Acquired - The Electronic Arts IPO (with Trip Hawkins)

0:00Cool, all more time. This is Trip. We're on Santa Barbara Radio. Great. And there's our opener. Welcome to season four, episode seven of Acquired, the podcast about technology, acquisitions and IPOs. I'm Ben Gilbert. David Rosenthal. And we are your hosts.

0:32With all these A-plus IPOs going on, we wanted to do a throwback episode to another era, 1989, 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.

1:01Trip 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. Yeah, it's great to have you.

1:29For 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 the show is really one of storytelling followed by one of judgment.

1:48If 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.

2:13It'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 you guys are listening and getting value out of it. 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, the agentic operating system that is redefining how the world's best legal teams work.

2:39Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Legora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm.

3:06for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts, and it pulls every key term into a grid a lawyer can actually work with. Lagora's bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work, and do higher value work. And this means that the pie can grow even as each individual task takes less time.

3:35And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. LaGora now has over 100,000 lawyers on the platform from 1200 legal teams in 50 countries, and crazily, they went from 1 million to 100 million in ARR in about 18 months. Truly insane numbers. And that is the real test.

4:27Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. All right, David. It is time. It's time. So excited to dive in with Trip here.

4:55So, per usual, we'd like to start way back at the beginning on this show. So, you grew up here in Southern California, right? In the 1970s? That's right. What did your family do? What brought them to California? I have family that came here about 100 years ago. Oh, wow. You didn't start early enough, David? Yeah. They were back east, and a few of them were obviously entrepreneurs. And I think that's how pretty much everybody in California got here, as they were willing to leave some other place.

5:23and head to one of the most remote parts of the planet. So growing up, you loved sports, right? You were a jack, but you also loved 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.

5:45Those don't seem to me sitting here, like, jocks back then, played Dungeons and Dragons. How did you meld both of those and come to love them? 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 that something really interesting was going on from a strategy standpoint. So I can't say that the time that I realized that I was a strategic thinker.

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

6:40I found that back in the 1960s, some game designers had invented these cardboard dice games. And a lot of people remember the one, it was called All Star Baseball, where there's a baseball one. And you'd have one for Babe Ruth and you'd have another one for Ty Cobb. And if it's Babe Ruth, there was a big pie slice for him to hit a home run.

7:06was Ty Cobb had a much bigger pie slice for hitting a single. You would put the thing on a spinner and you'd hit the spinner with your finger. I had one of these growing up in the 80s too. A lot of people will remember that one. They don't remember my favorite one, which is called Stratomatic. Again, it's a game invented in the 60s and you roll dice and there's all these player cards and you would look up the result. Heck, I was about, I don't know, 10.

7:32when 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 they're always oh my god there are more ways to roll the 7 than a 12 and how many more ways are there and why is that in which guy do I want if I'm to play my friend and I want to win I better figure out you know how this really works again I just kind of 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 ideally as a kid you're tuning into who you are and part of you are gifts from your ancestors and hopefully you can discover what abilities you were already born with you can figure out what's going on in your environment that really speaks to you

8:30and decide then, what are you passionate about doing about it? And I had the good fortune to have those things happen. And on the environment front, was it your senior year in high school, you were first exposed to computers? Actually, earlier in high school, I think I was maybe a sophomore. And then I was trying to get my friends to play these games. And a few of the nerdiest friends love the games too.

8:58We all loved it. We all saw what the value was, but a whole lot more friends, kids. They would drift back to watching television. It was too much work. Too much work, too much overhead. Yeah, so things like D&D are kind of famously geeky in that way. And it's just not everybody's cup of tea. And I was just thinking about realizing, man, this is a really special experience to be this mentally engaged, but not everybody can relate to it. It's just too much work to operate the thing.

9:27And that's when as soon as I heard about computers and I could kind of see it with my own eyes, this is how you do it. We're going to basically put all of the administrative operating stuff in a box and we're going to 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 going to be true 40 years later. And if you told me, you know, Trep, that's going to take 40 years. I'll go, oh, never mind.

9:55But you don't know that. So next thing you know, you spent 40 years working on it. By the way, I just have to say that I didn't know I had this accurate forecast about something that would be useful. Right. I didn't know it was going to 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 I have no idea what's going to happen 40 years from now. I don't know about you. We're thinking about it. We overly speculate. So this is all swirling around here in Southern California. You go to college at Harvard. You were there at the same time as Bill Gates and Steve Bummer. Did you interact with them at all? You know, we ended up using some of the same computer labs, but I only knew that later. I think it's entirely possible that Bill and I would have been in the Akin

10:48computation center at the same time without having it ever actually met. And honestly, those of us that were really serious about it, we would go there at night because these are timeshare systems. Right. Right. 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 basically nerds that you could smell from 10 feet away. There were guys sleeping under tables. I mean, it was just chaos. But if you were really into it, you were just thrilled to be there.

11:14on a machine at night when you have more speed. So 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 collegian 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 learning and mastering the computer. Yeah, that was a tough balancing act and I let her in football as a freshman.

11:42and then I realized that, wow, this is so time consuming that I can't do everything I'm doing. So, you know, I would have loved to have done it all. In hindsight, if I could go back and do it differently, I probably would have loved to have played varsity football and done that longer. And what I found was that they actually had a club football program. No practices, really. And it was tackle football.

12:08and you would play with different dorm dormitory groups. And that was a hell of a lot of fun. So when you're doing that, we went undefeated and unscored on. We only played six games, and it was really hard to have it elaborate offensive playbook, because nobody's spending a lot of time practicing. But I was the free safety on that team, and we never allowed anyone to score. I was the last light of defense. So that was for me probably the highlight of my football life. That's amazing.

12:37Was it at this time that was at Harvard where you realized you wanted to start a company and had started laying in motion all the plans that would that would actually already done it and so I started working on it and I got some help from my best friend 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 then I thought, well, hey, why don't I actually market this? And my dad was generous enough to loan me $5,000. And I went and sourced all of the different parts like a silk screen game board.

13:22and paper parts and things that you had to have perforations on so you could punch them out and dice and you had to figure out who am I going to buy dice from? So you're building a full tabletop game of your own? Yeah, and so that all got put together and 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 obviously it didn't get very far. So I lost every penny. And this is during undergrad? I'm in high school. High school.

13:51I'm basically learning two things. One, wow, ow, which man, it really hurts when you've got this baby, this thing you've created, it's your baby. Extension of yourself. And it has been rejected by the business world. And you can't keep going with it. And that feeling of failure and disappointment that that dream has died creatively. It was a good experience to go through that.

14:16And then the second thing I learned was, man, this is so much fun. I got to do this again. This is amazing. It's so stimulating. And I thought, you know, maybe I want to learn some more before I do it again. And so I have a chance to have a better outcome. And this is again, in the 1970s, where I'm actively thinking about how computers can come into it. And it wasn't too long after that, where it was in 1975.

14:42in a summer job in Santa Monica. You went to GSB to Stanford Business School right after Harvard, right? Yeah, so that comes a little bit later. So I'm still in college. And this is when a colleague comes back and tells me, wow, I was just in a retail store where you can rent computer terminals and take them home and have them connect through a modem to your mainframe. And they only charge you $10 an hour. You can basically do computing from home. And I said, wow, that's incredible.

15:12It's happening. It's finally happening. Yeah, and then he said well, that's not all shoot Intel just you know, just announced the invention of the first micro processor chip that can combine all these things on a single chip and then yeah, well dang well, that's gonna get into homes And this is this is in the summer in 1975 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 later on and literally My colleague walks away and I immediately start sketching it out and saying, okay, how long is it going to take for the hardware cost to come down, for the number of stores to grow, and for 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 that I could probably do that by 1982, seven years later.

16:02and that is exactly what I did. You bided your time a little bit until that. Listeners might expect, okay, so you went and started electronic arts, but you did something else in the interim, and that was Apple Computer, and that was one of the very first employees at Apple Computer. How did that happen? Can you tell us the story of how you got the job and the phone call you got from Steve Jobs? Well, since you guys want to talk about the IPO of electronic arts, The company oddly enough, it didn't really even have all that much value until two years after the IPO. And if you look at that time frame, creating that value was a 20 year process. Of course, a lot of entrepreneurs think, oh, yeah, look at this company. It's an overnight success. And it turns out, well, you know, very often it's really not even remotely at overnight success. And so pretty much, you know, there was about a decade.

16:56before electronic arts was founded where I'm planning the whole thing and then 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 really is. It really is a long game and by the way I thought about this recently when Google announced Stadia which is their play on the idea of cloud streaming games.

17:19And if that yeah in my initial thought was you had you know they don't have the game catalog and they're not going to get it because all the guys that have the game catalogs two of which Sony Microsoft and now you know Joy forces and they have no first party titles right how are they gonna how can they fix that problem and then I was wait a minute wait a minute EA didn't have that in the beginning right I have that in the beginning if you're or in the long game yeah then you're saying No one knows what games are going to be popular 10 years from now. Nobody even knows what the technology is going to be that the games are going to run. How do we hang around this long enough? And frankly, if Google thinks, we just want to be the leader of 10 years from now. So which young, super talented data scientists, machine learning AI experts are young indie developers now?

18:10that are going to grow in their careers to the point where five, ten years from now, they're going to make a hit that could be the next league of legends or the next coordinator, the next fortnight. Yeah, if you're willing to plant a head like that, most of us generally are way too impatient for that. You know, we want it to happen now. And of course, Google could maybe even acquire electronic arts, and then they would start to have the back catalog. That's going to be a very interesting space to watch. But getting back to our story, you have this thing unfolding over a 20-year period.

18:38And I realized, man, I got to 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 going to do that? I'm not really an engineer. I don't even understand how electricity works. But I love software. So I've always been around software. Software runs on hardware. And I was always good at talking to other engineers and kind of understanding the system and how it worked.

19:07And I thought, you know, I'm not going to have credibility in Silicon Valley by being an electrical engineer. I'm going to 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 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. You have to call them on their stuff.

19:32And then you have to command their respect and have credibility with them because you have expertise about something that they care about. So in my case, the pathway in was being more knowledgeable up with the customer and the applications. And I thought, okay, how do I get that going? And here again, there's a lot of good fortune. I think in a lot of these stories. But when I first got to the Bay Area, I was finishing school at Stanford. And it turns out I'm going right by.

20:00the headquarters of Fairchild Seven Connector, and they had actually just come out with one of the first consoles, and it was one of the very first consoles, again, this is mid-70s, that you could stick game cartridges into. So I went into their lobby. I never knew they did that. Yeah, it was called the Channel F. Were they competing with Atari? In effect.

20:22It was such a new industry that you're really just competing with yourself, honestly. But all the semiconductor companies in the 70s, they're trying to figure out how to drive demand for their chips and get more volume. So more of them thought, let's have a consumer division, we'll make watches, we'll make calculators. And then some of them thought, well, let's make 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 cartridge system where you can change the game? Anyway, so Fairchild was one of them.

20:52It was pretty clueless. They abandoned it 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 a Stanford student and I'd like to offer you 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 and says, what do you want? And I said, well, here's the deal. And if you just You know, give me the addresses of a couple hundred customers. I'll design a questionnaire and work with you and 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 for football or baseball? And is there going to be a ban for that? Because that's what I want to make. So he says, okay, sure. I continue on my drive to Stanford and I said, okay, now I'm going to go get course credit for this. So I didn't get paid. Yeah.

21:49But I was able to build it into my curriculum that way and then there I am in the library at Stanford that too long after that and I'm in the copier room and This guy just ahead of me on the copier he pulls out this report and I can I see video games on it And he puts it on the copier is making a copy of a couple of pages from this thing and I said what is that?

22:15And he said, yeah, this is a study I wrote last summer for this market research firm about, you know, about these simple little pong machines that the semiconductor companies had been making. And he had done a market analysis of it. I go, oh, okay. And then I basically followed the guy as he went and returned this report to the shelf in the library. And as soon as he left, I took it off the shelf and read it, covered it, covered it. And he realized, Dang, this is cool. You know, I could do a report like this about personal computers. Yeah. And nobody had done a report about personal computers. They were too new. And I mean, just to give out that statement. I know. So this would have been what, like, 1977? Yeah, this 76 probably. Okay. Yeah. It was either fall of 76 or early 77. Okay. So I need a summer job between the two years of business school.

23:13And I go talk to that same market research firm. They're down in San Jose. I said, yeah, I'd like to know 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, what is a personal computer? This is in San Jose. Yeah. The hardest Silicon Valley. And he's a research firm. Yeah. And I explained it to him. And he goes, you know, yeah, we do business with all these, you know, big big manufacturers and technology companies, because they don't care about that. They're not, we have no demand for that. Amazing. And I'm kind of doing an IRL 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. You know, there's the kind of printers that work with main printers and so on. So I tell you what, why don't you do that for us this summer?

24:08And then if that goes well, we'll talk about this other thing later. So of course that all went really well. And by the fall of 1977, he's beginning to hear about it because by then the first West Coast computer fair had happened in the spring of 1977. That's where the Apple II made its day. And I was there. Wow. And yeah, it was a very heady, exciting time. Did you meet Stephen Was there? They were probably there. I didn't meet them. I remember seeing the Apple II and thinking, wow.

24:38Yeah, did that feel in the moment like, oh my god, I'm a part of the world changing right now? Could you could you feel that it was you could totally feel that but the other thing that really jumped out of me was recognizing it's that one. You know, it's like, I know all these companies. Yeah, look at all their products. Yeah, I was in there. Like candy was there or like the apple two looks like it's something from a sci-fi movie that's going to be happening in 20 years and everything else in the entire convention hall.

25:05Looks like it's part of the past like a bunch of buggy webs and you know 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 a radio sac, right? Right. Yeah, the TRS 80 also knows the trash 80. Yeah, it was a very convoluted System and among other things it didn't even have color so it was basically In fact, they didn't have bitmap graphics either. It was a really clunky thing. But it was cheap. RadioShack had thousands of stores, and so it was distributed. He was doing a lot of volume. Anyway, so they allowed me to do the study. I got on trade all these companies, and so that included Apple. And I went down a visit one of the first handful of office workers there. And the most amusing part of this was, there were only handful of people there at that time.

26:01probably late 77 or maybe a little bit into early 78. And I said, are you guys doing any software? Because I'm a software guy. I wonder, what are you doing in software? He said, oh, yeah, we're doing software. He said, cool. Can I see it? He said, sure. And then we went around the corner and their entire software effort is one guy. Pretty sure this was Randy Wagenton, who's one of the very first engineers. And he was working on a Star Wars ripoff.

26:30where the company didn't have a Star Wars license. but the star for Star Wars movie had come out in the summer of 77. Wow. And they said, hey, let's do some things where we have bitmap graphics and we can do some 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 going to 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 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.

27:03and says, you're gonna have to stop doing that. It sure if he's from Fox. Oh, wow. And it sort of busting us behind the race. You guys can't have a Star Wars game without us having licensed it to you. And you got to pay for that. It's a different shape trench. This is like the cowboy period, you know, where can you kind of stay on top? You're asking for permission. You're just doing stuff until they stop you, right? Right. Wow. So anyway, I hadn't met the leaders of Apple yet and I go back and I'm finishing school and the study gets finished and I'm doing a little bit of a tour to meet with clients and talk about it and I pretty say one page flyer and I mailed it out to everybody that I knew and everybody that had been interviewed and then I'm just at home when they not too long after that in the phone rings and I pick it up and there's this guy yelling at me

28:02and saying, why the hell are you calling RadioShack the market share leader? This is incredible. And it turns out it's Steve Jobs. And he's seen this flyer that says that RadioShack'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 true. Which of course was total trash. Yeah, exactly. Again, this is the cowboy period.

28:31And the Apple too was a, frankly, a much more legitimate personal computer than the TRS 80, but it just wasn't accurate for them to say that. And yeah, he thought, oh, who is this dude that's outing us and making us look bad, making us look like? So he called me up to berate you. And this is the tables. Well, here's the other thing about how intimate Silicon Valley is that he had to know somebody, the new my home number. So we knew somebody mutually.

28:58And did you trace back how that ended? Oh, yeah. Oh, yeah. But at the time, I didn't understand the work, but you know, he and I are having this conversation. Of course, I'm having to hold the phone handset about a foot away from my ear. So he's yelling so loud. I managed to tell him, 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 this study and show it to you. And this is a study that in today's dollars would have cost about $2,500. There's no way Apple can afford it.

29:28So I know I know that being able to come in and show it to them. Right. You know, look at this for your own family owner. Is that a free value? Steve's probably very pleased with himself that his one phone call yielded this. Oh, totally. And of course, I'm going to 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 a very flattering. I think you guys are great. Okay. And then I said, oh, by the way, I'm actually looking for a job in the industry. All right. So I go down there and they offer me a job.

29:56And it's all based on this idea that I know something about the market. I know something about customers. I'm just a kid. Steve, offer you a job on the spot when you came down there. Not on the spot. And here's what's not really known that well about Apple is that everybody thinks about the two steves. But there was Mike. There were really three equal musketeer co-founders of the real corporation. It was kind of a hobby thing. And then Mike Markle came in to be the adult supervision. And he and the two steves.

30:26Each had about a third of the company So that's really that kind of tells you who the real founders are Mike cashed out pre IPO right no no no no no Mike actually hung in there longer than anybody So the thing about Mike is that Don Valentine had been told about the two steves and Don was already in a lead leading venture guy in the 1970s and they come from Fairchild. Yes and Intel and So he went and met with the two Steve's when they're in the garage and he thought, yeah, this is way too early for us. And then he told Marcola to talk to them. So he was kind of trying to turn Marcola into the angel that would help get it legitimized and a little more legitimized. Okay. So Mike goes and meets with them. And they're, you know, they're pretty much unkempt, uncivilized people. Like later Marcola would tell me that these are the days when Steve wasn't showering, right? Yeah. Well,

31:22Literally my first week at Apple I figured out what a hazardous person Steve was in towards the end of that first week I'm standing next to Mike and Steve's down at the end of the hall going by and I said to Mike Mike, we really need to do something about that. And I pointed it, Steve, and I called him a vet because he's a thing, right? And Mike says, Trep, look, come here. He pulls me to his office. He closes the door and says, Trep, you have no idea how much better he is now than a year ago. A year ago, who's like, you know, the wild man from Borneo. He was completely uncivilized. I had to teach him where you put the fork in the knife at a table setting. You know, he's basically explaining

32:03Almost as if he had a very child. What a fork is and how you use a fork and he's just asking me try to be patient. Look at the progress. There's going to be this guy can do a lot for us. Yeah. Well, so those three guys got together. That's amazing, by the way, that Mike, I mean, these were the days of the first thing.

32:23Investors and adult supervision did when they came into the company was fire these people, right? There's a very high turnover that Steve had the potential to become the greatest of all time Well, and and was made brilliant technical contributions and the first for several years of the company so he recognized the talent in both of them And the other thing about Mike though is that he didn't want to run the company either. So another really wanted to run it. So Mike was smart about setting it up for himself in a good way. He brought in Mike Scott or Scottie to be the CEO. And then Mike was the chairman. 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 then he's really the chairman who's still the big boss. And occasionally over the next, say, 20 years,

33:14he would have to be CEO for a while during some interim phase. But, you know, he just always remained connected with a company who was always in some critical role on the board. And, you know, it kind of outlasted everybody, if you look at his total tenure. But Interate, so Mike was my first boss and then Steve was my boss later. But I collaborated with Steve a lot initially because on my second day at the company, Mike said, Trip, you know something about business.

33:43Can you find a way for us to sell these businesses? And that hadn't really happened yet. Because only consumers were buying the Apple twos at this point. It was really just obvious. Were you able to sell it to businesses? We were. And of course the invention of the spreadsheet helped a lot. I brought the first spreadsheet into Apple and that product line hung around for like 10 years. So the Apple too was a huge it turned out to be a huge business and it lasted much longer than anyone's thought, which is a good thing because it kept Apple alive because then Stephen I went out to scheme out the next generation 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 we had the right ideas but the market was going to need time to develop. Is this primarily the Lisa?

34:38So it started with Lisa and then you go into the first Mac which also didn't really do very much. Yeah, for how much the 1984 Macintosh's heralded today, it was not a best sell. It was not about any success. Well, and ultimately the financial struggles of Mac is what got Steve kicked out. Yeah. So anyway, it is very interesting because then you have a decade after he gets booted out where Apple keeps losing share. And it was Steve's fault actually because he wanted Microsoft apps for the Mac 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 the licensing deal just really came back to haunt them. So by the time Apple realized, whoa, this is really not fair because Windows is copying our stuff and they're putting on all these PCs that are manufactured by all these different companies and we can't fight with that.

35:35and Apple's market share just kept getting smaller. And finally, when Apple decided this is wrong and unfair and we're going to have to see Microsoft. Microsoft said, well, here's the license agreement you guys gave us. And Bill had just outsmarted Steve. You didn't restrict our paperware. Even though the Macintosh was the very first platform for Word and then Excel. And then even later in 89 PowerPoint, you didn't restrict us from putting on other platforms. And that's true also. And again, it was all Steve thinking it's all about us.

36:04And we don't have to worry. They're not going to be able to do anything that's going to create a problem. Oops. So it's kind of funny because Steve saved Apple, but he destroyed it first. Oh my goodness. And then he goes back and he cleans up his own mess in pretty spectacular fashion. The Star Wars analogies are just too good. There's too many. Too many. So while you're at Apple, though, it's there that you realize that all of this software is a creative art.

36:32Wasn't it Apple that that's where you kind of started coming to this? I think one of the things that I had learned from some of the courses I had taken in business school that you probably don't want to start a company unless I mean the term distinctive competence was already around and those say you better be good at something but I had latched on to the notion that you'd better have a big idea and I don't know how that seed first got planted.

36:59They're people like Jim Collins later. They would call it the big hairy audacious goal. So I thought, yeah, there's got to be some angle. There's got to be some unique dimension. In fact, my favorite way of thinking about is what's called a hedgehog concept. And 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 the fox. The fox is really big. It's really fast. It's smart. It's got big long teeth.

37:29In the hedgehogs not good at being a fox What it can do is roll up into a ball and have spiky fur and that's all it needs to do 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 thinking about that while I'm at Apple and I know 1982 is coming and I know that's gonna be the year All time all time and And I'm working with these incredibly creative software people like Bill Atkinson, Larry Tesla 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 he said, most of them I didn't go to college or dropped out or you know, they're like they're like Picasso's. Yeah. Yeah. And and boy, you've really got to think about how to

38:23manage them differently, organize them differently, give them their 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 best selves. And that's when I realized that, yeah, you know, you may think of this as engineering, but this is actually an art form. And Hollywood is already turning other art forms into businesses, you know, get music and film and television.

38:53and 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 and becomes a new kind of Hollywood around that new platform, that new medium. And I definitely saw it as an entirely new medium. And again, I don't think anybody saw that before I did. I mean, I was thinking about that pretty early on. So, as you're talking about this and, you know, eventually talking down Valentine, it's quite bad. Like, do people think you were crazy? Like, were they like, oh, yeah, this is like, you're on to something or... Well, plenty of people thought I was crazy. Obviously. Like they had economics at Harvard. I had a lot of people try, you know, try to shut me down or tell me not to do it. Okay. So, you get this idea. It's 1982. The time has come and you're seeing you're in the industry.

39:45PCs are coming into homes. What was the first step to electronic arts? So again, that 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 1980, suddenly there's all this wealth is a billion dollar company at this point, right? So yeah, well, in terms of revenue, it's in that range. And the market cap is even, I think, more than that.

40:14a few billion. This is 1980. Yeah. And again, it was a super high growth from the whole time I was there. The year before I got there, the revenue was around $2 million. And then my first year, it was like, I think, 14. Wow. And then it was 60. And then it was 350. I mean, it was just crazy. And when I started, there were only 25 office workers. And then we had about 25 guys on an assembly line in the back.

40:44assembling a couple hundred of these hobby machines and four years later we have 4,000 employees. Steve's flying the pirate flag on the MAC office, right? And the thing is it just kind of got out of control after we went public. So when there starts to be the wealth it attracts everybody. Everybody wants to work there. And then there's a lot of politics and bureaucracy and different fiefdoms and the CEO went a little crazy after the IPO and he ended up getting pushed out.

41:13So there was just chaos. And then just various ways in which tension was growing. And the coming was kind of heading into that malaise that really hit in the mid 80s when John Scully and Steve had their big championship prize fight. An episode for another day. Indeed. So those seeds were already getting planted.

41:40I was hanging around because I thought, you know, I'm working on products that I haven't come to market yet. I really should finish that process. And yet I was not enjoying it. I mean, so I didn't really love being there. But I really felt like, wow, this company has been so good to me. They've been so loyal to me. This has been such a insane, fabulous opportunity. I've learned so much here. And that's actually the best I'd advice I would give anybody starting their career is don't think about the money at all.

42:07If 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 want to go to the place where you're going to learn the fastest. And Matt, for me, the learning curve at Apple was...

42:23Incredible. And just the sheer talent of a lot of the people and 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 kind of 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 can see it coming.

42:53And I'm thinking about it all the time. And then one day, a fellow employee dropped off the magazine and 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 already thought, yeah, Don Valentine, I know who that is, because basically Sequoia had come in after Mike had gotten things going around the time that I joined the company did a very small venture around. They raised $3 million. And Valentine led that deal.

43:23enjoy the board right and the price for share was three dollars per share if you just for splits it would probably be like a penny maybe less and About a year later we did another round at $42 a share Which again would still be pennies if you just for splits and that's when Valentine's sold out No, so you can see you know it went from three to 42 He didn't do that bad, but it then for more from 42 it went to like a hundred thousand, you know, so He missed out on most of the value. And I remember sitting with Steve in his office around the time of that funding round and talking about, what is Valentine thinking? You know, why is he doing this? And we were just laughing about it. We both knew that $42 was actually still really cheap. We were headed. It was going to be much, much more than that and that he was going to miss the boat. And sure enough, he did miss the boat. But it left me with this curious event.

44:20What is what is Valentine's think we were doing wrong? Yeah, who is this made him want to jump off the bus? I was always curious about that. Has he ever talked about that? Do we ever is anyone ever? I'm sure Don would never admit that he ever made any kind of mistake about any investment At a 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 into pitch him and Don had intimidated the guy so badly that he passed out in his office and easy life goals. And in that moment, I'm thinking, no, I want Don Valentine as an investor. I want him on my board because I want some of that tough that's willing and able to stand up to me. I'm going to need that. Yeah.

45:09So you knew at this point, you know, both from your own experience and then from Apple, how hard this was, right? Starting a company and going on this journey. Yeah, and, you know, you also realize, particularly, you know, you hang around someone like Steve, it was a real blessing for me to have a really great relation with him and work closer with him for four years and get to really know him personally. We all have blind spots and you've got to make sure in your team that there's complimentary people so that everybody sees everything when you add it all up.

45:39And yes, Steve was really victimized by his blind spots. It would prove out in my career that I would be victimized by my blind spots. And you're just trying to figure out, to the extent of your ability at that time, what kind of collaborative effort can we put together here? And again, I was just damn curious about this guy Don Valentine. He said, I not actually met him. So I contacted him and I go over to the office. And I'm thinking, you know, he's an older guy. He's kind of traditional.

46:05And he's probably going to tell me that I really need to stay at Apple and finish the products I've been working on to get closure and to not be a loser. That's not a project. And that's not all what he says. He says, I said, what do you think I should do? And he said, you need to quit Apple as soon as possible. And then he'll be here and start this. We got extra space. Come over, you can start it right here because he's thinking, yeah, I want to control this thing and have the inside track on it.

46:32And yeah, that was obviously a real breakthrough for me because I didn't expect to hear that. Can you tell us the story of you guys went to lunch before the investment was closed or anything what he said to you? Yeah, this is classic Don Valentine's who takes me to his country club for lunch and this is before he's actually wired the money so it hasn't quite happened yet and he said Yeah, I just want to make sure that we're doing the right thing here to make the investment. And I just want you to understand that in the board room, and if I'm telling you what to do, and you always do what I say, then what the hell do I need with you? He's basically saying 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. And you better have some conviction about what you're doing.

47:29because I'm investing in you. He's basically saying, if I'm the smartest guy in the room, what the hell am I investing in you for? That's amazing. So we all know what electronic arts is today. I mean, it's like the second biggest gaming company in the world, like 30 billion huge company. 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.

48:00and if you go back and look at that original business plan, which I still have, it's probably the only copy that exists. In that original business plan, it says that the company is a system. So a lot of times you think, oh, a company is a product or a company is a technology. A company is going to be a brand. What I wrote in that plan was we're going to build a system modeled after Hollywood. Exactly. And it's basically a system that says, okay, we're going to go find these independent, brilliant creative artists, and we're going to offer them a whole scheme of services and support. We're going to build development tools and create the equivalent of a digital art studio. And of course, this comes to be the model of game development. And then we're going to invent new contracts, new packaging, new marketing methods, and a new channel of distribution.

48:53because up to that point in time nobody had sold software of any kind directly to retail. Wow, so it really was this notion of sort of publisher first studio or developer second. It's like, we're going to go and give the right structure and support to the right sort of developers, but we ourselves who are core competency is this big umbrella of distribution services infrastructure.

49:18much more so the way we think about a game publisher today they become much more bifurcated but yeah and honestly i believe it was the beginning of professional video game publishing because what had come before that there were actually some pretty capable people that had gotten started as early as nineteen eighty so comes like broder brun if you look at dog Carlson is brother uh...

49:43Those guys did a fabulous job. They were really classy competitors to have. In fact, we used to 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 never had that forget like the first 10 years. We were like more of a portfolio of we had all these singles and they always had a home run with with the bases loaded.

50:10you know, great guys, great company. And so they were part of this, I think early experimentation of moving something out of the hobby phase and really making a real business. But pretty much before electronic card distribution, right? Well, here's all the things that really were not true until electronic cards. One of them is that nobody had given an advance to a developer ever. Oh, wow.

50:32Nobody had a really good contract about how this is going to 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 you want to make marketing posters? What happens if it gets turned into a movie later? I mean, just thinking all of that through and figuring, okay, well, we need to make money and we want to make sure that we make it.

50:58but 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 got to know some people and asked one of them, can you get me a copy of a recording contract? And I'm studying that and of course I already dense software contracts at Apple.

51:18and I went to my lawyer that I'd work with at Apple and I said, look, we're going to take these two things and we're going to make a whole new kind of contract and I kind of directed it on how to knit it together, what stuff it needed to cover. And nobody had really thought about that process until then. And it's the same thing about everything about the distribution channel. We invented a new kind of packaging and of course the funny thing about that. Didn't it look like records or something? They were like record albums.

51:44And this starts this starts with me just make cheap because I'm looking at the the baggies you know the first generation of hobby packaging was just like a baggy with a disc in it Yeah, and I said yeah, well, that's really not even professional So we're gonna have to do something and I said yeah, but it can't be very expensive to make it and I thought well record albums are selling it retail for nine dollars So they can't really be spending a lot of money on the album cover. We'll just go to the records Manufacture the guys that manufacture the record albums will get them to give us albums and we literally went to the largest one of those in the world and They they include us in the fact will actually it's about the paper cost 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 then and that's where we were able to design the standard software box the folding album

52:37that 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. And we're really the first people to kind of put the artist on the front and have a lot of information about the artist and to really make it say, hey, this is kind of like, this is like showbiz. Yeah. And of course, again, ironically, the media loved.

53:03The 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. But the gamers didn't care about it for quite a long time. In fact, they barely even knew who we were. Well, I was sitting on a plane next to this guy and you got to, it's sometimes in this conversation, what do you do? And he found out I had 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.

53:30I kept naming games your games and he kept saying he had them and I realized after all oh yeah, you know what he's a software pirate So this guy is getting all these because everybody was pirating games Wow, and I realized yeah, the reason he doesn't know electronic cards is because he doesn't have any the packaging So maybe he's not noticing the logo when it pops up on the screen It took forever for electronic us to really have brand power and for any of the individual artists to really have brand notoriety themselves. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year, an audit or a static PDF, then everyone would nod and you're done. But in an AI first world, that doesn't hold up anymore. Yep, your risk surface changes every week now.

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55:50Going 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 deal to finance the company with two million dollars? What did the terms end up being on that? Yeah, so we did accept Don's offer, you know, I basically had Funded the company originally myself. That's right. You put like $200,000. It was closer to 300. And I was basically just running it myself. I was the only person. So I had incorporated. I was running out of my home office and starting to have a lot of these conversations and kind of developing the business plan. And it was as soon as I started making job offers to other people that

56:45I thought, well, you know, I don't want them working in my home. So I'll take Don up on his offer. And the next thing that we packed, six people, it basically into, they gave us one office. We put, I don't know, a few people there. At that time, there were different venture firms that were making offers. Again, you talk about the intimacy, I mean, home one day in the phone rings and it's John Doerr.

57:13I didn't know John Doar was. And next thing I've got Brooke Byers and John Doar whining and dining me and trying to figure out how to get out on the deal. I already knew Ben Rosen was the leading semiconductor analyst at a time when he worked for Morgan Stanley. And he became one of the first visit calc spreadsheet users.

57:40clearly one of the hobbyist innovators that kind of understood the desktop benefit and became, I don't know, one of the influencers that helped Apple get established. Of course he was an early, he must have been allowed in as an angel investor in one of the early rounds. He had an LJ7 and ended up starting a venture firm. So I had a relation with Ben from my time at Apple and it ended up that different firms were competing at Dave Marquard from his firm. He couldn't get into EA, so we invested in this other company called Microsoft. Whoa. That worked out really well. August capital. That's what he's called now. It was a different name that I've got with the other company name was. And of course, for listeners, John, John Doer from Kleiner Perkins, Colfield and Buyers. And of course, you mentioned Buyers as well from. Yeah. So I ended up allowing Sequoia to lead.

58:36because I felt they deserved that. And then the other half of the deal was divided between seven Rosen and Kleiner. But Brooke and John from Kleiner, they really wanted more. And so we ended up doing another round six months later at a price four times higher. Whoa.

58:54And again, this is a thing that was happening that was different than what it happened before. Hardly, anybody had raised any money. And so, here's the electronic argument. I was saying, well, we've just raised more money than any game company ever. You're like the uber of. And I've got the best lawyers and the best PR firms. I'm just making sure we got the best of everything. We're stacked. There is a belief that I had at that time that we could be number one.

59:22It's like this is one of those things where I had to get my ass kicked later many times and realize, you know, if you don't always have to be number one, because it's actually really hard. And if you're playing for number one, you're probably going to have to take bigger risks. And you know, sometimes it's okay to be in the top five or the top 10. How much of the company did you sell to raise that two million? You know, I think it's not that different than it is today. I think after those two rounds that EA did, they probably own close to half.

59:51which, 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 going to be manufacturing around cartridges, and probably fending off a big lawsuit because we're reverse-engineering the Sega Genesis. Oh, we're going to get into that. Knowing all of that, it's like, okay, let's do a mezzanine round.

1:00:15And then let's do an IPO. But yeah, pretty much the company was built on those first two rounds of capital and even the IPO, which only brought it 8 million, which is kind of shocking by today's standards. That money has been sitting in. That 8 million has been sitting in EA's bank account ever since. I mean, they never had to dip into it. Wow. That's amazing. That is different today. David, I know you're going to take us forward and we need to one thing 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. Okay so when I incorporated the company on May 27th 1982 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.

1:01:12Some of them just, no, no. This is not 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. And there's different words that can come into that. And so we pretty quickly had it boiled down to either electronic artists. And I had just read a book about the history of United Artists.

1:01:40So, United Artists 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 an analogy. What had happened there was these four great Hollywood talents had disrupted the system by forming their own studio. And that's what became United Artists. And so, that's why electronic artists was on that list. And then Steve Hayes also knows Shays. He said, well, we're not the artists they are.

1:02:10And it was like, oh, okay. And this is about two o'clock in the morning. Yeah. And everyone goes, oh, yeah, that's true. Yeah. Okay. Electronic Arts then. Being the developers. Yeah. So we're serving the artists, but we're electronic artists. You're about the arts, but you are not the artist. We're the partnered company. Of 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.

1:02:38They don't actually have any meaning. You can get really personally attached to a name and think it really matters but what really matters is how you go make that name mean something and Electronics was that kind of a mashup where at a minimum it helped us tell the story to the media and got the media engaged in helping us spread the word because it started company. You can't do saturation bombing with advertising. You don't have the capital to do it. If you're pioneering something new, it's going to build slowly. Word of mouth is going to be really important. Your reputation based on the quality of what you're doing and the creativity. That's what's going to have to drive it.

1:03:19So we're going to dive in here and open up a chapter on EA Sports. There's one thing that happens before and that's in 1983 you recruited Steve Wozniak to join the Board of Electronic Arts. How did that go down? And at that point was then the board you and Steve and Don and did it stay that way through IPO and what was that relationship like? Well, actually, I founded the company in 1982 and the venture funding happened in December of 1982.

1:03:48from May through December, I only come back. Right, right, right. And I'm paying for everything. Yep. And then we didn't really have to have a board meeting until December, when now there's venture investors and customers on the, you know, so, uh, Brook Byers is not on the board from Clienter Perkins, Don Valentine's on the board. And that's, so it was actually was on the board from the very beginning. Was he the independent board member?

1:04:15Yes, and we actually then added a couple of other spectacular independent board members the next year, including my all-time favorite board member, Dick Asher. So the next year, 1983, 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 reenters the story is Dr. Jay and Larry Bird.

1:04:40go one-on-one. Which David and I watched some YouTube videos of last night and is still an awesome game. It's 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 can get the retailers to play it. Wow. Mostly the retailers.

1:05:07You know, they just want to be proud. Honestly, even like John Madden, John Madden has never played Madden football. He would get his sons to play it. Yeah. You know, we work very heavily with his two sons. But most people are intimidated. You hand them a joystick and they're thinking, I'm going to screw up. Right. Right. It's going to be embarrassing. And I don't want to humiliate myself. So no, you do it. And you know, 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. But with that one-on-one game. Basically, if you press the button, the guy would shoot the ball and a mic go in. That's all he has to do. 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. And I can go get that rebound. And you know, 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. And so funny. Last night in preparation.

1:06:00We played a little bit of NBA, the latest NBA live game. We couldn't even figure out how to play basketball in it. It's just like, it's just different. In all fairness, we were playing it on the iPad, which I'm not sure is intended to be the real thing, but it was a nightmare. This is an ongoing challenge, not just with games with technology in general, is that the people that make it understand it really well, because of the ones making it, and they underestimate the speed at which an average person can figure out what their intentions were and everything's still too difficult. There's that great aphorism in the gaming industry that a truly great game is easy to play, but almost impossible to master. That you have incredibly wide continuum of anybody can start playing, but you can't just beat it right away. The way I always put that is great games are simple hot and deep.

1:06:53You need to be able to instantly get engaged. And then it's got to take full advantage of the powers of the medium to present itself. But then you've got to be able to keep going deeper. So I often would use the analogy of the ocean. 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 little babies that can't get in the water yet and then there's slightly older children that are playing, you know, 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. And yeah, that's what that's what you want your game to do. Wow. So everybody can use that water. Yeah. So this game comes out. I believe this was the first certainly athlete, but but celebrity endorsement of a video game.

1:07:51period ever right yeah what what was it knew 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 had a period in a video game doing either being themselves or being an actor even So it was the first of its kind in that way back to the idea of you know records and the packaging and the distribution I mean this is This is just the next step in the process, right? In that breakthrough of making games. Yeah, of course. I really wanted to make games like football and baseball. Right. And we did a variety of things from the very beginning. So we did a golf game really early that didn't have any licensing. It was called World Tour Golf. And we fairly quickly got to something involving driving. I don't remember what the first one was, but there were a lot of things that we did. But Dr. Shane Larry Bird was really the start of EA sports.

1:08:47And I wanted to do a team game, but with a bit of technology, it's kind of limited. And I thought, well, how about just two guys? 4K memory. And, you know, you know, yeah, hey, Dr. J was a big hero of mine. And this is 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.

1:09:16And so I was a huge fan of Joe Neymeth, a huge fan of Dr. J. And those guys broke all the rules. They went to the rebel leagues. Yeah, yeah, yeah. I got outrageously paid. They did crazy things where they're here. They were crazy, you know, like, you know, pioneering the use of white shoes and football. And the, you know, the ABA with the multi-colored basketball. And then obviously their style of play. Yeah. Just super creative.

1:09:42So these guys were 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 that swag example number one. Yeah. So anyway, so here I am. I'm a this guy. I worshiped this guy. And Dr. Jay 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... Yeah, so he's just a hero to me. Yeah.

1:10:09I'm just delighted by the concept of seeing why I can do a business deal with him. We were working with a lawyer that knew his agent. We had a pathway. I was able to present to Julius the idea that this is going to be something good for the world. This is a new medium. It's going to have all this educational value.

1:10:31kids already and so I was able to help him 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 that was going to allow basketball to happen in a new way yeah that would in fact have educational value and by the way John Madden was attracted the same thing John and I knew it absolutely became true yeah we knew that players and coaches are going to use the football game that we're making because it's going to be a serious thing. He's playing football in high school. This would have been 90, 99 to 2003. My coach, who was his first year as a coach, was my freshman year and, or my sophomore year, and he would assign, he would say, go on, Madden, drop the plays, create the plays on Madden that we're running in our playbook. Right?

1:11:25input the stats for all of us who so I think your stats are and then like go home and learn the place yeah learn to read defenses yeah that was amazing yeah so anyway Julius agreed he was paid $25,000 and got a 2.5% royalty wow and then as soon as he was on we offered Larry Bird the same contract and that made it easy to get him on board. Wow. And Chris, 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, making making a design that worked well for what the platforms could do then. Wow. So way back to the beginning of the story. Football is always your dream. What came next after that? After after you saw that this. Well, that the the Dr. J game, it was pretty successful for us and it

1:12:19Made me think yeah, this is really gonna work and it's okay Well, then let's do football because that's what I at that time cared about the most Yeah, that's got to be quite validating because well 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 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. Yeah, and again, you're noticing that there's an audience that wants a more authentic sports experience that's that's an 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 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.

1:13:14but it's not a simulation of the game of tennis. Anyway, I didn't want to have some simple action arcade mechanic that allowed you to swing at a pitch and hit a baseball or run around as a football player and have it not be the real thing. Of course, with football, I got 22 guys running around the field, so I didn't realize at that moment, and this is like 1984.

1:13:42These 60-bit technology it's it's already coming Yeah, but it's gonna be 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 thought okay, this will take a year and of course it took four I knew that yeah to make a really effective Game you're gonna have to do it literally like a football play where the offense is at the bottom the defense to the top and you're moving up the screen And, of course, you're going to want to try to present that with a little bit of a 3D view. It's a little bit like it's behind the quarterback, yeah. Which amazingly, like two 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. That is that angle. Yeah, that's actually my favorite thing about the evolution of sports games is the way

1:14:37The broadcasters and the game companies keep referencing each other and get inspired by each other's idea so they're sort of co-evolving. It was really worth it. There was a year or two ago in a game, I wish I'd written down who did it.

1:14:51a wide receiver ran parallel to the endzone to run out time on the clock, which is a madden move. This happened in an NFL. Madden 2000. I did that all the time. Absolutely. But for the first time, it happened in a real NFL game. Wow. It's amazing. Okay, so this is 1984. The technology's not there yet. John Madden obviously will get into, but he was not your first choice, right? For the football version, for the football celebrity endorser, right? Yeah, at that point, I was I was thinking you know maybe we don't have to pay a royalty because there isn't anyone athlete that can really represent football and I could work with a coach and that would actually help me fill in gaps in my own knowledge but yeah maybe we just pay a coach a consulting fee and it doesn't have to be we can just make up our own brand own the brand but I thought you know if we're gonna if we're gonna have a brand name and

1:15:48We're going to be paying a royalty. Who's the biggest brand? Human being. And I instantly thought of Matt and because look, the guy had already won a Super Bowl and proven to be a Hall of Fame caliber coach. He'd been a player also. And then he'd become an Emmy Award-winning multiple Emmy Award-winning broadcaster. And he was in the middle of what would be a very long career. So I was always going to be on TV. And he's the Ace Hardware man. He's in the Miller Light beer commercials breaking through barriers.

1:16:17And of course, I mean, I think probably most listeners don't remember this, but his all of them 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 in credibility. Yes. So anyway, I thought, okay, well, let's just go to the top of the food chain and talk to them. And by this time we had enough contact with enough agents, there was easy to find out, okay, who do I talk to? And I had to fly to New York City to meet with his agent.

1:16:46She agreed there was a good proposition and then she sold John on it and not too long after that he got turned over to a more junior agent who really became John's kind of personal agent this guy Sandy Montag who was work with John for decades and we signed the deal and then at that point okay we have a signed agreement so we need to start actually doing the work and that's when a couple of colleagues and I flew to Denver and got on the train because john famously doesn't fly yeah he wasn't at the madden cruiser yet he was still taking amtrak he eventually got tired of the limited train schedules but we basically got on a train and the train went west and for two days 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

1:17:38couldn't do yet. And that was put 11 players on the field because his strong feeling was that if we're going to do a football game, we're going to do an authentic football game. How did that sort of negotiation go? And then how did you guys get to work on that requirement? Well, you know, like the Dr. Shay game, I was the designer. And to come into that maybe a child, I had already done a lot of work on a design. I had probably at least a 60 page.

1:18:04design document already for an 11 on 11 football game, but we were worried about how it would work on an 8-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 trench warfare and all the blocking. Seven on seven. And you know, 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 you've got all the pass patterns and all the passing game stuff and all the open field stuff. So it's 80, 20 football. Yeah.

1:18:38And to go into this that two-day meeting with John, I had to prepare a list of questions. And 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 wanted to bring it up because I just thought, hey, this is just an idea. 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.

1:19:08You have to understand if you're an NFL coach, there are 60 very large men 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 do you actually command and control those kinds of people? And what do you find with John? Here's a guy who's a big guy. He was an offensive lineman. And he's got all the dominance traits of a highly masculine human being.

1:19:37And that includes the fact that every third word out of his mouth is the F word. And yet, he's an incredibly intelligent guy in a brilliant strategic thinker in a brilliant operational thinker. So 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 mastermind thinker. Well, then you could see, you know, obviously, you approach this agent and the agent said there's got to be like, he became so involved. He could see that this was...

1:20:04a project worth doing. Yeah, oh, totally. But that's where I began to realize why he was so good at what he does because the guy is really, really smart. And of course, great strategic thinker. I'll give you a couple of examples in a moment. But it was very clear that he knew how to function well in football because of this combination of abilities that he had. And he was always very blunt.

1:20:31always very direct. So the whole thing comes up about skeleton. He just says, well, that's not football. I mean, that's all he had to say is that, okay, next question. So it's funny. The media has blown it up into this. I'd say, yeah, my research made it this like seminal moment of the negotiation. It really wasn't because none of us really want all of us wanted 11 out of 11. Right. Yeah. And he just.

1:20:53Said yeah, no, we're we'll we'll we'll want the real thing. Yeah, we don't want to go think so we'll just suck it up and figure out how to make it work and ultimately we did I mean that eight-bit Apple version that was the eight-bit product They also got under the IBM PC and that came out in 1988 came out in 88 and the 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 not a machine it was Well, of course it took forever. I would say a lot of blood, sweat, and tears. Do you want to share the story of the nickname of Madden? Yeah, towards the end of that phase, the auditors that were doing an annual audit of the company financials, they came to me and said, hey, I just want to make sure you know that the advance that you paid to Madden has no asset value because we've decided that you're never going to recoup it.

1:21:49So we're gonna cause, you know, your financials, it's gonna be written off as a complete waste of money. Basically, it's an expense. It has no asset value. I'm going, uh-huh. And I'm saying, it's interesting. Why am I not hearing this from my CFO or some of the other executives? And that's scared to tell me. 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 called, yeah, Trip, they actually called This project trips folly Wow Wow and by the way Walt Disney had had that happening him Walt's folly was the film Snow White. Oh, wow, which of course started at all. Sorry. Yeah, yeah, but that's no white was the first full-length animated film. Yeah, everybody thought you can't do that. It's got to be a short. Yeah, and well says I don't think so meanwhile, I think as of 2013 Madden had

1:22:49done 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 follies. I mean, even foreshadowing for a future episode, but Snow White had a very large impact on Airbnb. Yes, these things are sometimes worth pursuing. All right, listeners.

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1:24:44So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. So 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 1992 years later, the game comes out for the Sega Genesis, but there was In our research, it seems like this was the pivotal moment for EA as a company. Can you tell us about how you go from PC, game publisher to the console market and then going from IPO, I think the market cap was 60 million to then two billion a couple of years later. Yes. So in the mid 80s, the whole industry is struggling to grow because the

1:25:44console market had imploded with the collapse of Atari and that had acquired kind of a bad image and a bad reputation with the public. And was that because of intense competition? Why did Atari collapse? Well, they were heavily promoting something that had very limited capacity. So it was at some point going to seem like a hula hoop because it was. Yeah. And they didn't they didn't understand. And the NES came out what like 86, 87?

1:26:12Yeah, so the NES had come out in Japan and they brought it to America in the mid-80s. And the problem there was that the guys making the personal computers didn't care that much about graphics and sound, which mattered a great deal with games. And of course that equipment was fairly expensive. And then Nintendo comes in and they're offering a pretty good multimedia platform for a hundred bucks. Yeah.

1:26:39and 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 because you have to make the Nintendo car chips. It's not the incredible efficiency of saying optical disk. Nintendo didn't view, maybe even their own first parties they did, but they didn't view game developers as artists. That's right. In fact, they do that about Miyamoto-san. They had their own brilliant people that have in fact always made great first-party games. But the third parties were. They were happy to let some third parties tag along as long as they got overpaid by them for permission. And yeah, it never really worked out all that well for anybody to be a third-party Nintendo licensee. That's that's why pretty much forever. It's been about for Nintendo's platforms. It's always been about the first party games that Nintendo's making. But I was really worried that

1:27:37There was a hardware problem between the business model of Nintendo and the lack of multimedia features and so I'm already thinking about that and I was already a really big fan of the Motorola MC68000 processor because Steve and I had picked it for apples and next-gen machines. Well, anyway, when we started EA the first development systems we bought were sun workstations with that processor.

1:28:04and then coin-out machines started using that processor, and we licensed games like Marvel Madness from Atari coin-out, and we were able to port it to the Commodore Omega, the Atari ST, which also came out in the mid-As with that processor. So we were very familiar with that processor, and we find out that Sega, which had been limited to only 1% market share of 8-bit consoles, because Nintendo, that's the system that they had. They were going to come market first.

1:28:33with the first 16-bit console, using that processor with a sound chip, with a graphics chip, and a price under $200. And I thought, wow, we've built a tremendous arsenal of 16-bit technology tools and game brands.

1:28:51and they just don't line up with the right platform. This could be that platform. This is the iPhone moment, right? And the funny thing about it is that Nintendo was so successful. They had 98% market share. So all of the third party game developers, they either refused to do Nintendo because the cost structure and the risk and the controls, they decided, I don't like that and I'm just not going to do it. I'll stick with this little business I have on the IBM PC or whatever. So they did that.

1:29:20Like the guys are Broderbund. Yeah. Yeah. Or they said, well, if I'm going to be in the console market, it's going to have to get an 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 a claim. 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. Yep. So it's just the big a third party in that business model is never really worked out.

1:29:49of that well. Anyway, so I'm looking for a different kind of answer and I think, okay, it could be this machine. So it's coming out in the fall of 1988 in Japan and so we buy one at retail or buy a few 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're gonna do because they had not had a third party program for their eighth machine.

1:30:16So maybe they're still going to do that and never just have their own games. So we get the machine and we're thinking, well, yeah, this thing's pretty badass. We really like what it can do. And then I said, well, let's reverse engineer it. And let's make sure we do that legally correctly. So we don't in French copyright law. And then we'll be able to make our own games where we don't have to be a licensee. And that's when basically I decided, that it was time to take the company public, was that it? Yeah, you know, they're gonna sue us. Yeah. And we're gonna probably be tied up in court for a while. We need some more ammo before we go into that battle. Just a mezzanine, isn't it? What do you think your board think about this by the way? It took a little while to get everybody behind it. Were they fired up? Like did they see the potential here too? You know, I think there's two layers that first of all, you got to get the management team in support of it. And once the managing believes it's a good

1:31:15adventure then you go pitch the board because the board wants to make you know they're gonna look around the room go is everybody in on this 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 believe it's a good idea and you know thankfully everybody was in and and off we went and I compare this to what Lawrence of Arabia did by attacking Akabah from the rear and this was a turning point and World War One in the battle with the Turks. And they 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 locations where they made the movie. So I'm a complete fanatic about it. Cool. But at Interate, we embarked on that adventure and there was some really heroic work done by Jim Nichols and Steve Hayes and David Maynard to

1:32:13go into a what's called a clean room. And you can't even take anything in there with you. You go in there and you've got the equipment and you can't bring this to reverse engineer. You can't bring tools in with you. You go into that room and the room is 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 and it took a year. Wow.

1:32:39So 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 going to need to use a disassembler to take an existing game and look at the code of that game on a screen. And they're violating copyright law. They took the game down to assembly code. Well, you're trying to understand, what is this machine doing? You're going to need to look at images of what's in memory.

1:33:10Wow. 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, in the context of a clean room, it's covered under fair use that if you just, 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, now it's not a fair use anymore. So Steve Hayes.

1:33:39David Maynard, Jim Ditchell, these are guys that had made games for electronic cards. They know they're not going to be the ones making games for the Sega Genesis. This is like a Star Wars movie. Oh, these guys are the greatest heroes in the history of electronic cards. Wow. And Jim Ditchell's always a serious alcoholic, dead at a very young age. And I'll just treasure this guy forever because he was the one.

1:34:08who stuck with that and did the heavy lifting in the end that figured it out and made that sacrifice. And it's still to this day kind of makes me want to start crying. Wow. Oh my goodness. And it just what those guys did. Anyway, it was going up for months. We knew that the product was going to come to the US in the fall of 1989. We're thinking, hey, we're beginning to figure this thing out.

1:34:34and 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. They've always been talking to DRM. There's a security chip on the cartridge and it's handshaking with a security chip that's in the console saying, are you a legitimate Nintendo cartridge? Yes or no? And in order for you to do that, you would have to infringe a patent. So we actually did work reverse engineering than Nintendo, but then we realized that because of the patent, we'll get our ass kicked.

1:35:03So let's not do that. And as a result, EA 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 like Nintendo, so Nintendo had released that console, the Famicom, in Japan with no security chip. It was the American version of the NES. They'd introduced that chip. And we're worried, well, what if Sega does the same thing? Well, they didn't.

1:35:33Wow. 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 you guys. It's a black box and you only get the information if you sign their license agreement. Apple does that to this day. Yep. Right.

1:35:56Although the Supreme Court has recently had a few things to say about that. And also there's there's iPhone jailbreakers. So famously Craig Hockenberry with Twitter effect for the first iPhone before there was an app store figured out reverse engineer. It's similar to you guys. What the API structure was to write code for it. 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 we got it all figured out.

1:36:21and then we started getting development teams started making games so that was starting in the fall of 89 and that's when we went public and we're ready for the war which is going to start the next year fresh eight million in your pocket so here we go and then by the spring of 1990 we've got games ready to come to market and this is where some of the first games like buddha con and populous. And by this time, by the way, I was talking to third party game publishers that were we handled their distribution and competitors. I'm going to talk to a lot of people saying, hey, they're forming an alliance. This is what we're doing. And if you want to be partners with us, 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 the Steam Store and Google Play.

1:37:14And I'm really so delighted to see that by the way. I just I love what they're doing. Yeah, this seems to be a theme in your career is figuring out how to Allow the 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.

1:37:40So 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, you're right. It ends up like in a creative art form like this. It ends up killing. I mean, look at look no further than the state of gaming in the App Store. Fortnite being a notable exception over the last five years. Yeah, you're right because you have a success right now. It's like one in a thousand. Yep. The apps that actually make money. Yep.

1:38:09Is your offer to all these other game publishers joining your Alliance? Hey, we've effectively recreated a software development kit where we created one and you can have access to this amazing job. And here's the funny part of the story is that we're getting closer and closer to coming to market and we're actually out making sales calls, retailers are placing orders and we're ready to roll. There's a CES show in Chicago that's going to be in June and that's going to be the big unveil.

1:38:36And about, I don't know, 45 days before that, I thought, you know, I'm really committed to this plan. 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. And I think I don't really want to do that. And I said, yeah, but you really ought to do that. Anyway, so I called up the chairman.

1:39:04of SEGA who actually is the founder of SEGA. SEGA was started by David Rosen. He started it in Japan while he had been a American serviceman after the war and he had noticed the soldiers after the war that were assigned 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 SEGA was actually one of the first makers of mechanical you know, games to go out of military bases. So that's how Sega actually got started. I did not know that. I just thought it was a Japanese company. And of course, then it became a pretty big business globally and eventually Nakayama, son, who was the leading distributor into the channels in Japan. He ended up buying out the company. Wow. And David Rosen had actually sold it to an American company before that. And so he was out of it.

1:39:59and Nuck Amazon brought him back in as chairman. Wow. So I called up David, and he's basically, are you crazy? Are you nuts? You're running a public company. We're going to destroy your stock price when the news hits about us, suing you. And how do you know we can't just change the machine to make sure all your games don't work? I mean, he's just hitting me with every possible threat. And you're sitting there laser focused in a game of chicken being like, yeah, I just don't think you can.

1:40:27Pretty much, and I'm just saying, well, you know, hey, yeah, maybe we should get together and talk about it. Alright, so we end up having this meeting and it starts us down the road of this process of discussing, you know, ways that we could actually partner. And unbeknownst to me, they're all terrified.

1:40:46because they're planning on having this third party program. In fact, they've been socializing that with me for a year. I've been having these rope adope kind of 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 we're ready to do it yet. Meanwhile, I got guys in the next room, you know, reverse ancient machine and they don't know. And what are terms to become an official licensee? Well, there's a lot of discussion about that, as you can imagine.

1:41:15So my idea was 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. They actually, it turns out, were really worried.

1:41:37That I was having they they had heard about they're out trying to convince other people to do a third party deals and they're all saying hey just came to see me trip made me a better offer or so if you really But they're all saying no to me. I mean none of those people wanted wanted to do it. They were too terrified, but they're also saying no to Sega. They're just playing me against Sega. They're using me to try to help improve their position of Sega and Sega is actually worried that I'm going to tank their third party program. I did not know that I find that out much later. Meanwhile, I'm thinking, I don't have to make this deal with Sega. I mean, this is the thing about any kind of negotiation. You need to have leverage and being 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 there's no way they can force me to get a license. I believe I'd be happy to go to court instead. So they're beginning to catch on to that.

1:42:35And we get down to the point where, okay, we're pretty much an agreement and everything else. The only things that issue is they would like to get $2 per unit forever. And I want to cap it to a million units. And everyone on my management team is saying, Trip, you've done a fabulous job. Take the $2 per unit and forget about the cap. And I'm saying, you know, I pretty much know that they're gonna sue us. And I really am convinced that what we're doing is completely legally correct.

1:43:05and I don't mind 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 be moving towards going to court and they're going to reach a point where they realize that we're going to fight it out all the way the end and that they can't beat us and then they'll drop the $2 per unit thing and settle for the cap and I'm willing to play it out that way even if it takes six months. Did they?

1:43:32realize the power of madden football at this point. Yeah, we'll come back to madden. Anyway, I'm having this conversation with my staff and they're all rolling their eyes. And lo and behold, I got on a plane. I go to CES and David Rosen and our lawyers hunkered down and they agreed to what I wanted. So we never had to go to court. And again, I don't really, I didn't really understand the time that I had so much leverage because they were afraid that CES is going to start, and we're going to make this news, and we're going to 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 bluffful toe head. I was just a little lucky there. Wow. And didn't have to go through that. Herring of six months of the stock price getting trash. By the way, when EA went public, the market cap was 80 million. Okay. Sorry.

1:44:30but then it dropped to 60 million. And this persisted. I think we actually hit bottom later that year. So here we are announcing we're gonna do Sega, but the Martin's going, 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. Nobody's talking about it. And then we just started cranking out better quarterly results, astronomically better quarterly results for the next several quarters. And it took another, I don't know, maybe a year or two.

1:44:58And the company was worth two billion. I mean, it just really transformed in the next year or two. And was that Madden for Sega that just created all that revenue? Well, we already had Madden almost finished by the time that negotiation wrapped up. And it was going to ship I think in September of 1990. And 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 they had made a deal with Joe Montana to be their platform spokesperson to promote their whole product line. And they thought, well, hey, 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 business. So they had a studio outside studio, a developer.

1:45:52making that football game, and they found out that that game was going to miss Christmas. So they contacted me and said, hey, so knocking on a sign gets on the phone with me and say and says for the good of the platform that we all depend on here, you need to make a sacrifice for the team by taking Madden and changing it into Montana football. And we'll pay you some money for that. And then we'll all have a successful Christmas.

1:46:22And 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 said, what? We have the goose. We have the goose. We've already taken this game to our best retail customers. We've already got thousands of orders for the thing. This is going to be a key franchise for us. I've been waiting years for this. I'm not going to give it to them. Right. And then I thought about it and go, oh, wait a minute. We can do both. So I go back to say I said, okay, here's the deal.

1:46:52In six weeks, we're gonna hand you the game. That's gonna be John and Tana football. You're gonna give us $2 million in cash. I got my $2 million back. And we literally cranked out this different game in six weeks by taking Madden and basically dumbing it down. So look, I had put the playbook together. So the Sega version had I think 135 plays. The Montana had 13.

1:47:22It took out 90% of the place. And then instead of the sort of half 3D camera view, like Jim Simmons, the engineer that built this Genesis version, he basically invented this idea of the...

1:47:38the fake 3D angle. The 16-bit 3D. With scaling of the sprites so that it looked like the players were a little more like 3D. So he could just remove that scaling factor. The safety's back at the other. Well, in Japan, by the way, the sports games were known as Big Head games where it was a little cartoony with the baseball player with a really big head. So, okay, we're going to give that. So I knew that. I knew that didn't sell in America.

1:48:03and that we're gonna give them a really plain 2D top-down camera view. Wow. And then we took out some other stuff and it felt okay, now it's not threatening, it's not gonna, it's not really gonna, it's gonna be an arcade thing. And of course what we do with Madden was a great market compromise is we had a meeting of the minds in the developers community around Madden where we thought okay, we wanted to have the simulation accuracy But it's got to be more of an arcade game. And this is an audience. The players are going to be younger. They're going to be more interested in the action side of it. So the design had to take that into account. It was really a great design. And again, I think what Jim Simmons did in building that first version was among the most amazing work I've seen done in my career. And that engine that he built was so good that we immediately turned it into the hockey game.

1:49:00And that was the debut of our first hockey game. Remember that? 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 at Christmas. Wow. And nobody knew that under the hood that Montana was 98% of the same code base. Wow. That's incredible. And that really built EA into everything that it is today, right?

1:49:28console game, you know, Mountain just grows year after year after year and has the beauty of the sports season that you can release a new version every year and make it better every year. Yeah, that was one thing that I had grown up playing that game straight back where every year you got new cards because the players have changed teams and they had performed differently and their stats are different and you want the real thing. You know, therefore you want the current players at their current levels of ability. And so that was just a given. So after the hookies that it just got drafted out. Ever since the first version of Madden had come out, we had started doing a player desk every year. And it was a little awkward with consoles because there was no way to do an add-on later. Everything had to be on the cartridge. So the first version had neither an NFL license nor a player's license.

1:50:24and we're kind of faking our way through this for a while. That's the very first version of Madden. Which now is a very expensive license. Indeed, although it's actually a fair deal because what EA was able to do was build a brand and build a market position so that they had some leverage in that negotiation. Just an unbelievable, several times here in acquired, as David says, turns on a knife point or as I'll say pull the e-break, cut the wheel to the left.

1:50:52you guys just came out with flying colors. The building blows up behind you. You run out. It's like the end of an action movie. Well, you know, 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. Yeah. So you guys have been profitable like since you started, right? Well, no, no, the first couple of years, you got to invest and spend money and build, build distribution. And we got We got fairly close in 1984 to running out of money and it was right around that time that it kind of tilted enough and it was profitable in the fourth quarter of 1984 and then profitable after that. Got it. So it was already a successful business but 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.

1:51:49Can you talk a little bit about the calculus on why you decided to go public and did you consider not going public because many a gaming company you know 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 egalitarian about my companies so basically everybody's going to get stock options no matter what they do and we're going to try to figure out how to be.

1:52:14shared 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 stick around and go through the tough times and get that reward in addition to the other rewards. And you can't really do that and stay private because this is not going to be a sufficiently liquid marketplace for the shares unless you either sell the company or you go public. I have been there for three IPOs.

1:52:43two of which I had led. So it's not foreign territory for me to think this way, but not everybody in Silicon Valley wants to give shares to everybody. In fact, there's a lot of big tech companies like Oracle. I think maybe 20% of employees have stock options. Big companies maybe have a ESOP employees stock ownership plan, but you're not going to get very much. I've just always believed in everybody sharing in that. And then you've got to have some long-term plan for how are you going to get to liquidity.

1:53:10Were 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. Yeah. Well, these 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 changed 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 resources. I think electronic arts, it.

1:53:40took too long and yeah, it was seven years and it was painful for some employees. There was a lot of frustration and disappointment. A lot of it had to do with the economy not being in the right place in the mid to late 80s. And then of course 3DO later went away too early, but it was almost like to come here at no shot and even remotely trying to do what it was going to do if it didn't go out.

1:54:05ahead of things. And this is your gaming hardware business later that you started after EA. Yeah it actually was started at EA and it was kind of a skunkworks inside EA. That's right. And then it ended up spinning out as a separate company and it's a very sad sorted story because it was a very ambitious idea and I had been on such a run of success that Again, 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 when I think about that concept, it reminds me of these great drivers like Nikki Lauda and Edarton Santa, where they really know how to push a car.

1:54:53to that very edge where just a little bit more and you're going to turn it into an airplane and it's going to fly off the course. And that's what both of those guys did. And they did it on wet tracks when they, in theory, could have known better. But they knew how good they were. And they knew that they were really good at managing that edge until you don't. And so 3DO is that kind of an experience for me. And I really had a genuine interest in getting a platform out there that had that can solve all of these issues that we're creating these bottlenecks on the hardware side and holding developers back and holding the public interest back. Of course all that stuff ended up getting sorted out on its own, somewhat longer time frame. But probably the most classic mistake I've made the most in my career is being too early.

1:55:44Just a lot of a lot of us entrepreneurs, we see something and envision that product and we don't appreciate the fact that it's going to take a while to educate the audience and 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 go and take a job at Apple for years before 1982. Yeah, it's just it's an interesting issue for entrepreneurs to figure out what is the right timing of your ideas.

1:56:11Last question on the EA IPO and thinking about that versus other options, was it beneficial for the company and what did it enable the company to do that you guys couldn't have otherwise done if you had remained private, other than achieve liquidity for all the shareholders? If you knew and hindsight that you were going to 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 10X, 20X valuation. Yeah, perhaps.

1:56:39I think in the end, it's still a, you know, it's a happy outcome for everybody. I'm sure a whole lot of long-term employees were delighted that we went public. And none of us was delighted with the stock. The flat is a pancake and even trailing down after the first. We thought with Facebook, we're potentially seeing it right now, but sometimes it doesn't. This is something that has been, I understand it as a entrepreneur, a startup employee as venture capital. Like you, you can come to look at the IPO as like the end game. It's really 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 higher and higher and higher and higher. But as we've seen with Facebook and as the story is still to be written on Uber and Lyft, what happens after the IPO?

1:57:28Matters just as much if not more for your ultimate valuation and liquid way you decide to cash Yeah, and again in hindsight, I can clearly see that 3DO It wasn't a solid enough business proposition to really deserve to be started in the first place and it definitely was Not a good idea to take a public. Yeah, and I think if you're gonna take something public, you've got to have a really concrete idea of what operating business model you have, that you're going to be able to continue to systematically move forward and fairly steadily improve upon. Otherwise, you shouldn't just voice that off in the public. We saw this a couple of years ago with all the crypto stuff, where really, come on, there were so many schemes and I thought it was kind of sad because they were able to skirt a lot of the securities laws by offering to do it.

1:58:26in exchange for the crypto currency. A lot of those chickens have come on to risk. Should we bring home to grading? I think we said. 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 it a good use of capital? The way that we have adapted that 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? Was a change in shareholders beneficial to the business in some particular way? And frankly, the grading is a little bit more arbitrary in these IPOs. But the discussion is, I think, the more important part. And the thing that I index on when I lean really positive on grading the transaction.

1:59:14And we don't care as much about sort of like how it went mechanically like yeah, the stock dipped afterwards, but like that's not over here to litigate. The really interesting thing to me is what an incredible negotiating position it gave you with Sega. And if you...

1:59:29Sort of didn't have just raised that cash have been a more sort of legitimate public company 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, that's that's true. 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 everybody knows After Electronic Arts went public, it made it even easier to make acquisitions and the company made a ton of acquisitions in the 1990s and the really big, even enumerated. 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 and others want to do business with you and that's how you get FIFA and Harry Potter and everything else that's happened.

2:00:26And 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 your private, 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, yes, since it's liquid, you can do more of it. Yeah. One of the ways it's different is it In a private scenario, the acquisitions you're more likely to be able to make are going to be smaller, and they're likely to be struggling in some way, which is why they're willing to sell it. Whereas after your public, you've got the currency, now you can buy a really healthy operating business. You can pay a fair price for it, but it doesn't necessarily have to cost you a lot of cash. And then you just bolt that on to your operating results. Building EA to what it is today.

2:01:21David, how do you think about it and how would you throw a grade on that? Well, I think, I mean, it's obviously the right thing to do. Yeah, I mean, it's, it's an A for sure. The grading I think is most interesting on this show for IPOs that just happened. Like we just did lift, we did Pinterest, we did Uber. In 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 D in five or 10 years. This is exactly what you would have painted the scenario as an A. I 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 20 years. Obviously name. Yep. Right on. All right, I think that is all we've got. That is all we've got. Thank you, Trip. 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

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2:03:11Well, listeners, if you aren't subscribed and you like what you hear, you totally should. 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 in VCs and explore some of David and my personal VCs, you should become an acquired limited partner at glow.fm slash acquired. And we will see you next time. See you next time.