The Electronic Arts IPO (with Trip Hawkins)

0:00 One more time. This is Trip. We're on Santa Barbara radio. Great. And there's our opener. Welcome to season 4, episode 7 of Acquired. The podcast about technology, acquisitions, and IPOs. I'm Ben Gilbert, and we are your hosts.

0:32 With all these A plus IPOs going on, we wanted to do a throwback episode to another era. Nineteen eighty nine, where an IPO meant something very different. We come to you today from Sunny Santa Barbara, birthplace of Logan Green's transportation dream, if you listen to the lift episode, and of course the home of Sonos, if you listen to that episode. And today we sit here with Trip Hawkins, the founder of the most legendary gaming company in the world. Electronic Arts.

1:00 Tripp worked as an early employee at Apple Computer as the director of strategy and marketing until 1982, before starting EA, taking it public and later moving on to start other companies in the gaming space such as 3DO. And digital chocolate. Trip is now a professor of practice in the Technology Management Program at the University of California, Santa Barbara, and we are incredibly lucky to have him here with us today. So welcome Trip. Well thank you. I'm delighted to be here.

1:27 Yeah, it's it's great to have you. For anyone who's new to the show, here's how it works. We walk through the history and facts of a company from founding all the way through an acquisition or IPO. Then we analyze and grade the transaction where we issue judgment on if that was a good idea or not. So this show is really one of storytelling followed by one of judgment. If you are involved in startups and you want to dig in with us on company building topics rather than just the exit, we've got a second show for you. You can become an acquired limited partner by clicking the link in the show notes or going to glow.fm slash acquired and get access to these limited partner episodes. featuring interviews with expert operators, investors, and of course David and I diving deeper on topics like finding product market fit, term sheets, and how venture firms really work.

2:13 It's pretty cool. I mean, we started this as an experiment, what, like six months ago? And it's like a real show now and we're just so pumped about how many of you guys are listening and Getting value out of it. So It's been super fun. All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora.

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4:45 And just tell him that Ben and David sent you. All right, David. It is time. It's time. So excited to dive in with trip here. So per usual. We'd like to start way back at the beginning on this show. So you grew up uh here in Southern California, right? In uh in the nineteen seventies. That's right. What did your family do? What brought them to California?

5:06 I have family that came here about a hundred years ago. Oh wow. You didn't start early enough, David. They were uh you know back east and a few of them were uh obviously entrepreneurs and uh I think that's how pretty much everybody in California got here is they uh We're willing to leave some other place. And and head to uh the the one of the most remote parts of the planet. So growing up you loved sports, right? You were a jack, but you also love

5:32 Games. And games meant something very different back then, right? There were no video games. Games were pen and paper, they were Dungeons and Dragons, they were sports simulations Those those don't seem to me sitting here like uh Jacks back then played Dungeons and Dragons. How did you meld both of those and come to love them?

5:54 It was the golden age of television and I found that what I enjoyed the most on television was watching football and baseball. I could tell you. that something really interesting was going on from a strategy standpoint. So I I can't say that the time that I realized that I was a strategic thinker.

6:13 I'm just able later on to look back on it and realize, yeah, that that's that's why that spoke to me. I'm seeing these things on television because that's the medium that's available or or in some cases just even listening on the radio because everybody everybody had a radio. And Then of course I decided, hey, I wanna I'm gonna play these things in real life. So I'm you know becoming a jock in real life and I'm watching on TV And I've just had this craving f for more interaction with it.

6:40 I found that uh back in the nineteen sixties Some game designers had invented these uh card board dice games. And a lot a lot of people remember the one uh There was a it was called All Star Baseball where it's listed as baseball pieces of paper.

6:57 And you'd have one for Babe Ruth, and you'd have another one for for Ty Cobb. And if it's Babe Ruth, there's a big pie slice for him to hit a home run. Whereas Ty Cobb had a much bigger pie slice for hitting a single Yeah. And you would you would put the you would put the thing on a spinner and you'd you'd hit the spinner with your finger. I had one of these growing up in the eighties too. Yeah, so a lot of people remember that one. Yeah. They don't remember uh my favorite one, which is called Stratomatic, and again it's a game invented in the sixties and you roll dice, and there's all these player cards and you would look up the result.

7:29 And heck, I was about I don't know, ten. when I basically on my own figured out Bayesian probability theory from studying the dice and I realized why does this guy have this here and this other guy has it there? And then I'll like, Oh my God There are more ways to roll the seven than a twelve. And well, how many more ways are there? And why is that? And which guy do I want if I'm gonna play my friend And I wanna win, I better figure out

7:56 You know, how this really works. Again, I just kinda discovered that I found math and statistics fascinating. If I could apply it to something strategic where I was competing. I'm a very competitive guy. Uh ideally as a kid.

8:12 Uh, you're tuning into who you are. And part of you Or gifts from your ancestors. And y hopefully you can discover what abilities you were already born with. you can figure out what's going on in your environment that really p that really speaks to you.

8:30 And decide then what are you passionate about doing about it? And I and I had the good fortune To have those things happen. And on the environment front, You it w was it your senior year in high school you were first exposed to computers? The

8:45 Actually earlier in high school I think I was maybe a uh sophomore And and then I was trying to get my friends to play these games. And a few of the nerdiest friends Love the games too. And

8:58 you know, we all loved it. You know, we all kinda saw what the value was. But a whole lot more friends. Kids. they would drift back to watching television. Like it they was it was too much work. Too much work too much overhead. Yeah. So you know and you know things like D D are you know kind of famously geeky in that way. And it's just not everybody's cup of tea. And I'm I was just thinking about realizing man, this is This is a really special experience to be this mentally engaged.

9:22 But Not everybody can relate to it. It's just too much work to operate the thing. And that's when as soon as I heard about computers and I could kind of see it with my own eyes, I thought, This is how you do it. We're gonna basically put All of the administrative operating stuff in a box

9:38 And we're gonna put pretty pictures on the screen like television. And what I didn't realize at the time was that I was seeing Something that was gonna be true. Forty years later. Yeah.

9:49 And if you told me you know, Trip. That's gonna take forty years. I'll go, Oh, never mind. But you don't know that. So next thing you know, you spend forty years working on it. By the way, I I just have to say that I didn't know. I had

10:04 This accurate forecast about something that would be cool, right? I I didn't know it was gonna turn out to be a hundred billion dollar industry. I just thought it was a really cool thing that I cared about and that I wanted to go help. make happen. And I think uh I have no idea what's gonna happen forty years from now. I don't know about you. We're thinking about it. We overly speculate, that's for sure.

10:28 So this is all swirling around here in Southern California. You go to college at Harvard You were there at the same time as as Bill Gates and Steve Bomber, right? Did you did you interact with them at all? You know, we ended up yeah using some of the same computer labs. Yeah, but I only knew that later. I think it's entirely possible that Bill and I would have been in the Aiken computation center at the same time without without having it ever actually met. Honestly, those of us who were really serious about it, that we would go there at night. These are timeshare systems. Right.

10:59 and you didn't want to compete with all the students doing their homework during the day. You'd go at night. And there were there were basically nerds that you could smell from ten feet away. There were guys sleeping under tables. I mean it was just, you know, chaos. But if you were really into it, you were just thrilled to be there on a machine at night when you had more speed. Yeah. So you were you were also doing something though that Bill Gates was not doing, and that was playing for Harvard and playing football. Talk about how on earth you were balancing being a a collegiate athlete and being this person that's staying up all night in the computer lab, one of the only people at this time that were dedicated to the craft of of learning and mastering the computer.

11:37 Yeah, that was that was a tough balancing act and I I lettered in football as a freshman. And then I realized that wow, this is so time consuming that I can't do everything doing. So I you know, I would have loved to have done it all. In fact, you know, in hindsight, if we could go back and do it differently, I probably would have loved to have played varsity football and done that uh longer And what I found was that they actually had a club football program.

12:04 No practices really. And it was tackle football. And you would play with, you know, different dorm dormitory uh groups. Yeah, that was a hell of a lot of fun. So uh you know, when you're doing that, uh we went undefeated and unscored on. We we w we only played six games and you know, it was really hard to have a elaborate offensive playbook. Because you know, nobody's spending a lot of time practicing. Right. But I I was the free safety on that team and we never allowed anyone to score. I was I was the last line of defense. So that was for me probably the highlight of my my football life. That's amazing. So

12:37 W was it at this time that was it at Harvard where you you realized you wanted to start a company? Uh and had started laying in motion all the plans that would that would be. And so I started working on it. I got some help from uh my my best friend.

12:54 who by the way ended up becoming a football coach. So we're we're really into football and so there's a You can think of that in today's terminology that would be about, you know, prototyping and building a minimum viable product. So we did that. And and then I thought, Well, hey, why don't I uh actually Market this. And uh my my dad was uh generous enough to loan me five thousand dollars and I went and

13:16 Sourced all of the different parts like uh Yeah, Silk Screen uh Game board. And paper parts and things that you had to, you know, have perforations on so you could punch'em out and Dice and

13:28 I had to f you know figure out who who am I gonna buy dice from and building a full tabletop game of your own. Yeah. And so that all got put together and uh customers loved it. I got incredibly positive feedback from customers. I had no idea how to run a company. I didn't have enough money to do any marketing. So it obviously didn't get very far, so I lost every penny. And this is during undergrad? I'm in high school. I'm basically learning two things. One Wow, ouch, man, it really hurts when you got this baby, this thing you've created, that's your baby. Extension of yourself. And has it has been rejected by the business world.

14:04 And you can't keep going with it. And y that feeling of failure and disappointment that that dream has died creatively. Yeah, it was a good experience to Go through that. And then the second thing I learned was, man, this is so much fun. I I gotta do this again. This is amazing. So stimulating.

14:23 And I thought, you know, maybe I want to learn some more before I do it again. Yeah, so I have a chance to have a better outcome. And this is again in the nineteen seventies where I'm actively thinking about how computers can Yeah.

14:36 And It wasn't too long after that, where it was in nineteen seventy five and you know I'm in a summer job in uh Santa Monica. You went to G S B to Stanford Business School right after Harvard, right? Yeah. So that comes a little bit later. So I'm I'm still in college. And This is when uh a colleague uh comes back and tells me uh

14:57 Well, I was just in a uh retail store where you can rent computer terminals and take'em home and have them Connect through a modem to your mainframe. And they it they only charge you ten bucks an hour. You can basically do computing from home. And I said, Wow, that's incredible. It's happening. It's finally happening. Yeah. And then you say well that's not all shoot, Intel uh just, you know, uh just announced the invention of the first microprocessor chip that can combine all these things on a single chip.

15:23 And I think, Yeah, well dang, well that's gonna get into homes. And this is uh this is in the summer of nineteen seventy five. It turns out that was the world's first computer retail store. It was Dick Heiser's computer. It's called the Computer Store, run by this guy Dick Heiser, who's at Apple, he became an Apple dealer. Uh later on. And literally

15:41 My colleague walks away and I immediately start sketching it out and saying, Okay, how long is it gonna take for the hardware costs to come down? For the number of stores to grow. And for the the number of machines and homes to be big enough that you can make some money selling some games. And that's when I realized

15:58 That I could probably do that by nineteen eighty two, seven years later. And that is exactly what I did. You bided your time a little bit until then. It's you know, listeners might expect Okay, so you went and started electronic arts. But you did something else in the interim and and that was Apple Computer and that was one of the very first employees at Apple Computer.

16:19 How did that happen? How you got the job and the phone call you got from from Steve Jabs. Well, you know, since you guys want to talk about the IPO of electronic arts The company, oddly enough, it it didn't really even have all that much value until two years after the IPO. And if you look at that time frame.

16:38 creating that value was a twenty year process. Mm-hmm. And it turns out, well, you know, often It's really not even remotely an overnight. Pretty much. Yeah, there was a About a decade.

16:56 before Electronic Arts was founded, where I'm planning the whole thing. And then it took another decade of actually running the business before it really took off and had a lot of value. Long game we're in here. It it really is. It really is a long game. And By the way, I thought about this recently when uh Google And now it's Stadia, which is their play. on uh the idea of

17:17 Cloud stream game games. And I thought, yeah, and my initial thought was, Yeah, you know, th they don't have the game catalog and they're not gonna get it because all the guys that have the game catalogs, two of which Sony Microsoft are now You know. Joint forces. And they have no first party titles. Right. How are they gonna how how can they fix that problem? And then I'm like, Wait a minute.

17:35 Wait a minute. Uh E didn't have that in the beginning. Apple didn't have that in the beginning. If you're or In the long game. Then you're saying

17:43 Shoot. Nobody knows what games are gonna be popular ten years from now. Nobody even knows what the technology is gonna be that you that the games build the infrastructure. How do we Hang around this long enough. And uh you know, frankly it's uh if if Google thinks yeah, do we just want to be the leader ten years from now? So which

18:00 Which young Super talented. data scientists, machine learning, AI experts. Our young indie developers now. that are gonna grow in their careers to the point where five, ten years from now, they're gonna make a hit.

18:14 That could be the next League of Legends or the next Call of Duty. The next Fortnite. Yeah, if if you're willing to plant ahead like that. Most of us generally are way too impatient for that. We w we want it to happen now. Of course, Google could maybe even acquire electronic arts and then they would start to have the the back catalogue. It's that's gonna be a very interest interesting space uh to watch. But getting back to our story. Yeah. Yeah, you have this thing unfolding over a twenty year period.

18:38 And I realized, man, uh I gotta know a lot more about how to run a business. And I also need to go help somebody sell Computer systems into homes. Yeah. Okay, how am I gonna do that? I'm not really an engineer. I don't even understand how electricity works. But I love software.

18:57 So I've always been around software. Software runs on hardware and I've I was always good at talking to other engineers and kinda understanding the system. And how it worked. And I and I thought, you know, um I'm not gonna have credibility in Silicon Valley. by being an electrical engineer.

19:14 I'm gonna have to build my credibility some other way. Now this is something that a lot of people can still do today. You don't have to be the expert on the on the tech. You have to be able to relate to those people. You have to be able to learn their dialect. You have to learn when they're bullshitting you. Uh you have to go call them on their their stuff. And then you have to command their respect and get and have credibility with them because you have expertise about something that they care about. So In my case

19:39 The pathway in was being more knowledgeable up with the customer. In the applications. And I thought okay, how do I get that going? And here here again, uh there's a lot of good fortune, I think, in a lot of these uh stories, but When I first got to the Bay Area, I was you know finishing school at Stanford.

19:57 And it turns out I'm going right by the headquarters of Fairchild semiconductor. Mm-hmm. And they had actually just come out with uh one of the first Uh consoles. And it was one of the very first consoles.

20:10 This is mid seventies. That you could stick game cartridges into. Huh. So I went into their lobby I never knew they did that. Yeah, it was called the channel F. Were they competing with Atari?

20:21 In effect. It it was such a new industry that you're really just competing with yourself, honestly. But all the semiconductor companies in the seventies, they're trying to figure out how to drive demand for their chips so they can get more volume. So more of them thought, let's have a consumer division, we'll make watches, we'll make calculators. Yeah. And then some of them thought, well let's make uh arcade type simple consoles like Pong games. A lot of them made Pong games. And then only a few of them just said, Well, hey, how about a a cartridge system where you can change the game? Anyway, so Fairchild was one of them.

20:52 It was pretty clueless. They c they they abandoned it uh before too long. But while they were doing it, I dropped into their lobby and I said, I'd like to talk with somebody in marketing and they go, What about Well, I'm I'm a Stanford student. I'd like to offer to do a free market research project. Free is a fabulous word. It's the most powerful word in the history of marketing. And it opens a lot of doors. And this junior marketing guy comes out

21:16 And says, What do you want? And I said, Well, you know, here's the deal and you know if if you just You know, g give me uh the addresses of a couple hundred customers, I'll I'll design a questionnaire and work with you on making sure your questions get answered and we'll basically go try to understand more about who your customers are and what they want. Of course, secretly I'm thinking, yeah, do they prefer football or baseball? And is there gonna be a demand for that? Because that's what I want to make. So uh he says, Okay, sure.

21:42 I continue on my drive to Stanford and I said, Okay, now I'm gonna go get course credit for this. So I didn't get paid. Yeah. But I was able to build it into my uh curriculum that way. And then uh there I am in the library at Stanford not too long after that, and I'm in the copier room. And this guy just ahead of me on the copier.

22:02 He pulls out this report. And I can I see video games on it. And he puts it on the copy or making a copy of a couple of pages from this thing. And I said, Uh what is that? And he says, Yeah, this is a study I wrote last summer for this market research firm about you know about these simple little uh pong uh machines that

22:23 the semiconductor companies had been making. And he had done a market analysis of it. I go, Oh. Okay. And then I w I basically followed the guy as he went and returned this uh report To the shelf in the library.

22:37 As soon as he left I I took it off the shelf and read it cover to cover. And I realized. Dang, this is cool. You know, I could do a report like this. About personal computers. Yeah. And nobody had done a report.

22:51 About personal computers. They were too new. And I mean just think about that statement. I know. So this would've been what, like nineteen seventy seven? Seventy six? Uh yeah, this seventy six, probably. Okay. Yeah. It was either fall of seventy six or early seventy seven.

23:08 Okay, so I need a summer job between the two years of business school and I go talk to that same market research firm, they're down in San Jose. I said, Yeah, I'd like to No, they they were they were in the habit of hiring MBAs and having them spend the summer writing a study. And I said, I'd like to write a study about personal computers and the head of that firm says to me

23:28 What is a personal computer? This is in San Jose. Yeah. Heart of Silicon Valley. And and he's he's a research firm. Yeah. And and I explained it to him and he goes, You know, yeah, we do business with all these, you know, big big uh manufacturers and technology companies and Because And the heel of the cards, the decks, the thing.

23:48 They're not we have no demand for that. Amazing. And I'm kinda doing an eye roll like boy, are you out of it. And then he said, But you know what, we do need to get a report done on computer printers. So uh

24:04 I tell you what, why don't you do that? For us this summer. And then if that goes well, we'll talk about this other thing. Later. So of course that all went really well. And by the by the fall of nineteen seventy seven, he he's beginning to hear about it because by then the first West Coast

24:20 Computer fair it happened and The spring of seventy seven. That's where the Apple Two made its debut. Yeah. And I was there. Wow. And yeah, it was a v very heady, exciting. Did you meet Steven Waz there? They were probably there. I didn't meet them. I remember uh seeing the Apple two and thinking, Wow

24:38 Yeah, did that feel in the moment like Oh my God, I'm a part of the world changing right now. Could could you f could you feel that it was You could totally feel that, but the other thing that really jumped out at me was recognizing It's that one. Yeah, it's like I know all these companies, yeah, looking at all their products. Yeah, everything like Tandy was there or like the Apple Two looks like it's something from a sci fi movie that's gonna be happening in twenty years and everything else in the entire convention hall.

25:05 Looks like it's part of the past, like a bunch of buggy webs and you know, uh carriages before the car is invented. Yeah. Well, this had that feeling. I assume you're gonna get into this right now, but the home computer market at this time was dominated by Radio Shack, right? Right. Yeah, the uh TRS eighty, also known as the Trash eighty. Yeah. It was a very convoluted uh system.

25:27 And it among other things, it didn't even have color So it was basically uh in fact it didn't have bitmap graphics either. I it was a really clunky thing. But they it was cheap. Radio Shack had thousands of stores and so it was distributed. It was doing doing a lot of volume. Anyway so they allowed me to do the study.

25:46 I got entree at all these companies. And so I uh that included Apple. And I went down to uh visit w one of the first handful of uh office workers there. And uh one the the most amusing part of this was there's only a handful of people there at that time. This is uh Pretty late. Seventy seven or or maybe uh a little bit into early seventy eight.

26:07 And I said, Are you guys doing any software? Because I'm a software guy. I wanna know what are you doing at software? So, Oh yeah we we yeah, we're doing software. I said, Cool, can I see it? Is that sure? And then you w work around the corner. And their entire software effort is one guy. Pretty sure this was Randy Wigginton.

26:22 And he was working on a uh Star Wars Rip off. Where the company didn't have a Star Wars license.

26:33 But the Star first Star Wars movie had come out in the summer of seventy seven. Wow. And they thought, Hey, let's let's do something where'cause we have bitmap graphics and we can do something where you're like you're like Luke and you're you know, you're trying to blow up the Death Star and we're gonna Do that with some really simple graphics. Unbelievable that Steve Jobs would later buy Pixar from George Lucas. And yet Apple at this point didn't have a Star Wars license. Well, in fact, I I remember after I started Apple, we went to CES and we're showing that game. And this guy comes up and hands me a business card. It says. You're gonna have to stop doing that.

27:06 And sure enough, he's from Fox. Oh wow. And it's sort of used. But yeah, this is like the cowboy period. Yeah, where can you kinda Stay on. You're not asking for permission. You're just doing stuff until they stop you. Right. Right. Wow. I hadn't met the leaders of Apple yet. And I go back and I'm finishing school and the study g gets finished and

27:40 I'm a I'm doing a little bit of a tour. To meet with clients. And uh talk about it. Mm-hmm. And I and I uh I produced a one page flyer and I mailed it out to everybody uh that I knew and everybody that it that had been interviewed. And and then I'm just at home one day, not too long after that, and the phone rings.

27:58 And I pick it up and there's this guy yelling at me. And saying, uh w why the hell are you calling Radio Shack uh the market share leader? This is incredible. And it turns out it's Steve Jobs.

28:11 And he's seeing this flyer. that says it Rio Shack's a market share leader. He's really pissed off about it and I knew why. Because they were running an ad campaign in the hobby magazine saying that Apple was the world's best selling personal computer and it wasn't. Which of course was total trash. Exactly. The Apple two was a Frankly, a much more legitimate

28:34 personal computer than the TRS eighty, but it just wasn't accurate for them to say that. And yeah, you thought well who who is this dude that's outing us? And making us look bad, making us look like that. And then the tables and then Well here's the other thing about how intimate Silicon Valley is that he had to know somebody that knew my home number. So so so we knew somebody mutually.

28:58 Yeah. Did you trace back how that ended up? Oh yeah. Oh yeah. But at the time I didn't understand how that worked. But you know, he and I are having this conversation. Of course, I have I'm having to hold the phone handset about a foot away from my ear because he's yelling so loud. I I managed to tell him uh yeah, the you know, the study's finished and he wants to argue with me, naturally. That's what he does. And he said I'd be happy to bring the study and show it to you. And this is a study that in today's dollars would have cost about twenty five hundred dollars.

29:25 There's no way Apple can afford it. So I know I know that being able to come in and show it to them. Right. You know, if they're thinking look at this, we're going to Yeah, free value. Steve's probably very pleased with himself that his one phone call yielded uh this and and of course I I'm gonna say he's arguing with what I'm saying about the company. I'm saying, Well I'll let you read what I say about the company, but I think you'll find it very flattering. I think you guys are great. Okay.

29:49 And then I said, Oh, and by the way, I'm I'm actually looking for a job in the industry. Right, so I go down there and they offer me a job. And it and it's it's all based on this idea that I know something about the market and I know something about customers. I'm just a kid. D Steve offer you a job on the spot when you came down there? Uh not on the spot. And what here's what's not really known that well about Apple is that everybody thinks about the two Steves. Right. But there was there was Mike. There were really three

30:13 equal musketeer co founders of the real corporation. It was kind of a hobby thing. Mm-hmm. And then Mike Markley came in to be the adult supervision. And he and the two Steves Each had about a third of the company. Mm-hmm. So that's really that kinda tells you who the real founders are. Mike cashed out pre IPO, right? No, no, no, no, no. No. No Mike Mike actually hung in there longer than anybody. Oh okay. So the thing about Mike is that Don Valentine had been told about the two Steve's.

30:42 And Don was already Be an elite leading Venture guy in the nineteen seventies. And it come from Fairchild. Yes. And Intel.

30:52 And So he he went and met with the two Steves when they're in the garage and he thought, Yeah, this is way too early for us and and then he told Markla to talk to them. So he was kinda trying to turn Markla into the angel that would help get it. Legitimized enough. Okay, so Mike goes and meets with them and they're

31:13 Yeah, they're pretty much unkempt, uncivilized people. Like later Markle would tell me that These are the days when Steve wasn't showering, right? Yeah, well uh literally my first week at Apple, I figured out what a hazardous person Steve was. And towards the end of that first week, I'm standing next to Mike and Steve's down at the end of the end of the hall Going by. I said to Mike.

31:34 Mike, uh we really need to do something about that. And I pointed at Steve and I called him a that. And Mike says, Trip, yeah, g look, come here. He pulls me into his office, he closes the door and says, Trip, you have no idea how much better he is now than a year ago. A year ago he was like uh the wild man from Borneo. He was completely uncivilized. I had to teach him where you put the fork and the knife at a table setting. You know, he's he's basically explaining Almost as a fairy child. And he's he was just asking me.

32:09 Trip try to be patient. Look at the progress. There there's gonna be the this guy can do a lot for us. Yeah. Well, those three guys got together. That's amazing, by the way, that Mike I mean, these were the days of the first thing investors in adult supervision did when they came into the company was fire these people, right? Like it's amazing. That's still true today. There's a very high turnover rate. Yeah, saw that Steve had the potential to become the greatest of all time. Well and and and was made brilliant technical contributions in the first uh first several years of of the company. So he recognized the talent in both of them. And uh the other thing about Mike though is that he didn't want to run the company either. So none of them really wanted to run it. So Mike was smart about setting it up for himself in a good way.

32:53 He brought in Mike Scott or Scotty. to be the CEO and then Mike was the chairman. Uh so he's the boss of everybody. And then his discipline was marketing. So he was in charge of marketing because that was fun for him. And that he's he's really the the chairman who's still the the big boss

33:11 And and and occasionally over the next say twenty years. He would have to be CEO for a while. During some interim phase. But you know, he just always remained connected with the company. He was always in in some critical role on the board.

33:25 And Yeah, it kinda outlasts everybody, if you look at his total tenure. But anyway, so Mike was my first boss and then uh Steve was my boss later. And but I collaborated with Steve a lot in initially because on my second day at the company, Mike said Trip, you know something about business.

33:42 Can you find a way for us to sell these businesses? And that hadn't really happened yet. 'Cause only consumers were buying the Apple Two's at this point. It was really just hobbyists. Were you able to sell it to businesses? We were. And and of course the invention of the spreadsheet helped a lot. Uh I brought I brought the calc at the I brought the first spreadsheet. into Apple.

34:02 Yeah. That product line hung around for like ten years. So the Apple Two is a Huge. Turned out to be a huge business and it lasted much longer than anyone else thought, which was a good thing because it kept Apple alive.

34:15 Because then Steve and I went out to scheme out the next generation. Mm-hmm. And honestly we were way overly optimistic about how quickly that would be relevant. And Ultimately there was obviously a lot of failure there. And

34:31 The w we have the right ideas. Mm-hmm. But the market Is this primarily the Lisa? So it's it started with Lisa and then you go into the first Mac, which also didn't really do very much. Mm-hmm. And yeah, for how much the nineteen eighty four Macintoshes Herald did today, it was not a best selling project success. Well, and and ultimately the financial struggles of the Mac is what got Steve kicked out. Yeah.

34:55 So y anyway, it it is very interesting because then you start you have a decade after he gets booted out where uh Apple keeps losing share. And It was Steve's fault, actually, because He wanted Microsoft apps. For the back.

35:10 And he was really careless about the IP license that they needed To do Windows. Because he didn't take that threat seriously. Whoa. And and the licensing deal just really came back to haunt them. And by the time Apple realized Whoa this is really not fair because Windows is copying our stuff. And they're putting in on all these uh PCs that are manufactured by all these different companies and we can't fight with that.

35:34 And Apple's market share just kept getting smaller. And finally when Apple decided this is wrong and unfair and we're gonna have to see Microsoft, Market said, we'll say, Well, Here's the license agreement you guys gave us. And Bill had just Bill had just outsmarted Steve. You didn't restrict even though the Macintosh was the very first platform for Word and then Excel and then even later in eighty nine PowerPoint. You didn't restrict us from putting it on other platforms. And again, it was all Steve thinking it's all about us. And we don't have to worry that.

36:04 They're not gonna be able to do anything that's gonna create a problem. Uh oops. So it's kinda funny because Steve saved Apple. But he's destroyed it first. Oh my goodness. And then he and then he goes back and he cleans up his own mess in pretty spectacular fashion. The Star Wars analogies are just too good. While you're at Apple though, it's

36:25 It's there that you realize that All of this. Software. is a creative art. Was it at Apple that that's where you you kinda started coming to this. I think one of the things I had learned from some of the courses I had taken in business school That

36:41 You probably don't want to start a company. Unless I mean it the term distinctive competence was already around in those days. You better be good at something. But I had latched onto the notion that you'd better have a big idea. And I don't I don't know how that seed first got planted. Yeah, there are people like Jim Collins later, they would call it uh the B Hag, you know, the the big hairy audacious goal.

37:07 So I I th yeah, there's gotta be some angle, there's gotta be some unique dimension. Fact that the in fact that my favorite way of thinking about it is uh what's called a hedgehog concept. And that that's where yeah, it's not really about distinctive competence because you can have a lot of competent competitors, but the hedgehog has to compete with a fox. Mm-hmm. The fox is really big, it's really fast, it's smart, it's got big long teeth. Uh and the hedgehog's not good at being a fox.

37:31 What it can do is roll up into a ball and have spiky fur and that's all it needs to do to to defend itself from a fox. A fox will eventually get bored and leave it alone. So that's really what it's about. And I'm I'm thinking about that while I'm at Apple and I and I know nineteen eighty two is coming and I know that's gonna be the year. And

37:53 And and I'm working with these incredibly creative software people like Bill Atkinson and Larry Tesler and many others. And It just finally occurred to me that these guys are not engineers, they're creative people. They're artists. They're in fact they're personalities It's almost like they're divas. Well, like you said, most of them either didn't go to college or dropped out, or you know, they're

38:17 They're like uh they're like Picasso's. Yeah. Yeah, and and boy, you you've really got to think about how to Manage them differently, organize them differently, give them their uh creative freedom and figure out what are the support services you need around people like that to enable them to really blossom and be their the their best selves. And that's when I realized that

38:38 Yeah, you know uh You may think of this as engineering, but this is actually an art form. Mm-hmm. And Hollywood Is already turning art f other art forms into businesses. You get music and film and television.

38:52 And even book publishing kind of fits into this. And I thought, Oh, okay. So there's a way to make a new company. That really believes in this idea of a software artist.

39:05 and becomes a new kind of Hollywood around that new platform, that new medium. And I I definitely saw it as an entirely new medium. Again, I I don't think anybody saw that before I did. I mean I I was thinking about that pretty early. So as you were talking about this and you know, eventually talking to downtown at Scoy but like do people think you were crazy? Like were were they like, Oh yeah, this is like you're onto something or plenty of people thought I was crazy. Like like the uh like the head of economics at Harvard. I had a lot of people try you know try to shut me down and tell me not to do it.

39:37 Okay, so You get this idea. It's nineteen eighty two. The time has come and you're seeing you're in the industry P Cs are coming into homes.

39:47 What was the first step to electronic arts? So again that the maybe the last year at Apple it was a difficult year. Apple was public, right? Yeah, and after the company had gone public in late nineteen eighty Suddenly there's all this wealth.

40:02 Mm-hmm. Or somewhere near the Yeah. Well in terms of uh market. Uh it it's in that range and the market cap is even uh I think uh more than that. I I've forgotten. This is nineteen eighty. Yeah, and and uh again it was just super high growth from the whole the whole time I was there. Uh the the year before I got there, the revenue was around two million dollars.

40:26 And and then m my first year it's it was like I think fourteen. Wow. And then it was sixty, and then it was three fifty. I mean, it was just Crazy. And you know, when I started there were only twenty five office workers and then we had about twenty five guys on an assembly line In the back.

40:44 Assembling a couple hundred of these hobby machines. And four years later we have four thousand employees. Steve's flying the pirate flag on the Mac uh office, right? And the thing is, uh it just kinda got out of control after it went public. It attracts everybody. Everybody wants to work there. And then there's a lot of politics and bureaucracy and different fiefdoms and And uh the uh CEO went a little crazy after the IPO and and he ended up getting pushed out.

41:13 So there there was Just chaos. Yeah. And and then just various ways in which uh uh tension was uh growing. And it it you know, the company's kind of heading into that malaise that really hit in the mid eighties when uh John Skullly and Steve had their You know, big uh championship prize fight. An episode for another day.

41:36 So th those those seeds were already getting uh planted. And I was hanging around because I thought, you know, I'm working on products that haven't come to market yet. I really should finish that process and And yet I was not enjoying it. I mean, so I I didn't really love being there, but I really I felt like wow, this company has been so good to me. Uh they've been so loyal to me. This has been such a insane, fabulous opportunity. I've I've learned so much here.

42:00 And that's actually maybe the best advice I would give anybody starting their career. Is don't think about the money at all. If necessary, work for free to get into the place you want to get into. And then go to the place that isn't just the place that you're passionate about in terms of what they do and what their values are. But you basically wanna go to the place where you're gonna learn the fastest. Mm-hmm.

42:21 And man, for me the learning curve at Apple was Incredible. Oh my bad. And the just the sheer talent of a lot of the people and the the brilliance and the leadership and the creativity. just to be around that and then to have the thing organically growing that fast where you're seeing the outcomes of thousands of decisions and the good, the bad, and the ugly, it was just amazing. So I just really felt like I uh kinda owed there was a debt of gratitude there that kept me there maybe even one or two years longer than I otherwise might have stayed. But I could see it coming.

42:53 And I'm thinking about it all the time. And then one day uh A fellow employee uh dropped off a magazine said, Hey, there's an article in here that might be of interest to you. And I found a different article, one page. article about Don Valentine. And I I thought, Yeah, Don Valentine, I know who that is because basically Sequoia had come in

43:12 After Mike. Had gotten things going. Around the time that I joined the company did a very small venture around they raised three million dollars. And Valentine w uh led that deal. And join the board, right? And the price per share was three dollars per share. If you adjust for splits, it would probably be like a penny, maybe less.

43:30 And about a year later. We did another round at forty two dollars a share. Which again would still be pennies if you adjust for uh uh splits. And that's when Valentine's sold out. No, so you can see, you know it it went from three to forty two. He didn't do that bad, but it then from more from forty to two it went to like

43:50 A hundred thousand. You know, so You missed out on most of the the value. And I remember sitting with Steve in his office around the time of that uh funding round. And Talking about

44:00 What is Valentine thinking? I mean, why is he doing this? And we were just laughing about it because we both we both knew that forty two dollars was actually still really cheap. Yeah. We were where we were headed. It was gonna be much, much more than that, and that he was gonna miss the boat. And sure enough, he did miss the boat. But it left me with this curiosity about it. What did what is what did Valentine think we were doing wrong that made him want to jump off the bus. I was always curious about that.

44:27 Has he ever talked about that? Do we ever does anyone ever never admit that he ever made any kind of mistake about any investment? Any rate. I had this curiosity about Don and I'm reading this article and I'm already thinking about starting my own company. And It says in the article that a guy had come in to pitch him

44:48 And Don had intimidated the guy so badly that he passed out in his office. And you see life goals. And in that moment I'm thinking, No, I want Don Valentine As an investor, I want him on my board. Amazing. Because I want Some of that tough. That's willing and able to stand up to me.

45:07 I'm gonna need that. Yeah. 'Cause you knew at this point, you know, fr both from your own experience and then from Apple how hard this was, right? starting a company and going on this journey. Yeah, and and you know, you also realize particularly, you know, you hang around g someone like Steve, it was a real blessing for me to have a really great relation with him, work closely with him. for four years and get to really know him personally. We all have blind spots.

45:30 And you've you gotta make sure in your team That the There's complimentary people so that you everybody sees everything when you add it all up. And yes, t Steve was really victimized by his blind spots. Uh it would prove out in my career that I would be victimized by my blind spots. Yeah, you're just trying to figure out

45:48 is to the extent of your ability at that time. And again, I was just damn curious about this guy, Don Valentine, is that I had not actually met him. So I contact him and I go over to the office and I'm thinking You know, he's he's an older guy, he's kinda traditional And he's probably gonna tell me that I really need to stay at Apple and finish the products I've been working on. to get closure and t to not be a loser that would quit in the middle of my project.

46:15 And that's not at all what he says. He says I asked him, What do you think I should do? And he said, You need to quit Apple as soon as possible. Come over here and start this thing. And then literally saying we got extra space, you know, come over and you can start it right here. Because he's thinking, Yeah, I want to control this thing. And have the inside track on it. And uh yeah, that was obviously uh a real breakthrough for me because I didn't expect to hear that. Can you tell us the story of um U you guys went to lunch before The investment was closed, right? And what he said to you?

46:44 Yeah, this is classic Don Valentine's who takes me to his country club for lunch and this is before he's actually Where the money is. He said uh Yeah, I just wanna make sure that

46:58 We're m doing the right thing here to make the investment. I just want you to understand that In the boardroom. If I'm telling you what to do. And you always do what I say.

47:09 then what the hell do I need with you? He wants you to stand up to him. You better you better be the dude that's got the vision for this thing and you'd better know it. I'm gonna bring the fire and you gotta bring the fire right back. Because I'm investing in you.

47:31 He's basically saying. If I'm the smartest guy in the room, then what the hell am I investing in you for? This is amazing. We all know what electronic arts is today. I mean, it's like the second biggest gaming company in the world, like Thirty billion. Huge company.

47:46 What was the vision? in that conversation with Don when you said I'm thinking about leaving Apple to do this thing, what was this thing? Yeah, so it was to start a new kind of game publisher. And if you go back and look at that original business plan. Which I still have. It's probably the only copy that exists. Wow.

48:06 In that original business plan it says that the company Is a system. Hm. So you know, a lot of times you think, Oh, a company's a product. Mm-hmm. Or company as a technology. A company is gonna be a brand.

48:21 What I what I wrote in that plan was we're gonna build a system. Modeled after Hollywood. Exactly. And it's basically a system that says, Okay, we're gonna go find these independent, brilliant creative artists And we're gonna offer them a whole scheme of services and support. We're gonna build development tools and create the equivalent of a digital arts studio.

48:42 And of course this comes to be the model of giving. And then we're gonna uh uh invent new contracts, new packaging, new marketing methods. And a new channel of distribution Because up to that point in time nobody had sold software of any kind directly to retail dealers. Wow, so it really was this notion of sort of publisher first studio or developer second. It's like we're gonna go and give the right structure and support to the v the right sort of developers, but we ourselves who our core competency is this big umbrella of distribution, services, infrastructure, I mean is much more so the way we think about a a game publisher today. They become much more bifurcated, but It yeah, and and I honestly I I believe it was the beginning of professional video game publishing because what had come before that

49:32 There there were actually some pretty capable people that had gotten started as early as nineteen eighty. So companies like Broadburn, if you look at Doug Carlston, his brother, uh Those guys did a fabulous job. They were uh really classy competitors to have. In fact, we used to uh regularly play softball against them and it was a fantastic rivalry. And I was always jealous of that company because they always had some big monster hit game that was like half the revenue. And we we never had that. I forget like the first ten years. We were like more of a portfolio of s we had all these singles and they always had a home run with with the bases loaded.

50:09 Yeah, it's uh great guys, great company. Yeah, so they were part of this uh I think early Uh experimentation of moving something out of the hobby phase and really making a real business. But pretty much before electronics. Well here's all the things that really were not true until electronic cards. One was that nobody had given an advance to a developer ever. Oh wow.

50:31 Uh no there were there nobody had a really So nobody was financing. Nobody had a really good contract about how this is gonna work. Nobody had figured out the business model of exactly how do you compensate the developer. For example, what happens if I make a t shirt about the game? What do they get for that? What happens if we want to make marketing posters? What happens If it gets turned into a movie later. I mean Just thinking all of that through and figure out, Okay, well we need to make money. Yeah, we wanna make sure that we make it.

50:58 But what what can we do for them? Yeah. And of course the recording industry had figured out All of this. Yeah. So that's what I did is I actually went to Hollywood and I and I got to know some people and Asked one of them, Can you get me a copy of a recording contract? Wow. And You know, and I'm studying that. And of course I'd I've already done software contracts at Apple And I went to my lawyer that I'd work with at Apple and I said, Look, we're gonna take these two things and we're gonna make a whole new kind of contract and I kinda directed him on how to knit it together, what stuff it needed to cover.

51:29 And nobody had really thought about that process until then. And it's the same thing about everything about the uh distribution channel. I mean, we we inv invented a new kind of packaging. And of course the f the funny thing about that didn't it look like records or something? They were like they were like record albums. And this starts this starts with me just being cheap, because I'm looking at the the baggies, you know, the the the uh first generation of hobby packaging was just like a baggie with a disc in it. Yeah, goodness. And I said, Yeah, well that's really not even professional. So we're gonna have to do something. And I thought yeah, but it can't be very expensive to make it. And I thought well record albums are selling at retail for nine d nine dollars. Mm-hmm.

52:07 So they can't really be spending a lot of money on the album cover. We'll just go to the records manufture the guys that manufacture the recording albums will get them to give us albums. And we literally went to the largest one of those in the world. And they they uh clued us into the fact well actually it's about the paper cost.

52:24 And we can give you your own custom design. in a smaller size. And you'll save money because it'll have less paper. And that's where we were able to design The standard software box.

52:36 That had a sleeve where you can put the manual and a sleeve where you can put the disc, and then enough space for all the artwork. About the artist. And about the game. Uh-huh. And we're really the first people to kind of put the artist on the front and have a lot of information about the the artist. And it really make it say, Hey, this is kinda like this is this is like showbiz.

52:58 Yeah. And of course, uh again, ironically But the media loved The idea of the software artist and the idea that we're pioneering this new medium and it's a new creative art form. They wrote about that all the time. Mm-hmm. But the uh gamers didn't care about it for quite a long time.

53:14 In fact they barely even knew who we were. Well I was sitting on a plane next to this guy and you you got a it's sometimes in this conversation, What do you do? And and he found out I in a game company and he didn't know the name. He didn't know who Electronic Arts was. And I said, Well, have you heard of this game? Oh I have that I I kept naming games. And he kept saying he had them and I realized after a while Oh yeah, you know what? He's a software pirate.

53:38 Oh, yeah. And I realized yeah, the reason he doesn't know electronic arts is because he's he doesn't have any of the packaging. So may maybe he's not noticing the logo when it uh pops up on the screen. It took forever. for electronics to really have brand power. And for any of the individual artists to really have uh brand notoriety themselves. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta.

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55:38 So you can get$1,000 off Vanta at vanta.com slash acquired. That's V-A-N-T-A.com slash acquired for a thousand dollars off. And just tell them. That Ben and David sent you. Going back to the original financing and starting in Sequoia, so you mentioned that Don wanted it to start in Sequoia's office so that he could sort of control it and watch it. you when you emailed us and we've been going back and forth mentioned that you had competing offers. How did that whole thing go down? And you ended up signing a a deal uh to finance the company with two million dollars. What did the terms end up being on that?

56:15 Yeah, so we I did accept Dodds. Offright. You know, I I basically Yeah. Funded the company originally myself. That's right, you put like two hundred thousand dollars closer to three hundred.

56:26 And And I I was basically just running it myself. I was the only person. So I I incorporated I was running out of my home office. And starting to have a lot of these conversations and kind of developing uh the business plan. And it was as soon as I started making job offers to other people that I thought, well, you know, I don't want them working in my home. So I'll take Don up on his offer.

56:52 And and then next thing you know, we packed uh six people Uh it basically into they they they gave us one office. We put I don't know, a a few people there. At that time there were different venture firms. that were uh making offers. Again, you talk about uh the intimacy. Uh I'm at home one day and the phone rings and it's John Dorr.

57:12 Uh huh. And next thing I've got uh Brooke Byers and John Dore uh kinda whining and dining me and trying to figure out to get out on the deal. I already knew Ben Rosen Ben Rosen was the leading semiconductor analyst. Right. Uh at a time when he worked for Morgan Stanley.

57:32 And he became one of the first uh VisaCalc Spreadsheet users. He was uh clearly one of the hobbyist innovators that kind of understood the uh the desktop Right. Uh benefit.

57:47 And became, I don't know, one of the influencers that you know helped Uh helped Apple get established. He must have been allowed in uh as an angel investor in one of the early rounds. He and uh L J Seven ended up starting a venture firm. Seven resumes. So I had a relationship with Ben from my time at Apple and Yeah, it ended up that different firms were competing. Uh Dave Marcourt, uh from his firm.

58:10 He couldn't get into EA, so he invested in this other company called Microsoft. Whoa. That worked out really well. That's what he's called now. It was a different name then. I forgot what the uh that other company name was. And of course for listeners, John John Dorr from Kleiner Perkins, Caulfield and Buyers. And of course you mentioned buyers as well from Yeah. So uh I ended up Allowing Security lead,'cause I felt they deserved that.

58:38 And then uh The other half of the deal was divided between Seven Rosen and Kleiner. But Uh Brooke and John from Kleiner. you know, they really wanted more and so we ended up doing another round six months later at a price four times higher. Wow.

58:54 And again, this is uh this is a a thing that w w that was happening that was different than what had happened before. Hardly anybody had raised any money. And so here's electronic arts saying, Well, we've just raised more money than any game company ever. You're like the Uber of game plan. And uh I've got the best lawyers and the best PR firm and yeah Yeah, I'm just making sure we got the best of everything because exactly There is a belief that I had at that time that we could be number one. And Like this is one of those things where I uh I I had to get my ass kicked later.

59:25 many times and realize, you know, you don't always have to be number one. Yeah. Because it's actually really hard. And if you're playing for number one, you're probably gonna have to take bigger risks and Yeah, you know, sometimes it's okay to be in the top five or the top ten. Yep. How much of the company did you sell to raise that two million? You know, I I think it's not that different than it is today. I think after those two rounds that EA did it, yeah, they they probably own close to half. Yeah. Mm-hmm.

59:52 Which and that was all the capital you raised as a private company. Well actually many years later when we know we're pre IPO And we also know we're going into the console business and we're gonna be manufacturing our own cartridges and And probably fending off a big lawsuit because we're reverse engineering Sega Genesis. Knowing knowing all of that, uh it's like okay, uh let's do a mezzanine round.

1:00:15 And and then let's do an IPO. But but yeah, pretty much uh the company was built on those those first two rounds of capital. And even the IPO, which only brought in eight million. Which is kind of shocking by today's standards. That eight million has been sitting in EA's bank account ever since. I mean they never had to dip into it. Wow. It's amazing. That is different today. David, I know you're gonna take us forward and and we need to. One one thing uh that I want to pull out of trip is does your business plan have the name of the company on it. And what was the name of the company that you incorporated as?

1:00:50 Okay, so when I incorporated the company on May twenty seventh, nineteen eighty two, it was called Amazing Software. And it's funny because some people loved it and others hated it. And after I hired some employees and there's people hanging around the office and people are calling and they're having to answer the phone and say amazing software They some of them just uh no no. This is not it. This is not the the the the winning name. And it rather rapidly boiled down because of course I'm pushing for the idea that, you know, it's got to be about this idea of software as an art form. Mm-hmm. And there's different words that can come into that.

1:01:30 And so we pr pretty quickly had it boiled down to either uh electronic artists And I I had just read a book about the history of United Artists. Right, of course. So United Arts for me, you know, for a couple of years already at that time was a great source of inspiration because it was A similar kind of analogy what had happened there is these four great Hollywood talents had disrupted the system by forming their own studio.

1:01:55 And that's what became uh United Artists. And so that that's why Electronic Artists was on on that list. And and then s uh Steve Hayes, uh also known as Shays. He said well Uh, we're not the artists they are.

1:02:09 Mm. And and it was like, Oh, okay. Ha. And this is about two o'clock in the morning. Yeah. And everyone goes, Oh yeah, that's true. Yeah, okay, electronic arts then. They being the developers.

1:02:22 Yeah, so we're work we're serving the artists, but we're electronic arts. You're about the arts, but you are not the artist. We're the partnered company. Course you know, that obviously changed over time. Eventually we had our own internal studios, et cetera. But this is what a lot of people don't appreciate about names is that in the beginning they're completely arbitrary. They don't actually have any meaning. Anyway, uh y you you get you can get really personally attached to a name and think it really matters, but

1:02:46 What really matters is how you go make that name mean something. Mm-hmm. And electronic arts was that kind of a matchup where at a minimum it helped us tell the story to the media. And got the media engaged and helping us spread the word. Because uh to start a company you can't do saturation bombing with advertising. You don't have the capital to do it. And if you're pioneering something new, it's gonna build slowly. It's gonna word of mouth is gonna be really important. Your reputation Based on the quality of what you're doing and the creativity in it. Yeah. That that's what's gonna have to drive it.

1:03:18 So we're gonna dive in here and open up a chapter on EA sports. There's one thing that happens before in and in that's in nineteen eighty three you recruited Steve Wozniak. to join the board of electronic arts. How did that go down? And and at that point was then the board you and Steve and Don and and did it stay that way through IPO and and what was that relationship like? Well actually I founded the company in nineteen eighty two.

1:03:43 And the venture funding happened in December of nineteen eighty two. So of from May through December. I own the company. And

1:03:54 And I'm paying for everything. Yep. And and then we didn't really have to have a board meeting until December when now now there's venture investors and Kleiner's on the you know so uh Brooke Byrs is on the board from Kleiner Perkins, Don Valentine's on the board. And that's so was actually was on the board from the very beginning. Uh was he the independent board member? Yes. And we actually then uh added a couple of other spectacular independent board members the next year.

1:04:21 Including my all time favorite board member, Dick Asher. So The next year, nineteen eighty three. after you get the venture financing wrapped up. One of I don't believe it was your first title, but one of your first titles. This is where your other thread of sports re enters the story.

1:04:37 Is Doctor J and Larry Bird go one on one. Which David and I watched some YouTube videos of last night and is still an awesome game. Still awesome. Incredible. You know, if you had a chance to actually play it, you'd even appreciate it more because The design was so simple and elegant that anybody could play it. In fact, it's actually I think it might even be the only time in history that retailers when you're out on a sales call Even you could get the retailers to play it.

1:05:05 Wow. Most mostly the retailers. You know, even like honestly, even like John Madden, John Madden has never played Madden football. He would get his sons to play it. But most people are intimidated. You you hand them a joystick and they're thinking, I'm gonna screw up. It's gonna be embarrassing and I don't wanna humiliate myself, so no, you do it. And yeah, I've been on so many sales calls with so many different kinds of customers where they're saying, Oh yeah, just show it to me. Yeah.

1:05:33 But Uh with with that one on one game, basically if you press the button The guy would shoot the ball. And it might go in. That's all you had to do. And and it and and then you would realize, oh hey, okay, I can do this. And then you start to move the stick and realize, oh I can actually run around.

1:05:49 And I can go get the get that rebound. And oh you know what I can make this other kind of shot and I can do this. And then you know, pretty soon you're realizing I got this. Yeah. It's so funny. We played a little bit of NBA the latest NBA live. Game. Uh we couldn't even figure out how to play basketball in it. Like you started it it's just like it's in all fairness is we were playing it on the iPad, which I'm not sure is intended to be the real thing, but it was a it was a nightmare.

1:06:18 Not just with games, but technology in general, is that The people that make it. Understand it really well, because they're the ones making it. Yeah. And they underestimate the the speed at which an average person can figure out what what their intentions were and everything's still too difficult. Trevor Burrus There's that great aphorism in the gaming industry that a a truly great game is

1:06:39 Easy to play, but almost impossible to master. That you can actually incredibly wide continuum of anybody can start playing, but You can't just beat it right away. Yeah. The way I always put that is great games are simple, hut and deep. You know, you you you need to be able to instantly get engaged and and then it's gotta take full advantage of the powers of the medium to present itself.

1:07:04 But then you've gotta be able to keep going deeper. Mm. So I I I I often would use the analogy of the ocean. You know, you go you go down to the beach and there's people of all sizes and shapes and ages. And there's kids playing in the sand. There are the little babies that can't get in the water yet. And then there's slightly older children that are playing you know, uh at the ankle level. And then as you go further out, eventually get all the way out to the dudes that are scuba diving. Yeah. And yeah, there's just no limit, you know, to where that can go. Yeah, that's what that's what you want your game design to do.

1:07:37 Wow. Everybody can use that water. Yeah. So This game comes out. I believe this was the first

1:07:47 Certainly athlete, but but celebrity endorsement of a video game. Period. Ever, right? Yeah, what what was uh new about it? It was really the birth of EA Sports, even though we didn't call it EA Sports at the time. It was the first time that Any kind of celebrity.

1:08:02 had appeared in a video game. doing either being themselves or So it was th the the first of its kind in that idea of, you know, records and the packaging and the distribution. I mean this is This is just the next step in that process, right? In that breakthrough of making it. Yeah, and of course, I r I really wanted to make games like football and baseball. And and we we did a variety of things in the from the very beginning. So we did a golf game really early that didn't have any licensing. It was called World Tour Golf.

1:08:34 And we uh you know, fairly quickly got to uh something involving driving. I I don't remember what the first one was, but there were a lot of things that we did. But Dr. Jane Larry Bird was really the start of EA sports. And I wanted to do a team game, but with eight bit technology it's kinda limited. And I thought well how about just two guys. Four K memory and You know you know, y yeah, hey, uh Doctor J was a big hero of mine. And

1:09:02 This is what one of the ways you can learn about yourself is if you notice who your heroes are. They have values and Passions and abilities. That resonate with you because they're deep in you.

1:09:16 And so I was I was a huge fan of Joe Namath, a huge fan of Doctor J, those guys broke all the rules. You know, they went to the rebel leagues. Yeah, yeah, yeah. They got outrageously paid. They did crazy things with their hair. They They were crazy pioneering the use of white shoes and football and and the the ABA with the multicolored basketball and and then obviously their style of play, right? Just super creative. So these these guys were the yeah, the rebels with that pirate swagger. Yeah. And that's pretty much something you see that's really common with good entrepreneurs. They've got they've got that swag.

1:09:53 Example number one. Yeah. So anyway, so here I am. I'm a this guy, I worship this guy, and Doctor J happened to be one of the top one or two most popular athletes in the world. At that time. You see a lot of yourself and his sort of uh uh Yeah, so he's just a hero to me. And You know, I'm I'm just uh delight by the concept of see if I can do a business deal with him. And we we were working with a lawyer that knew his agent. And so we had a pathway in I was able to present to Julius the idea that this is gonna be something good for the world.

1:10:26 This is a new medium. It's gonna have all this educational value. Yeah, he had had kids already. And so I was able to help them frame it as your kids are going to grow up through this and this is going to be a new thing. And one of the fabulous things about Julius Is that he was already basically an ambassador for basketball. Yeah. And he understood that this was a new medium.

1:10:46 That was going to be b allow basketball to happen in a new way. Yeah. That would in fact have educational value. And by the way, John Madden was attracted to the same thing. Absolutely became true. Yeah, we we knew that players and coaches are gonna use the football game that we're making because when I was playing football in high school, this would have been Ninety ninety nine to two thousand three. My coach who was it his first year as head coach was my freshman year.

1:11:15 And or my sophomore year. And he would assign he would say go on Madden. Drop the plays. Like you know, create the plays on Madden that we're running on our playbook. Right. Input the stats for all of us. Here's what I think your stats are. And then like go home and learn the plays. Yeah. Learn to read defenses. Yeah. It was amazing.

1:11:34 Yeah, so anyway, uh Julius agreed. He was paid twenty five thousand dollars. And got a two point five percent royalty. Wow. And then uh as as soon as he was on We offer Larry Bird the

1:11:48 Same. contract and that made it easy to get him on board. Wow. And Chris uh w what a perfect rivalry. I mean they were they were already banging heads and they're both of them played on great championship caliber teams and And then it was a matter of, you know, make making a uh design that worked well for what the platforms could do then. Wow. So

1:12:07 Way back to the beginning of the story. Football's always your dream. What came next after that? After after you saw that Well that the the Doctor J game, it was pretty successful for us and it made me think, Yeah, this is really gonna work. Mm-hmm. And I thought, okay, well then let's do football because that's what I at that time cared about the most. Yeah, that's gotta be quite validating because while it seems obvious now that sports video games are I mean, a huge and ridiculous market, at that time it wasn't even clear that like it could work because no one had really done it before. And so it had to be incredibly validating that

1:12:42 You you ship that title, like literally ship that title, and people play it and like it and you get good feedback. I mean that had to be this like sigh of relief almost. Yeah, and again you're you're noticing that there's an audience that wants a more authentic sports experience that's that's an a more accurate simulation of the real thing. Yeah. As compared to say the other treatment that it was generally getting, where it's like a a form of amusement. So Pong is a great game. It's a great form of amusement, and you could say that it has something in common with tennis. But it's not a simulation of of the game of tennis.

1:13:18 Anyway. I I did I didn't want to have some simple action arcade mechanic that allowed you to swing at a pitch and hit a baseball or uh run it run around as a football player and have it and have it not be the real thing. And of course, uh with football you got twenty two guys running around the field. So I I didn't realize At that moment.

1:13:39 This is like nineteen eighty four. Because sixty bit technology it's it's already coming. Yeah, but it's not there yet. But it's gonna be a it turns out it was gonna be a while. And and eight bit wasn't really quite good enough. But now by the So we we thought okay, this will take a year. And of course it took four I knew that yeah, if to make a really effective Uh game you're gonna have to Do it literally like a football play. Mm-hmm.

1:14:03 the offense is at the bottom, the defense is at the top, and you're moving up the screen. And then of course you're gonna want to try to present that with uh a a little bit of a three D view. It's a little bit like it's behind the quarterback. Yeah. Which amazingly like two uh incredible things about this. One Still the visual metaphor used to this day in the most popular gaming franchise or one of the most popular gaming franchises in the world. And two, they literally fly a camera now on the field. Yeah, that's actually my favorite thing about the evolution of

1:14:35 sports games is the way the broadcasters and the game companies keep referencing each other and get inspired by each other's ideas. So they're sort of co evolving. Oh there was a it was really it was a year or two ago In a game I wish I had written down who did it. A wide receiver ran parallel to the end zone to run out time on the clock, which is a madden move. This happened in an NFL game. I did that all the time. Absolutely. But uh for the first time it happened in a real NFL game. It's amazing. Okay, so this is nineteen eighty four. The technology's not there yet.

1:15:08 John Madden. Obvious we'll we'll get into, but he was not your first choice, right? For the football version, uh for the football celebrity endorser, right? Yeah, and At that at that point I was I was thinking, you know, um

1:15:22 May maybe we don't have to pay a royalty because there isn't Any one athlete that can really represent Football. And I could work with a coach. And that would actually help me fill in gaps my own knowledge.

1:15:35 But Yeah, maybe we just pay a coach a consulting fee and It doesn't have to be we we can just make up our own brand and own the brand. But I thought, you know, if we're gonna if we're gonna have a brand name And

1:15:48 We're gonna be paying a royalty Who's the biggest brand? human being. And I m instantly thought it Madden because Look, the guy had already won a Superbowl and uh proven to be a Hall of Fame caliber coach. He'd been a player also.

1:16:02 And then he'd become an Emmy Award winning, multiple Emmy Award winning broadcaster, and he was in the middle of a what would be a very long career, so the guy was always gonna be on TV. Yeah. And he's the ace hardware man. Yeah he's in the Miller light beer commercials breaking through barriers. And of course I I mean I think probably most listeners don't uh remember this, but uh His Hall of Fame coaching career was with the Raiders and Al Davis, you know, the just win baby era, you know, he was he checked all the boxes, incredibility. Yes. So and I thought okay, well let's just go to the top of the food chain and talk to them. And by by this time we had enough contact with enough agents, there was easy to find out, okay.

1:16:41 Who who do I talk to? And I had I had to fly to New York City To meet with his agent. She agree that it was a good proposition. And then she sold John on it. And not too long after that it got turned over to uh

1:16:54 A more junior agent who really became John's kind of personal agent, this guy Sandy Montag. who has w work with Jod for decades. And we uh signed the deal. And then at that point, okay, we have a sign agreement, so we need to start actually doing the work.

1:17:09 And that's when uh a couple of colleagues and I flew to Denver and got on the train.'Cause I doesn't fly. Yeah, and we he he wasn't at the at the Madden Cruiser yet. He was still taking Amtrak. He eventually got tired of the limited train schedule. But we basically got on a train and the train uh went west and for two days w all we did day and night was talk football. Wow. That's so amazing. And so uh John insisted on something that that the technology arguably couldn't do yet, and that was put eleven players on the field because his strong feeling was

1:17:43 that if we're gonna do a football game, we're gonna do an authentic football game. How did that sort of negotiation go? And then how did you guys get to work on on that requirement? Well, you know, like the Dr J game. I was the designer. Mm-hmm. And To come into that maybe John, I I had already done a lot of work on a design. I had probably at least a sixty page design document already for an eleven on eleven football game. But we were

1:18:09 Uh worried. about how it would work on an eight bit machine. And as a player I was already familiar with skeleton Which is where you take the guards and the tackles off the field. You don't worry about the the trench warfare and all the blocking. Seven on seven. And you know, in in that kind of seven on seven framework, you're still running the ball, you just don't have as many blockers and tacklers in the equation, and and you've got all the pass patterns and all all the passing game stuff and all the open field stuff. So it's eighty twenty football.

1:18:37 Yeah. And to go into this that two day meeting with John, I had to prepare a list of questions And the this it was just page after page after page of questions. And I think The question about hey, what do you think about skeleton? It was like question number five or something. And I I wanted to bring it up because I just thought hey, you know, it just this just is this is just an idea.

1:18:59 It wasn't something I was committed to. It was just one of the many things I had to ask him about. How violent was his reaction. Well, here's the thing about John. You have to understand if you're an NFL coach, uh there are Sixty, very large man who could probably just grab your head and pop it like a grape. And some of them are on steroids and so they're sometimes really angry. So you have to control those people. So how the heck do you actually command and control those kinds of people? And what what do you find with John

1:19:27 Is here's a guy who's a big guy. He was an offensive lineman. Yeah. And he's got all the dominance traits of a highly masculine human being. And that include the fact that every third word out of his mouth is the F word. And and yet he's an incredibly intelligent guy and a brilliant strategic thinker and a brilliant operational thinker.

1:19:50 So like if you were building a giant factory in China, he would be a great guy to go run that factory because he's that kind of a he could see you know, obviously his uh you approached his agent and the agent said there's gotta be but like he became so involved, he could see that this was a project worth doing. Yeah, oh totally. But that's where I began to realize uh why he was so good at what he does, uh, because the guy is really, really smart. And of course great strategic thinker. I'll I'll give you a couple of examples in a moment, but It was uh it was it was very clear that he knew how to function well in football because of this combination of uh abilities uh that he had And

1:20:29 He was he was always very blunt, always very direct. So the the whole the whole thing comes up about skeleton, he just says, Well, that's not football. Okay, next question. So it's funny the the media has blown it up into this. It really wasn't because none of us really want it. Right. Yeah. And and he he just said yeah, no, we're we're we all we all want the real thing or Yeah, we all want the real thing, so we'll just suck it up and figure out what may make it work. And ultimately we did. I mean that eight bit Apple version There was the eight bit uh product.

1:21:05 They also got under the IB and PC. And that came out in nineteen eighty eight. And the the g it it won awards and the guys that reviewed that game said, This is kind of unbelievable that this thing actually works at all. You know. And people were really impressed, like how did they manage to do this on an eight minute machine? It was Well but of course it took forever. Yeah, well t towards the end of that phase, uh the auditors They were doing an annual audit of the company financials. They came to me and said

1:21:40 Hey, uh just wanna make sure you gu you know that the advance that you paid to Madden, it has no asset value. Because we've decided that you're never gonna recoup it. So we're gonna cause you know, you in your financials it's gonna be written off as an a as a complete waste of money, basically. It's an expense. It has no asset value. And going, Uhhuh.

1:22:01 And I'm saying it's interesting, uh why am I not hearing this from my CFO or or some of the other executives And they're too scared to tell you. And that's when I learned that yeah, none of them wanted to tell me. And that's where the auditors were sent directly to me to tell me. And that's when I learned that Yeah, they actually call Yeah, Trip, they actually call This project

1:22:20 Trips folly. Wow. Wow. And by by the way, uh uh Walt Disney had w had that happen to him. Walt's folly. was the film Snow White. Oh wow. Which of course started an all star yeah. Yeah transformed. Snow White was the first full length full animated feature. Everybody thought you can't do that. It's gotta be a short. Yeah. And well says no I don't think so. Meanwhile, I think as of twenty three thirteen Madden had

1:22:48 Done four billion in revenue as a franchise and has only continued to grow from there. Yeah. Yeah. So that was a pretty good folly. Yeah. Sometimes folly is I mean even Foreshadowing for a future episode, but Snow White had a very large impact on uh Airbnb. Yes, these things are sometimes worth pursuing. All right listeners. Now is a great time to thank our longtime friend of the show, ServiceNow.

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1:24:55 The game finally comes out for the Apple II, like I said, get ported to the IBM PC. But That wasn't the market. And that wasn't what made Madden and that frankly that wasn't what made EA It was in nineteen ninety, two years later, the game comes out for the Sega Genesis, but there was

1:25:13 In our research it's it seems like this was the pivotal moment for EA. as a company. Can you tell us about About how you go from P C que

1:25:24 Publisher to the console market and then Going from At IPO at IPO I think the market cap was sixty million to then two billion a couple of years later. Yes. So

1:25:37 In the mid eighties. the whole industry is struggling to grow because the Console market had imploded. With the collapse of Atari, and that it acquired kind of a bad image and a bad uh reputation with the public. And was that because of intense competition? Why did Atari collapse?

1:25:56 Well, they were heavily promoting something that had very limited capacity. So it was at some point gonna seem like a hula hoop because it pretty much was. And th they didn't they didn't understand. And the NES came out what, like eighty six, eighty seven? Yeah, so the the NES had come out in Japan and they brought it to America in the mid eighties. And the the problem there was that the guys making the personal computers didn't care that much about graphics and sound. Yeah. Which mattered a great deal with games.

1:26:28 And of course that equipment was fairly expensive. And and then Nintendo comes in and they're offering a A a pretty good multimedia platform for a hundred bucks. Yeah. And and yet it's a very different business model where Nintendo controls everything and there's no creative freedom and the manufacturing cost is really high but you have to make Sir Cintendo Chip. You know, it's it it it it's not the uh incredible efficiency of, say, an optical disc.

1:26:54 Nintendo didn't view Maybe even their own first parties they did, but they even then, they didn't view game developers as artists. That's right. In fact, uh they they do that about uh Miyamoto san. They have their own brilliant uh People that have in fact always made great first party games. They were happy to let some third parties tag along as long as uh the they got overpaid by them for permission. And yeah, it it did it never really worked out all that well for anybody to be a third party Nintendo licensee. That's that's why

1:27:25 Pretty much forever. It's been about for Nintendo's platforms, it's always been more about the first party games that Nintendo's making. But uh I was really worried that There was a hardware problem.

1:27:40 between the business model of Nintendo and the lack of multimedia features. And so I'm already thinking about that. And I I I was already a really big fan of the uh Motorol M C sixty eight thousand processor because Steve and I had picked it. Right. Next gen machines. Yeah.

1:27:57 Well anyway, uh when we started EA, the first development systems we bought were Sun Work stations with that processor. And then Coin Op machines started using that processor and we licensed games like Marvel Madness from Atari Coin Ops. And we were able to port it to the Commodore Amiga, the Atari S T, which also So we were very familiar

1:28:19 With that processor. And we find out that Sega. Which had been Limited to only one percent market share.

1:28:27 Consoles because Nintendo master system that they had, yeah. They were gonna come to market first. With the first sixteen bit console. Using that processor with a sound chip, with a graphics chip. And a price under two hundred dollars.

1:28:41 And I thought, Wow. Uh we've we've built uh tremendous arsenal Sixteen bed. Technology, tools. And game brands.

1:28:51 And they just don't line up with the right platform, this could be that platform. And this is the this is the iPhone moment, right? And the funny and the funny thing about it is that Nintendo was so successful, they had ninety eight percent market share. So all of the third party game developers They either refuse to do Nintendo because the cost structure and the risk and the controls. They just said I don't like that and I'm just not gonna do it. I'll stick with this little business I have on the IBM PC or whatever. So he then did that.

1:29:20 Like the guys are Broderman. Yeah, yeah. Or they said, Well, uh if I'm gonna be in the console market, it's gonna have to be on Nintendo because they have all the market share. And there's really only one company that had a pretty good ride that way, which was Acclaim.

1:29:33 Right, right, right. And even they eventually went under because of all the constraints about the console side. And there were some other big Japanese companies like Konami that had a pretty good run, but even they faded. So it it just the being a third party uh in that business model has never really worked out uh that well. Anyway, so I'm looking for a different kind of answer and I think, okay. Uh it could be this machine. So it's coming out in the fall of nineteen eighty eight.

1:29:58 in Japan and so we we buy one at retail or buy a field at retail And bring it back to the United States. And Sega's ambition was to recreate the Nintendo ecosystem for themselves, right? Well I didn't know that yet. We didn't know what they were gonna do because they hadn't they had not had a third party program for their eight bit machine. So maybe they're gonna make maybe they're still gonna do that, and they're just have their own games. So we get the machine and we're thinking, Well, yeah, this thing's pretty badass. Uh, we really like what it can do.

1:30:26 And and then I th then I said, Well, we're g let's reverse engineer it. Mm-hmm. And well let's make sure we do that legally correctly. So we don't infringe copyright law. And then we'll be able to make our own games for it. We don't have to be a licensee.

1:30:41 And Tha that's when basically I I decided that it was time to take the company public because I thought, Yeah, you know, they're gonna sue us. Yeah. And we're gonna probably be tied up in court for a while. Um We need some more ammo, uh before we go into that battle. Just a mezzanine isn't gonna be. What did your board think about this, by the way? Well it it took a little while to get everybody behind it.

1:31:01 Were they fired up? Like did they see the potential here too, or You know, I I think uh there's two layers to that. First of all, you gotta you gotta get the management team Uh in support of it. And once once the managing believes it's a good Adventure. Then you go uh pitch the board because the board the board wants to make sure you know they're gonna look around the room and go, i is everybody in on this? Mm-hmm. Or because you know, why would they support it if they can tell there's there's factions in the management team that don't

1:31:28 Uh believe it's a good idea. And you know, thankfully everybody was in. And And off we went. And I compare this to what uh Lords of Arabia did

1:31:39 by attacking Aqaba from the rear. And this was a turning point in World War One and the battle with the Turks. Yeah. And they they uh d did basically what everybody thought was impossible to do. And by the way, that's still my favorite movie. And I've actually been to several of the locations where Lawrence the real Lawrence was, and I've been to several of the locations where they made the movie. So I'm a complete fanatic about it. Oh, cool.

1:32:02 But at any rate, uh We uh embarked on that adventure and there was some really heroic work done by Jim Nichells and Steve Hayes and David Maynard. To Go into a uh

1:32:14 The what's called a clean room. And you can't even take anything in there with you. You you go in there and you've got the equipment And you can't bring This is to reverse engineer the job. You go into that room and the room is c essentially sealed. And then you have to create tools from scratch. and figure out a way to unravel the mystery of how that machine, that black box, how does it work?

1:32:37 And it took a year. Oh. So they're off doing this for a year and they're doing that heroically knowing that they won't get to be able to make games for it. And here's the quirk of the copyright law is that they're gonna need to use a

1:32:50 Disassembler. To take an existing game. And look at the code of that game on a screen. Mm-hmm. And They're violating copyright. They took the game down to assembly code?

1:33:02 And Well if if you're you're trying to understand what is this machine doing? You're gonna need to look at images of what's in memory. Yeah. Wow. Okay. Now you're looking at something that is being visually represented on the screen. A copy of what's in memory is being shown on the screen. That is A copyright infringing act. Yeah. However.

1:33:21 In the context of a clean room Uh it it's covered under fair use. That if you're just ch if all you're trying to do is figure out how this black box works, that's okay. But if you exploit that information To make software for that machine.

1:33:36 Now it's not a fair use anymore. Steve Hayes. Uh, David Maynard, Jim Mitchells, these are guys that had made games for electronic arts. They know They're not gonna be the ones making games for the Sega Jets. This is like a Star Wars movie. Oh, these guys are the greatest heroes in the history of electronic arts. Wow. And Jim Nichells.

1:33:56 Always a serious alcoholic. Uh dead at a very young age. And I I'll just Treasure this guy forever. Because he was the one

1:34:08 Who stuck with that. And did the heavy lifting in the end. That figured it out and made that sacrifice. And it it still to this day kind of makes me want to start crying. Wow. Oh my goodness. And it just uh what those guys did. Anyway, it just it was going on for months. Uh we knew that the uh Uh

1:34:27 product was gonna come to the US in the fall of nineteen eighty nine and we're thinking, Well, hey, we're beginning to figure this thing out. And we don't see any reason why we can't make our own games for it, because it's not like Nintendo. Nintendo had a little security chip Yeah, they're they've always been good at DRM. You know, there's there's a security chip on the cartridge and it's handshaking with a security chip that's in the console. Yeah. Saying, Are you a legitimate Nintendo cartridge? Yes or no? Yes or no. And in order for you to do that, you would have to infringe a patent. Mm.

1:34:56 So we actually did work reverse engineering the Nintendo, but then we realized that you know, because of the patent it's not we'll yeah, you know, we'll get our ass kicked. So let's not do that. And as a result, you know, EA uh did make a few Nintendo games, but we were never able to really put enough attention on Nintendo, there wasn't a way to make enough money. So meanwhile, we're kind of all in on the Sega Genesis and we're worried that

1:35:18 Like Nintendo. See, Nintendo had released that That console the Famicom in Japan. With no security chip. It was the American version that introduced uh that chip. I see. And we're worried, well what if Sega does the same thing? Well they didn't.

1:35:33 Wow. So okay, the coast is clear. So their entire mechanism, just to like really make sure I have it. to make sure that their games were the only ones that would run on the platform was to just not publish any documentation on how anyone could publish for the platform. That's right. But since It's a black box and you only get the information if you sign their license agreement. Apple does that to this day. Right. Although the Supreme Court has recently had a few things to say about that. And also there's there's iPhone jailbreakers. So famously Craig Hawk and Berry with Twitter efficacy for the first iPhone before there was an app store figured out, reverse engineered similar to you guys, what the API structure was to write code for it.

1:36:10 Like you guys in figuring out and reverse engineering the black box were able to write games for it and then they would just work. Yeah, so uh we we got it all figured out. And then we started uh getting development teams started making games. So that was starting in the fall of uh eighty nine. And that's when we went public.

1:36:31 Yeah, we're ready for the war. Which is gonna start the next year with the first gate. Fresh eight million in your pocket. So here we go. And then by the spring of Nineteen ninety. We've got games ready to come to market. And this is where uh Some of the first games like Budokan

1:36:48 And populist. Oh yeah. Wow. And and by this time, by the way, I was talking to third party game publishers that where we handled their distribution. And competitors. I'm going around talking to a lot of people saying, Hey this is forming an alliance. This is what we're doing. And if you want to be partners with us, uh there's various ways we can partner with you to have us all operate something. It's a little bit like what Epic is doing now, challenging Google the Steam Store and Google Play. Yep. And I'm really so delighted to see that, by the way. I mean, I just I love what they're doing. Yeah, this seems to be a theme in in in your career is figuring out how to um allow the

1:37:23 the creators of the games to have that more direct relationship. And honestly it's really simple. What I've always been passionate about is the power of the medium. And the freedom of creative people. to exploit it in a variety of ways. that the public can have access to.

1:37:40 Mm. So an anybody that wants to come along and choke that to death and control it and prevent certain things from being viable. Yeah. Not a fan. Yeah. Well it ends up it you're right, it ends up like In a creative art form like this, it ends up killing. I mean look at uh look no further than the state of gaming in the app store. Uh you know, Fortnite being a notable exception over the last year. You have a success rate now, it's like one in a thousand that of apps that actually make money. Is your offer to all these other game publishers joining your alliance, hey, we've effectively recreated a software development kit, or we've created one and and you can have access to this amazing document. But we're getting closer and closer to coming to market and we're actually out making sales calls, retailers are placing orders.

1:38:26 Yeah, we're ready to roll. Uh there's a CES show in Chicago that's gonna be in uh June. And that's gonna be the big Unveil. And b about I don't know, forty five days before that I thought, you know I'm really committed to this plan.

1:38:44 And at the same time As a CEO of a public company and as a competent executive, maybe I ought to go talk to Sega. And see if we could actually Maybe partner. Mm-hmm.

1:38:55 And I think, yeah, I don't really want to do that. And I said, Well yeah, but you really you really ought to do that. Anyway so I called up the chairman. of Sega, who actually is the founder of Sega. Sega was started by David Rosen. He started it in Japan, well he he had been a the sir American serviceman after the war.

1:39:14 Uh and he had noticed the uh soldiers. After the war that were assigned to to be there. They had a lot of free time with nothing to do. And there was demand for like pinball machines and stuff like that. And so uh Sega was actually one of the f first makers of you know mechanical, you know, a games to go on a military basis. Wow. So that's how SEG actually got started. I did not know that. I just thought it was a a Japanese company. And of course then it became a a pretty big business uh globally and eventually uh Nakeama son Who was the leading distributor

1:39:48 in into the channels in Japan. He ended up uh uh buying out the company. Wow. And uh d David Rosen had actually pre uh sold it to an American company before that. And so he was out of it. And Naka Amazon brought him back in as chairman. Wow. So I called up David. And he's basically saying, Are you crazy? Are you nuts? You're running a public company.

1:40:10 Uh, we're gonna just destroy your stock price when the news hits about us suing you. And How do you know we can't just change the machine and make sure all your games don't work? I mean he's he's just hitting me with every possible threat. Yeah, I did I just don't think you can Pretty much. And I'm just saying, Well, you know, hey yeah, maybe we should get together and talk about it. All right. So we we end up having this meeting. And it it starts us down the road of this process of of discussing you know ways w that we could actually uh partner. Mm-hmm. And unbeknownst to me.

1:40:44 They're all terrified. Because they're planning on having this third party program. I feel the fact they've been socializing that with me for a year. I've been having these uh rope a dope kinda conversations with them where they would come in and try to excel me on becoming a third party licensee for the Sega Genesis and I would have to pretend that I think it's kind of interesting, but they're not ready to do it yet. And Uh meanwhile I got guys in the next room, you know, reverse engineer machine and they don't know. And what are terms to become an official licensee? Well, that was there's a lot of discussion about that, as you can imagine. So my idea was uh

1:41:18 to pay them very little. I basically was willing to pay Two bucks a unit. Up to A million units and then not pay them anything else. And those units are games per discussion. They actually, it turns out, were really worried.

1:41:37 That I was having they they they had heard about they're they're out trying to convince other people to do third party deals. And they're all saying to see me. But they're all saying no to me. I mean, none of those people Uh wanted to do it. They were too terrified. They're just playing me against Sega. They're using me to try to help improve their position with Sega and Sega's actually worried Then I'm gonna tank.

1:42:02 They're third party programming. I did not know that. Maybe I find that out much later. Meanwhile, I'm thinking I don't have to make this deal with Sega but th this is the thing about any kind of negotiation. You need to have leverage. Mm-hmm. Being

1:42:16 Able to be committed to a position. Helps you get leverage because the other side thinks, Yeah, okay. That's what they're committed to. And in this case I was fully convinced we didn't need to have a license. So I you know there's no way they can force me to get a license. I believe I'd be happy to go to court instead.

1:42:33 So they're beginning to catch on to that. And we we get down to the point where, okay, the only we're pretty much in agreement on everything else. The only things at issue is they would like to get two dollars per unit forever. And I want to cap it to a million units. Mm-hmm. And everyone on my management team is saying, Trip, you've done a fabulous job. Take the two dollars per unit.

1:42:54 And I'm saying you know I pretty much know that Uh, they're p gonna sue us. And I and I really am convinced that what we're doing is completely legally correct. And I don't mind

1:43:06 Playing this out. And I know that they'll sue us. And we'll be prepared and we'll go through document discovery and they'll see us engage with that and then we'll maybe be moving towards going to court. And they're gonna reach a point where they realize that we're gonna fight it out all the way to the end and that they can't beat us. And then they'll drop the uh two dollar per unit.

1:43:26 thing and settle for the cap. And I'm willing to play it out that way, even if it takes six months. Did they Realize the power of Madden football at this point. Anyway, I'm having this conversation with my staff and they're all rolling their eyes. And lo and behold, I get on a plane, I go to CES and David Rosen and our lawyers hunker down. And

1:43:49 They agreed to what I was what I wanted. So we we never had to go to court. Wow. And the again uh I don't really un I didn't really understand at the time uh that I had so much leverage because they were afraid that C S is gonna start and we're gonna make this news and we're gonna blow up their third party program. They're launching soon. I already knew I had no program with others They apparently didn't know that. Oh my God. Just flying right in with a buff the whole time. I was just a little lucky there. Wow.

1:44:18 And didn't have to go through that harangue of six months of the tr stock price getting trash. But by the way, the the when the when EA went public, the market cap was eighty million. Okay. Sorry. But then it dropped to sixty million. Ah. And and this persisted. I think we actually hit bottom Later that year. So here we are announcing ready to do Sega, but the

1:44:39 The Murray's going to be. Who the hell is Sega? Sega's got no position in this business. We don't know if that's gonna lose them money or what You know, nobody's talking about it. And then we we just started cranking out better quarterly results, uh astronomically better quarterly results for the next several quarters, and it took another I don't know, maybe a year or two. And the company was worth two billion. I mean it it just really transformed in the next year or two. And was that Madden for Sega that just created all that revenue?

1:45:08 Well, uh we already had Madden almost finished by the time that negotiation uh wrapped up. And it was gonna ship I think in September. Of nineteen ninety. Mm-hmm. And it was it was not too long after that show that Sega contacted us and said You know, it turns out that our developers that are making our football game, which the w they had made a deal with Joe Montana to be their uh platform spokesperson to promote their whole

1:45:32 uh product line. And they thought well hey uh part of their deal with him being their television spokesperson included, putting his name on a game. Which is hard. Like you guys Oh, so he was spokesperson for the Genesis console. Yes. Wow. And their entire uh business. So they had they had a studio, outside studio, a developer. making that football game. Oh man. And they found out that that game was gonna miss Christmas.

1:45:56 Oh, yeah. Naki Yama Sun gets on the phone with me and say and says uh Uh for the good of the platform that uh we all depend on here, you need to make a sacrifice for the team. By taking Madden. And

1:46:13 Changing it into Montana football. And we'll pay you some money for that. And then we'll all have a successful Christmas. And uh at least one of my high ranking executives said, Yeah, that's a good idea, let's do that and I looked at him and I thought, What? We have the goose. We have the goose. We've already taken this game to our uh best uh r uh retail customers. They've al we've already got thousands of orders for the thing.

1:46:38 This is gonna be the a key franchise for us. Uh you know, I've been waiting years for it for this. I'm not gonna give it to them. Right. And then and then I thought about it and go. Well wait a minute. We can do both. So I go back to a second and say, Okay, here's the deal. In six weeks we're gonna hand you the game.

1:46:55 That's gonna be Montana football. You're gonna give us two million dollars in cash. I got my two million dollars back. Ha ha. And we literally cranked out this different game in six weeks. By taking Madden.

1:47:10 And basically dumbing it down. So look, I I had put the playbook together. So the Sega version had I think a hundred and thirty five plays. The Montana had thirteen. What took out ninety percent of the plays.

1:47:24 And then instead of the uh sort of half three D Camera view. Yeah, yeah. Like Jim Simmons, the engineer that built this uh Genesis version Yeah, he he he basically invented this idea of the the fake three D angle the six with the scaling of the sprites. Yeah so that it looked like the players were a little more like three D I think. So he could just remove that scaling from the safeties back at the uh Well uh in in Japan, by the way, the sports games were known as big head games where where it was a little cartoony with a baseball player with a really big head. So okay, we're gonna give him that. I knew that I knew that didn't sell in America. And and then we're gonna give'em a really plain two D top down camera view. Wow.

1:48:08 And then and then we took out some other stuff and felt okay, now it's not threatening. It's not gonna interfe it's not really gonna it's gonna be an arcade thing. Of course, what we did with Madden was a great market compromise is we had a meeting of the minds in the in the developers community around Madden where we've thought, okay. We wanted to have the the simulation accuracy But it's gotta be more of an arcade game and this is an audience. Uh the the the players are gonna be younger, they're gonna be more interested in the action side of it. So the design had to

1:48:41 It was a It was it was really a great uh design. And again, I think what Jim Simmons did in building that First uh version was Uh among the the most amazing work I've seen done in my career.

1:48:55 And that engine that he built was so good that we immediately turned it into the hockey game. And that was the debut of our first hockey game. Hm. Did Madden and Montana ship at the same time? Yeah, so they both came out for Christmas. And they were two of the five best selling games that Christmas. Wow. And nobody knew that under the hood that Montana was ninety eight percent of the same code base. Wow. That's incredible.

1:49:21 And that really Built. EA into w into everything that it is today, right? Uh The Console game Madden just

1:49:30 Yeah. And has the beauty of the sports season that you can release a new version every year and Make it better every year. Um that was one thing that uh I had grown up uh playing that game Stratomatic where every year you got new cards because the players have changed teams and they they had performed differently and their stats are different and you want the

1:49:52 the real thing. Therefore you want you want the the current players W at their current levels of ability. And so that was just a given. So after rookies that had just got drafted out. Yeah, every ever since the first version of Madden had come out, we had started doing a player A player disc. every year. And it was a little awkward with the uh consoles because

1:50:14 Th there was no way to do an add on later. Everything had to be on the cartridge. So the first version, you know, it had neither an NFL license nor a pl player's license. And we were we were kind of faking our way through this for a while, like the that f very first version of Madden Which now is a v very expensive license. Uh indeed. Although it's it's a it's a actually a fair deal because What uh what EA was able to do is build a brand and build a market position so that they had some leverage in that negotiation. Just an unbelievable

1:50:44 Several times here in Acquired, as David says, uh turns on a knife point, or as I'll say turns on a knife point pull the e break, cut the wheel to the left. I mean, you guys just came out with flying colors, the building blows up behind you, you know, you you run out. It's like the end of an action movie. Well, you know, it's it it's true. It really was that kind of pivot, but before we even did any of that The company had been profitable with revenue growth for the prior five years. And Yeah, so you guys have been profitable like since you started, right? Well, no no the first couple of years you gotta invest and spend money and you know build Build distribution. Yeah, we got

1:51:21 Yeah, we got fairly close in nineteen eighty four to running out of money. And it was right around that time that it kinda tilted enough and you know it it was profitable in the fourth quarter of of uh nineteen eighty four and then profitable after that. Got it.

1:51:39 Yeah, in terms of unlocking an order of magnitude jump in the value. Yeah. Yeah. Well, this is the part of our show where we ask what would have happened otherwise. So

1:51:49 Can you talk a little bit about the calculus on why you decided to go public and did you consider not going public?'Cause many a gaming company You know, y you you could have been private for a long time, especially if you're making money and you don't need to take any further investment. I've always believed in being kind of e egalitarian about my companies. So basically everybody's gonna get stock options no matter what they do. Mm-hmm. And we're gonna try to figure out how to be shared owners of the business and have everybody feel like, Yeah, there's something in it for me to have a long term view here and to stick around and to

1:52:21 Go through the tough times and get Yeah. In addition to the other rewards. And you can't really do that and stay private because there's just not going to be A sufficiently liquid marketplace

1:52:34 for the shares unless you either sell the company Or you go public. Yeah. I have been there. For three IPOs.

1:52:42 Two of which I led. So it's not it's not foreign territory for me to think to think this way. But not everybody in Silicon Valley wants to give shares to everybody. In fact, uh there's a lot of big tech companies like Oracle, I think maybe Twenty percent of employees have stock options. Yeah, big companies maybe have a uh ESOP, you know, employee stock ownership plan, but you're not gonna get very much. I've just always believed in everybody sharing in that. And and then you've got to have some long term plan for how you're gonna get to liquidity.

1:53:10 Were you facing pressure from shareholders saying, Hey, we really should, you know, it's been However many years. Seven years, seven years we really should think about returning capital to three IPOs that I was around. Apple went at a time when it was perfectly appropriate for Apple to do it. Yeah. And it was a mixed blessing because it clearly change the culture of the company in a negative way. But it really did help put the company on the map and give it plenty of uh resources.

1:53:38 I think election regards it Took too long. Mm. And yeah, it was it was seven years and it it was Beautiful.

1:53:47 For some employees, you know, there's a lot of frustration and disappointment and a lot of it had to do with the economy not being in the right place in the mid to late eighties. And then of course three DO later went probably way too early. But It was almost like the company had no shot at even remotely Trying to do what it was gonna do if it didn't go out. Uh ahead of things. And this is your uh gaming hardware business later that that you started after EA.

1:54:10 Yeah, it actually was started at EA I mean, it was kind of a Skunk Works insight to right. And then it w ended up spinning out as a separate company and it's a very sad sort uh story because it was a Very ambitious Idea. And

1:54:26 I I had been on such a run of uh success. That Again, there's that's where your greatest strength turns out to be your greatest weakness because you think you're infallible or invincible at that point. And you don't realize that you're finally pushing over that edge. And you know, I I uh when when I think about that concept, it reminds me of uh these great drivers like Nicky Lauta and Ederton Santa. Yeah. Where they really know how to push a car.

1:54:53 to that very edge where just a little bit more and you're you're gonna turn it into an airplane and it's gonna fly off the course. And that's what both of those guys did. And they did it on on uh wet tracks. When they in theory could have known better. Yeah. But they but they knew how good they were and they knew that they were really good at managing that edge. Until you until you don't. Mm-hmm. And yeah. So three DO is that kind of an experience for me. And I really had a genuine interest in

1:55:20 Getting a platform out there that had But that can solve all of these uh issues that We're creating these bottlenecks on the hardware side and holding developers back and Holding the public interest back.

1:55:33 Of course all that stuff it ended up uh getting sort of out, you know, on its own. Yeah. Some longer time frame. But probably the uh most classic mistake I've made the most in my career is being too early. Just a lot of a lot of us entrepreneurs. We see something when we envision that product and then we don't appreciate the fact that it's gonna take a while to educate

1:55:53 The audience. And have be have them be willing to pay for it. Well, don't be too hard on yourself. I mean, we wouldn't be sitting here today if you didn't have the discipline to to go and take a job at Apple for years before nineteen eighty two. Yeah, it's just uh it's an interesting issue for entrepreneurs to figure out what is the right timing of your ideas. Last question on the EAIPO and sort of thinking about that versus other options. Was it beneficial for the company and what did it enable the company to do that that you guys couldn't have otherwise done if you had remained private other than achieve liquidity for all the shareholders? If you knew in hindsight that you were gonna make a deal with Sega, the company wouldn't have needed to go public. Right. You could have gone public a year later at a ten X

1:56:37 twenty X valuation. Yeah, perhaps. I I think in the end it's still a you know it it's a happy outcome for everybody. I'm sure uh a whole lot of long term employees were Delighted that we went public. And none of us was delighted with the the stock being flat as a pancake and even trailing down after the first uh. This is something that has been I understand it as a

1:57:03 Entrepreneur. Uh start up and play as venture cap. Like you You can come to look at The IPO as like the end game. It's really not. It's not. It's the end of the beginning. Right. And so the valuation that you achieve and that you pump up to for that IPO, you just keep the thing at higher and higher and higher and higher. But

1:57:21 As we've seen with Facebook and as Story is still to be written on on Uber and Lyft. what happens after the IPO m matters just as much, if not more, for your ultimate valuation, uh and and liquidity where you decide to cash in. Yeah, and again in hindsight, I can clearly see that Uh three DOM. It wasn't a solid enough business proposition to really

1:57:43 Deserve to be started in the first place. And it definitely Uh was Not a good idea to take it public. Yeah. And th I think if you're gonna take something public, you've gotta have a really concrete idea.

1:57:57 Uh what operating business model you have that you're gonna be able to continue to systematically move forward and and and fairly steadily improve upon Otherwise you just you just you shouldn't just voice that off in the public. We saw this a couple of years ago with all the crypto stuff. Oh yeah. Where Really? Come on. I mean th there were so many schemes.

1:58:18 And it it I I thought it was kinda sad because Because they were able to skirt a lot of the securities laws. By offering uh t to do it. You know, in exchange for the uh cryptocurrency. And yeah, a lot of those chickens have come home to roost.

1:58:31 Uh Should we bring it home to grading? Think we should. trip the way this all started was in an acquisition we grade with all these years of hindsight, was it a good idea for the big company to buy the little company? Was that a good use of of capital? The way that we have adapted that uh for IPOs is Was the transaction a good idea for the company to do? Did they do something interesting with the capital? Did they need the capital for something? Um, was a change in shareholders beneficial to the business in some particular way? And frankly, the grading's a little bit more arbitrary in the in these IPOs. And but the discussion is, I think, the more important part.

1:59:07 And the thing that I index on when I lean really positive on on grading the the transaction. And and we don't care as much about sort of like how it went mechanically, like yeah, the stock stock dipped afterwards, but like that's not what we're here to litigate. the really interesting thing to me is what an incredible negotiating position it gave you with Sega. And

1:59:28 If you sort of didn't have just raised that cash have been a uh more l sort of legitimate public company, um, you may not have been able to have the leverage that you needed in those negotiations to ultimately get your one million unit cap. Yeah, th that's that's true. I I would also add that We already had a pretty good history as a private company making acquisitions. And there again you're gonna end up with shareholders that are gonna want some liquidity. But as you gotta do it, as everybody knows.

1:59:59 After electronic arts went public, it made it even easier to make acquisitions and the company made a ton of acquisitions in the nineteen nineties. If you think about the really big strategic lever that ultimately enabled EA sports to be a big deal, it's the distribution channel. It's having a big pipeline. So that the NFL wants to do business with you. Yeah. And others want to do business with you and that's how you get FIFA and And uh Harry Potter and everything else that's happened.

2:00:26 And being public and being able to acquire things and to be able to flow more goods through that channel as you're really building the power of that channel. Yep. It's funny, we hadn't really talked about that as a benefit of going public yet on this show is When you're buying companies with all stock and you're private, it's it's harder to do those transactions. When you're public You know, whether you're paying with cash or whether you're paying with stock. It's roughly equivalent to the yeah, since since it's liquid you can do a lot more work.

2:00:54 In a private scenario, the acquisitions you're more likely to be able to make are gonna be smaller. And they're likely to be struggling in some way, which is why they're willing to sell it. Whereas uh after you're public and you got the currency Now you can buy a really healthy operating business, you can pay a fair price for it, but it doesn't cost it necessarily have to cost you a lot of cash. And then and then you just bolt that on to your operating results.

2:01:18 Building EA to what it is today. Yeah. David, how do you think about it and how would you throw a grade on that? Well, I think um I mean it's obviously the right thing to do. Yeah. Uh yeah, I mean it's it's it's an A, for sure. The grading I think is most interesting on this show

2:01:32 For IPOs that just happened. Like we just did Lyft, we did interest, we did Uber. And there we paint the scenario of what's going to make this an A in five or 10 years, and what's going to make this a Right. D in five or ten years. This is exactly what you would have painted the scenario as an A would give you leverage to massively expand the business into a new market, make acquisitions, which became a huge part of the strategy over the next twenty years. Uh yeah, obviously name. Yep. Right on.

2:01:58 Mm-hmm. Alright, I think That is all we've got. That is all we've got. Thank you.

2:02:05 Thank you so much for joining us. My pleasure. It's been fun. All right listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yeah.

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2:03:16 We'll be gloriously covering all of the remaining big upcoming IPOs and doing more of our classic bread and butter episodes on acquisitions as well. If you want to go deeper on what it's like to build a startup, get interviews with expert operators and VCs, and explore some of David and my personal theses, you should become an acquired limited partner at glow.fm slash acquired. And we will see you next time. See you next time.

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