderson, Amy, "A Play on PlayStation: Electronic Arts," Fortune, January 8, 2001, pp. 173+.

Huebner, Daniel, "EA Activision Report Surging Fourth-Quarter Revenues," Game Developer, July 2002, p. 4.

"King of the Nerds," Economist, July 28, 1990, pp. 5859.

"On Top of Its Games," Business Week, April 30, 2001, p. 139.

Pethokoukis, James M., "Is It Time to Say Game Over?" U.S. News & World Report, May 10, 2004, p. 50.

Pfanner, Eric, "French Video Game Makers Fear Their Grasp Is Slipping," New York Times, January 10, 2005, p. C5.

Pitta, Julie, "Electronic Smarts," Forbes, May 27, 1991, pp. 1012.

, "This Dog Is Having a Big Day," Forbes, January 22, 1990, pp. 1067.

Pomerantz, Dorothy, "Top of Their Game," Forbes, January 6, 2003, p. 131.

Richtel, Matt, "Despite Loss, Electronic Arts Predicts Upturn," New York Times, August 2, 2006, p. C8.

, "Video Game Makers Are Battling Sinking Stock Prices," New York Times, June 19, 2006, p. C1.

Schiesel, Seth, "A Bright Spot in the Dim Video Game Picture," New York Times, February 2, 2006, p. C8.

Schonfeld, Erick, "Robots on the Rise: Videogame Rivals Are in the Midst of a Shootout," Fortune, December 9, 1996, p. 274.

Shapiro, Eben, "Jury Still Out on Video Games: Electronic Arts' Prospects Studied," San Jose Mercury News, June 24, 1991, p. 11E.

Wilson, Lizette, "Gaming Giant EA Gambles Online," San Francisco Times, October 19, 2001, p. 15.

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Electronic Arts Inc.

Electronic Arts Inc.

1450 Fashion Island Blvd.
San Mateo, CA 94404
U.S.A.
(415) 571-7171
Fax: (415) 571-6375

Public Company
Incorporated: 1982 as Electronic Arts
Employees: 1,065
Sales: $418.29 million
Stock Exchanges: NASDAQ
SICs: 7372 Prepackaged Software

Electronic Arts Inc. (EA) is one of the worlds leading publishers of video and computer games software. Better known video game companies, including Sega, Nintendo, and Atari, manufacture video game players but produce games only for their proprietary equipment. Electronic Arts, on the other hand, produces software for various manufacturers hardware, whether computers, video game consoles, or CD-ROM players, and EA has specialized in just software. EA has experienced rapid growth in a swiftly expanding world market, with earnings increasing 60 percent annually between 1989 and 1994.

Electronic Arts was founded in 1982 by three former managers of Apple Computer: William M. (Trip) Hawkins III, who was a marketing director at Apple and at age 26 became head of the new enterprise; William Bingham (Bing) Gordon, who became the companys director of marketing; and Tom Mott. Both Hawkins and Gordon earned MBAs from Stanford University. The decision was made to form a company that specialized in developing and marketing software games for home computers at a dinner with four other friends at Hawkinss home. EA started with a team of 11 people and $5 million in capital from private investors.

EA was flexible from the beginning, developing its software for whatever computer hardware was most popular at the time, usually then producing multiple versions of programs to run on different systems. EAs first product, shipped in May of 1983, was a software game for the Atari 800 game player, but shortly thereafter the market shifted to the Commodore system. EA readjusted quickly, and in October 1983 it shipped six more games for the Commodore 64 computer. In 1984 its Skyfox computer game, designed for the Apple II computer, became a best-seller. Two years later EA began producing games for the new Commodore Amiga, which turned out to be a very popular computer. By 1990 EA was investing an additional 50 percent of each products development costs to retool the software so that it could run on a different hardware system.

Games software in the early 1980s was still a very new industry, as personal computers were not yet widespread. Thus, EA took a fresh approach to designing software, modeling the development and production more on the entertainment industry than on the software industry. Instead of hiring computer programmers, EA hired software graphic arts designers and project managers it called producers. Ideas for new computer games often came from freelancers, who proposed game scenarios just as independent scriptwriters submit their scripts to Hollywood studios. If an idea was approved by an in-house committee, the project was assigned to a producer. Later, more of the ideas were developed in-house, but EA continued to consider its software developers artists.

Like movie studios, EA produces many games to increase the chance of a success. Since 1984 EA has also acquired marketing rights to software packages developed by smaller outside companies through its Affiliated Labels program. EA even began contracting celebrities, especially sports stars, whose names and images were added to the software. These have included football star John Madden, basketball players Michael Jordan and Larry Bird, and chess champion Garry Kasparov. NASAs Chuck Yaeger was involved in the development of a flight simulation game.

Unlike many of its competitors, who use third-party distributors, EA took the strategic approach of establishing its own sales force. EAs salespeople sell directly to such retailers as Egghead Inc., Toys R Us, Wal-Mart and Target. In addition to permitting better control over sales and inventory, use of the sales forces has also helped EA keep better track of consumer trends.

Early on EA began selling its software overseas. In 1986 $1.5 million of its $30 million in revenues were from international sales. In 1987 EA established a manufacturing facility which became part of what is known as EA Europein Langley, England. EA President and CEO Hawkins had begun to spend more time exploring strategic growth plans, particularly international expansion, and in 1987 much of the day-to-day administration of the company was turned over to his newly-hired senior vice president, Kenneth Zerbe. EA went public in September of 1989 with a market capitalization of about $84 million. Sales that year were $63.5 million, and net income had shot up from $1.3 million in 1988 to $4 million in 1989.

Having developed its software to run on a variety of computers, by 1986 EA had become the leading supplier of entertainment software in the United States, but this market was limited. In the late 1980s video game cartridges, which run on special players connected to television sets, were proving to be a more lucrative industry because most consumers had television sets but not computers at home. In 1989 the video game market was estimated at $3.4 billion in sales, as compared to $250 million for floppy disk computer games. It also comprised mostly children and teenagers, rather than the young adults who used computers. This market was dominated by the Japanese company Nintendo, with its own and compatible cartridges accounting for 80 percent of 1989 U.S. video game sales. Although EA had begun producing software for some cartridge game companies, it did not develop games for Nintendos systems. EA was unwilling to abide by Nintendos conditions, which would have involved agreeing not to provide the same games to Nintendos competitors, such as Sega.

EA made its major move into the video game market by gambling on an unreleased game player from Sega. EA did not merely revise, but designed entirely new games for Segas Genesis machine, which in 1989 was the first 16-bit video game player available to the U.S. market. The 16-bit players were almost twice as fast as the existing 8-bit machines. For the Genesis player, EA worked on eight to ten projects, each costing about $250,000, for a total product development investment of $2 million to $2.5 million. EA shipped its first games for Segas Genesis in June of 1990, although sales of the machines did not really take off until 1991. Nevertheless, a quarter of EAs 1990 sales were from games for Genesis. The success of the Genesis, in fact, was partly due to the great popularity EAs sports games. EA was soon producing about 35 percent of the games that could run on Segas Genesis, allowing EA to get a jump on the software competition in developing games for 16-bit machines.

The successes of Genesis spurred ever higher sales for EA. EAs net revenue increased 54.8 percent from $113 million in fiscal year 1991 to $175 million in 1992, largely due to a 215 percent increase in sales of cartridge games for the Sega Genesis, which totaled $77 million in fiscal year 1992. The following year, EAs total net revenues were up another 70.4 percent to $298 million, with sales of Sega games up 117 percent to $167 million.

It was also in 1990 that EA changed its position and began making games for Nintendos 8-bit player for the first time. Nintendo did not introduce a 16-bit machine, the Super Nintendo Entertainment System (Super NES), to the United States until June of 1991. At this time, however, Nintendo reversed its policy and began letting software developers revise games they sold to competitors to also run on Nintendo machines. Thus, EA suddenly had a broader market for the 16-bit games it had developed for Sega.

In December of 1990 Lawrence Probst, who had joined the company as vice president of sales in 1984, took over Hawkinss post as president. Six months later Probst also assumed the position of CEO, which had been held by Hawkins, who remained as chairman and leading shareholder. In 1991 EA, originally incorporated in California, was reincorporated in Delaware and became Electronic Arts Inc.

EA quickly established itself as the leading independent developer of video games for 16-bit players. In fiscal year 1992, EAs sales of software for video game cartridges overtook its sales of software on floppy disks for personal computers for the first time. The following year 56 percent of EAs worldwide revenues were from Sega format games, while 18 percent was from Super NES games.

EA capitalized on its leadership in sports games by introducing the EA SPORTS brand name in 1991. Over the years, EA had purchased licenses for team and league names and logos from the National Basketball Association, the Professional Golf Association, the National Hockey League, the National Hockey League Players Association, and the Major League Baseball Players Association. Some of EAs most popular games were John Madden Football, NHLPA Hockey, Bulls vs. Blazers and the NBA Playoffs, Lakers vs. Celtics and the NBA Playoffs, and PGA Tour.

In the early 1990s EA took great strides towards further international expansion. In 1991 EA acquired Vancouver, Canada-based Distinctive Software Inc. and renamed the subsidiary Electronic Arts Canada Inc. This acquisition doubled the companys games developers to about 115 people. In September of 1992 EA formed a joint venture with Japans Victor Musical Industries Inc. The Tokyo-based company, called Electronic Arts Victor Inc., translated and distributed EAs games for the Japanese market and several other Asian countries. During the year following the establishment of EA Victor, EAs sales in Japan increased 140 percent. EA also established a manufacturing facility in Puerto Rico in 1992. Meanwhile, EA Europe had expanded its activities beyond manufacturing to include the translation of EA titles into up to seven languages and their distribution in 31 European and Mediterranean countries. EA Europe also developed original software games itself, and European sales doubled in both 1992 and 1993 before declining in fiscal 1994. International sales accounted for about one-third of EAs revenues in 1993.

In 1992 EA acquired Origin Systems Inc., a leading computer games developer based in Austin, Texas, with net revenues of $121 million. Origin was best known for its Ultima series of fantasy role-playing games in personal computer diskette and CD-ROM formats. These story games complemented EAs offerings in action, flying and driving simulation, and strategy games. EA subsequently diversified into educational games software for children, a category also known as edutainment. In December of 1992 the EA*Kids brand and division was launched to provide software for children aged 3 to 14. Learning games introduced in 1993 included Ping and Kookys Cuckoo Zoo, Eagle Eye Mysteries, Peter Pan: A Story Painting Adventure, and Scooters Magic Castle. EA*Kids has also created versions of its software for schools. In April of the following year EA signed an exclusive long-term licensing agreement with the Childrens Television Workshop to produce interactive multimedia software featuring the Sesame Street characters. A 1994 plan to merge with Broderbund Software, which was later cancelled, would have further expanded EAs involvement in the edutainment field. Part of the reason for EAs move into educational software was the aging of the company, whose employees were having children themselves.

Although EA has usually stayed out of developing hardware for running software games, it did introduce an innovative device in 1993 called a Four-Way Play Adapter. It was the first device on the market that allowed up to four players, rather than just two, to simultaneously play a competitive game on a Sega Genesis game system. EA has also devised special performance-enhancing computer chips inside game cartridges.

An even more significant contribution to hardware development was EAs leading role in establishing a joint-venture technology company, 3DO Inc. 3DO was set up to license technology to hardware developers for the next generation of video game players, the 3DO Interactive Multiplayer, which has a 32-bit RISC microprocessor and a double-speed CD-ROM drive. EA was the largest of the original shareholders of 3DO, with approximately a 20 percent share. Other participants included Time Warner Inc.s Time Warner Enterprises unit, Matsushita Electric Industrial Co., Ltd., MCA, AT&T, and two venture capital firms. EA helped develop 3DOs system software, and Hawkins, who was the driving force behind venture, became CEO of the new company, while remaining chairman of EA. The 3DO Interactive Multiplayer permitted quality of sound and graphics that was unmatched for video games played on a television set. In 1993 EA was one of the first companies to introduce games for the 3DO format, which would hopefully become the new standard for video games.

In addition to the 3DO CD player, EA began developing more products for the PC and Macintosh CD-ROM formats. Its first CD-ROM games were introduced in 1992. With the emerging base of computers with CD-ROM drives in homes, CD-ROM software was expected to be the fastest growing category in the mid-1990s.

As equipment became more advanced, EA pursued its Hollywood model of entertainment software publishing even further, developing more sophisticated software. In the fall of 1993 EA formed its Advanced Entertainment Group, which brought together animators, musicians, photographers, writers, and film makers. Through this venture, live actors have been filmed in Hollywood sound stages, and the videotaped performances have been digitized and integrated into the software. EA also began joint projects with Colossal Pictures, creators of the MTV show Liquid Television. Advanced Entertainment Group Senior Vice President Stewart Bonn explained in a company brochure: We want to create a place where artists and craftsmen from various disciplines are inspired to gather and collaborate on exciting new forms and images. The resulting multimedia software combined CD-quality digitized stereo sound, full-motion video, and 3D-modeled animation. The more creative and realistic software helped extend EAs video game market beyond children and teenagers to adults.

To create these highly sophisticated games, EA increased its already deep investment in research and development. In 1994 the company was investing 14 percent of its revenues in R&D, up from around 12 percent the previous two years. EAs innovative development techniques have included its Artist Work Station, a computerized means of efficiently designing software and adapting it for multiple platforms. EA also came up with new ways to merge computer animation and live-action video. In 1993 the company formed a special group to oversee software development for the 32-bit hardware format, involving both the creation of entirely new games and the extensive redesign of existing games. Each new game for the 32-bit machine cost over $1 million to develop due to their complexity. Even if the 3DO were not to become the standard, the 32-bit system was expected to be the next trend, as Sega and Nintendo began developing 32-bit game players. Always looking toward the future, in the mid-1990s EA had other plans in the works, including interactive movies, travel-based entertainment, and access to its software through interactive cable television.

Principal Subsidiaries:

Origin Systems; Electronic Arts Puerto Rico Inc.; Electronic Arts Canada Inc.; Electronic Arts Ltd. (U.K.); Electronic Arts Pty. Ltd. (Australia); Electronic Arts GmbH (Germany); Electronic Arts S.A. (France); Electronic Arts Victor, Inc. (Japan; 65%).

Further Reading:

Burstiner, Marcy, Game Plan Pays Off; Software Maker Plays to Win in Competitive Field, San Francisco Business Times, May 21, 1993, p. 7A.

Carlsen, Clifford, Electronic Arts Hires Zerbe, Looks to Future, San Francisco Business Times, July 27, 1987, p. 8.

Chakravarty, Subrata N., The Best Job in the World? Forbes, March 28, 1994, pp. 50-51.

Grant, Linda, Plugging in to a New Game Plan, U.S. News & World Report, April 25, 1994, p. 74.

King of the Nerds, The Economist, July 28, 1990, pp. 58-59.

Pitta, Julie, Electronic Smarts, Forbes, May 27, 1991, pp. 10-12.

______, This Dog is Having a Big Day, Forbes, January 22, 1990, pp. 106-107.

Shapiro, Eben, Jury Still Out on Video Games: Electronic Arts Prospects Studied, San Jose Mercury News, June 24, 1991, p. 11E.

Heather Behn Hedden

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