MTI Electronics Arts in1995


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AGENDA

Video Industry

Key Characteristics

Phases & Leaders

Comparison with MovieIndustry

Electronic Arts

Business Model

Core Competencies

Technological Strategy

The Dilemma

Industry Trends

Platform Analysis

Way Forward


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VIDEOINDUSTRY


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KEY CHARACTERISTICS

A. PRODUCTS:

o Capital Intensive Highly Engineered

Hi-Tech

Expensive :to produce

:to distribute:to buy

o Low Unit Volume

Not mass produced and revenue contribution of each

unit was low

o Dynamic

The products had very limited life and consumersdemanded frequent changes/upgrades

(contd)


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B. GEOGRAPHIC SCOPE:

o North America, Europe & Japan

C. DOMINANT ECONOMIC CHARACTERISTICS:

o

Seasonalityo Low margins on hardware with larger margins on software

D. STRATEGIC GROUPS

o Different periods saw different industry leaders

o Nintendo having the largest market share

o No collaboration among the leading players

(contd)

(contd)

KEY CHARACTERISTICS


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F. DRIVING FORCES

o Changing/improving technology

o Demand for stand alone/portable gaming devices

o Consumer entertainment needs

G. MARKET SEGMENTS

o Initially targeted children (08 - 15 yrs.), products positioned as toys

o Later older children & young adults were also targeted

H. SUCCESS FACTORS

o Managing inventory & software development

o Technological superiority of products

o Originality of concept & content

(contd)

KEY CHARACTERISTICS


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PHASES & LEADERS

ATARI

Home version ofarcade game

Electronic &Semiconductortechnology

PHASE 1:[1970 - 85]

NINTENDO

Variety of original &

creative games

Customer service

8 bit NES

PHASE 2:[1985 - 90]

NINTENDO &SEGA

Superior game play

16 bit Genesis

Reduced dependency- developers/retailers

PHASE 3:[1989 - 93]

AT&T, Microsoft, etc.

Extra Memory &

special effects in gamesConvergence:computer,communication,entertainment

32 & 64 bit & CD-ROM

PHASE 4:[1993 onwards]


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MOVIE INDUSTRY VALUE CHAIN

Script/PropertyProducers

Agents

Studios OtherDistributions

Advertisers

MediaAgencies

TheaterDistribution

DVD

Distribution

CONSUMERS


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COMPARISON WITH MOVIE INDUSTRY

Similarities

VIDEO GAME MOVIEDriven by Programmers/Developers Driven by Producers/Directors

Scripts reviewed by a committee for approval Similar scripts review process

Once script is selected then a larger teamstarts to work on it

Team includes actors, directors, editors,technicians, etc.

Software designers are the creative artists The writers, recording starts are the creativeartists

A host of background/backstage operationsmake the game possible

A host of background/backstage operationsmake the movie possible

Marketing blitzes to generate excitement

about the games

Promotional Ads are launched to create

excitement about the movies

Sunk cost: game development Sunk cost: movie production

No single recipe to develop a hit game No surefire formula for making a hit movie

Target Holiday seasons Good sales for movies opening during

holidays


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COMPARISON WITH MOVIE INDUSTRY

Dissimilarities

VIDEO GAME MOVIE

Costs are not very large Very large costs are associated with movies

Too much dependence on technology Technology dependence is relatively less

Target segment limited to Children &young adults

Everyone is a potential consumer formovies

Seasonality is more Seasonality is relatively less

Distribution systems are more elaborate &need fast response speeds Distribution systems need not be thatelaborate or responsive

Hit Rule: profit comes from a larger part ofoutput

Hit Rule: most profit comes from a tinypart of output


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ELECTRONIC ARTS UNTIL 1995

1982:Foundedby Trip

Hawkins

1982-1989:

Excellent Growth

Innovative, highquality games

45% revenue from

Affiliated labels

3 Major decisions

Design s/w for PCsApplications across

h/w platforms

Outsourcemanufacturing & s/wassembly

1989: Crisis

Focus shifted tostand alone videogame market

EA went public at$8 a share

Early 1990s

Broadened productline

1st 3rd partydeveloper of Sega

1991: Founded 3DO

1992: Clear leader in

16-bit

1994-1995

Re-organisation:4 divisions

Expandedoverseas

Invested instate-of-the-artdistribution

systems


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BUSINESS MODEL

PERMANENT STAFF

FINANCE DISTRIBUTION

MARKETING

STUDIOGAME

DESIGNERS

EA

Game Scripts,Future royalties

Advances,Periodicpayments

SCRIPT

EA PROJECT

REVIEW

COMMITTEE

PRODUCTION

TEAM

Post-Approval


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CORE COMPETENCY

CORE COMPETENCY

Ability to assess market changes and new technologies

Flexibility to adapt to the new market needs

CAPABILITIES

Market intelligence, hardware objectivity, frugal system ofdistribution through economies of scale and scope,

RESOURCES

Tangible Licenses, Techno savvy management teams,

Intangible Capacity to innovate, Reputation withcustomers and distributors, Organizational culture


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TECHNOLOGY STRATEGY

TECHNOLOGY CHOICE

Invested in leading-edge computertechnology

Developed Artist Workstation

Compatible across variety of hardwareplatforms

Aversion to dependency on one hardware

TECHNOLOGY LEADERSHIP

Pioneering role in 16 bit products

Ability to assess new platforms

Focus on next generation hardware 3DO

TECHNOLOGY ENTRY TIMING

Designing games for 16 bit Sega Genesis

Navigational Competence

Tiger teams

Education and reference applications

TECHNOLOGY LICENSING

Licensing of EA Studios products

3DO designs given away at nominal fees

Licensing for 3DO software

EA used its technological capabilities offensivelyto create new advantage


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ALIGNMENT OF BUSINESS &TECHNOLOGY STRATEGY

INNOVATION

OPERATIONALEXCELLENCE

CUSTOMERINTIMACY

studio & scriptmodel

Importance to creativefunctions

Unique entrepreneurialculture

EA Affiliated

Labels Economies of scale

& scope indistribution

Broad product line Integration in

value chain Artist workstation

Direct sales force

Strong retailerrelationship Quick marketing

responses Product

forecasting Competitive

assessment Celebrity products


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INDUSTRY TRENDS

CAPITAL

REQUIREMENTS Increasing developmentcost

Longer product development

Higher animation costs

Larger teams

Porting applications to newplatforms

25-30% of total developmentcosts

Increasing marketing anddistribution costs

New channels (specialtysoftware stores , electronicstores)

Pre-launch marketing blitzes

(contd)


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PC MARKETStrong Growth Upgrade kits

Sharp price reductions

No drastic changes ininteractive entertainmentsoftware business

25 % revenue from CD ROMgames (predicted)

75 % from non pc based (play-stations)

Feasibility of owning a PC PC relatively expensive

Installation difficulties

INDUSTRY TRENDS

(contd)

(contd)


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INTERACTIVEMEDIA Convergence of communications, entertainment andcomputing industries

Increased role of video game applications indetermining success

Possibility of Hollywood studios and other contentproviders entering the market

ONLINE Rapidly increasing world wide web users

New distribution channels

Exploding growth in online services industry

Launch of Segas first online video game service

INDUSTRY TRENDS (contd)


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PLATFORMSSkipped 32 bit generation

Ultra 64 (250 $)Silicon based cartridge and not CD ROM

2 million times faster than CD ROM

NINTENDO

Genesis upgradable to 32 bit

Saturn console (480 $)

32 bit, CD ROM based playerAdapter for further enhancements

SEGA

Access to content through Columbia pictures

Playstation (480 $)

32 bit CD ROM player with superior graphics, video and

sound quality

High performance subsystems

SONY

Jaguar (250 $)

64 bit, CD ROM stand alone platform

Fewer games

ATARI


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Processor Platform Tie Ratio

8 bit Nintendo 12

16-bit Super NES 10

Sega Genesis 10

32-bit Sega Saturn 15

Sony PlayStation 15

3D0 15

PC PC-Floppy 1

PC CD-ROM 2

3DO

Backward compatible unlike Genesis,

Super NES, etc.

Sound and video quality unmatched

Expected tie ratio of 15

Gross Profit % table 1996 (E) 1997 (E)

Sega Genesis 42 % 41 %

Super Nintendo 26 % 25 %

PC/MAC 67 % 65 %

Other Platforms 40 % 40 %

License/OEM 84 % 80 %

Affiliated Labels 18 % 17 %

3DO, Saturn, Playstation 62 % 62 %

THE LUCRATIVE PLATFORMS

PC/MAC License/OEM

3DO, Saturn, Playstation


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WAY FORWARD Development for 32 bit technologies

o

Sony PlayStation, 3DO and Saturn High gross profit margins

Sony sure-shot success due to its current brand perception

o PC/MAC

Expected to be the fastest growing

CD-ROMSo Continue production of cartridges (for Nintendo and Sega)

Focus on selling in other countries , in sync with target of 40 % sales outside

the US

Translation of EA titles into up to seven languages and their distribution in

31 European and Mediterranean countries

Edutainment

o High growth category

o Recent acquisitions


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Continue to push 3DO development

Should wait for the online way of distribution to develop

before venturing

o Fast follower approach rather than first mover

WAY FORWARD


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Documents

MTI Electronics Arts in1995