The Electronic Arts IPO (with Trip Hawkins)

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, along with guest Tripp Hawkins, delve into the origins and evolution of Electronic Arts (EA), a pioneering gaming company. Tripp, an ex-Apple employee and a strategic thinker with a passion for sports and games, founded EA in 1982 to revolutionize software as an art form, drawing inspiration from Hollywood's talent-driven model. EA's IPO in 1989 was a strategic move, providing leverage for crucial negotiations with Sega and enabling future acquisitions, pivotal to EA's growth and the success of franchises like Madden Football. Tripp shares insights on the challenges of timing in entrepreneurship and the importance of an egalitarian approach to company ownership, highlighting EA's journey from a private company to a public powerhouse valued at $2 billion, largely due to its strategic positioning and successful pivot into the console market.

• The podcast Acquired focuses on technology acquisitions and IPOs.
• Ben Gilbert and David Rosenthal are the hosts.
• The episode is a throwback to the year 1989, discussing how IPOs meant something different back then.
• The episode features Trip Hawkins, founder of Electronic Arts (EA), and his journey from an early Apple employee to starting EA and other gaming companies.

"Welcome to season four, episode seven of Acquired, the podcast about technology acquisitions and ipos."

The quote introduces the episode's theme and the hosts, setting the stage for the discussion with Trip Hawkins.

• Trip Hawkins worked at Apple Computer as the director of strategy and marketing until 1982.
• He founded EA, took it public, and later started other companies like 3DO and Digital Chocolate.
• Trip is now a professor at the University of California, Santa Barbara.

"Trip 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 three D O and digital Chocolate."

The quote provides a brief overview of Trip Hawkins' career, highlighting his significant contributions to the gaming industry and his current academic role.

• Acquired podcast narrates the history of companies from founding to acquisition or IPO.
• The show includes analysis and judgment on the success of the transactions.
• There is a second show for listeners interested in company building topics, offering deeper dives into subjects like product-market fit and venture capital.

"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."

This quote explains the structure of the Acquired podcast, emphasizing the blend of storytelling and analytical judgment.

• Pilot is a sponsor of the Acquired podcast and provides accounting, tax, and bookkeeping services for startups and growth companies.
• They are backed by prominent investors and focus on allowing companies to outsource non-core functions like accounting.
• Pilot operates a company's entire financial stack and has experience with startups and scaling businesses.

"Pilot both sets up and operates your company's entire financial stack. So finance, accounting, tax, even CFO services like investor reporting from your general ledger all the way up to budgeting and financial sections of board decks."

The quote details the services offered by Pilot, showcasing their comprehensive approach to financial management for businesses.

• Trip Hawkins grew up in Southern California during the golden age of television.
• He was a strategic thinker with a passion for sports and games, which at the time were pen-and-paper or board games.
• Hawkins combined his love for sports strategy with his interest in games, leading to his fascination with math and statistics.

"I found that back in the 1960s, some game designers had invented these cardboard dice games... I just kind of discovered that I found math and statistics fascinating."

The quote reflects on Hawkins' early interest in games and how it sparked his appreciation for math and statistics, which would later influence his career.

• Hawkins started a company in high school, creating a tabletop game.
• Despite the company not succeeding, it taught him valuable lessons about business and fueled his desire to continue entrepreneurship.
• He recognized the potential of computers in gaming and foresaw the future integration of software and hardware in homes.

"I lost every penny... And then the second thing I learned was, man, this is so much fun. I got to do this again."

The quote captures Hawkins' resilience and the positive outlook he maintained despite the failure of his high school business venture.

• Hawkins attended Harvard at the same time as Bill Gates and Steve Ballmer.
• He balanced being a collegiate athlete with his passion for computing, leading to his decision to focus more on his software interests.
• Hawkins' foresight in personal computing led him to create a market research project on personal computers, which eventually led to his job at Apple.

"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."

This quote illustrates Hawkins' strategic thinking in building his career path, recognizing the importance of understanding the market and applications over technical engineering skills.

• Hawkins planned the foundation of Electronic Arts for about a decade before its actual establishment.
• He knew he needed more business knowledge and experience in selling computer systems to homes.
• His strategy involved understanding the market and customer needs, which he gained through his work at Apple.

"Pretty much there was about a decade before Electronic Arts was founded, where I'm planning the whole thing."

The quote highlights the extensive preparation and long-term vision Hawkins had before starting Electronic Arts, emphasizing that success often takes years of groundwork.

• Don Valentine's initial encounter with Steve Jobs and Steve Wozniak.
• Valentine's role in encouraging Mike Markkula to become an angel investor for Apple.
• Mike Markkula's influence on Steve Jobs's development and professional behavior.
• The high turnover rate at Apple and the potential seen in Steve Jobs and Steve Wozniak.
• The decision to bring in Mike Scott as CEO while Mike Markkula remained as chairman.

"So he went and met with the two steves when they were in the garage, and he thought, yeah, this is way too early for us." "And towards the end of that first week, I'm standing next to Mike, and Steve's down at the end of the end of the hall going by. And I said to Mike, mike, we really need to do something about that." "Well, and Waz made brilliant technical contributions in the first several years of the company, so he recognized the talent in both of them."

These quotes illustrate the early skepticism about Apple's potential, the rough edges of Steve Jobs that needed smoothing, and the recognition of the talent that both Steve Jobs and Steve Wozniak possessed. Mike Markkula's role as a mentor and chairman is highlighted, along with the challenges of managing a rapidly growing company.

• The Apple II's unexpected longevity and success, especially in the business market.
• The introduction of VisiCalc, the first spreadsheet software, to Apple.
• The initial target audience for Apple II being hobbyists rather than businesses.

"We were. And, of course, the invention of the spreadsheet helped a lot. Yeah, visical. I brought the first spreadsheet into Apple, and that product line hung around for, like, ten years."

This quote emphasizes the importance of the VisiCalc spreadsheet in extending the Apple II's market reach and lifespan, indicating the significant impact of software applications on hardware sales.

• The overoptimism surrounding the Lisa and the first Macintosh.
• The Macintosh's lack of immediate commercial success and its financial struggles.
• Steve Jobs's role in both the success and initial downfall of Apple.
• The licensing deal with Microsoft that allowed the creation of Windows, which ultimately hurt Apple's market share.

"Well. And ultimately, the financial struggles of the Mac is what got Steve kicked out." "And by the time Apple realized, whoa, this is really not fair, because Windows is copying our stuff and they're putting it on all these pcs that are manufactured by all these different companies, and we can't fight with that."

These quotes reflect on the challenges faced by Apple during the early days of the Macintosh, including internal struggles and strategic missteps in licensing that led to broader competition from Microsoft.

• The importance of having a big idea or a distinctive competence when starting a company.
• The realization that software development is a creative art, akin to Hollywood's model.
• The vision of a new company that embraces the concept of software artists.

"And I'm thinking about that while I'm at Apple. And I know 1982 is coming, and I know that's going to be the year." "And that's when I realized, you know, you may think of this as engineering, but this is actually an art form."

These quotes capture Trip Hawkins's epiphany that software development is a creative process and his ambition to establish a company that would revolutionize the industry by treating software developers as artists.

• Trip Hawkins's decision to leave Apple and start Electronic Arts (EA).
• The interest from various venture capital firms, including Sequoia Capital, Kleiner Perkins, and Seven Rosen.
• The strategic decision to raise more money than any game company had before, aiming to be the best in the industry.

"So I contact him and I go over to the office, and I'm thinking, he's an older guy, he's kind of traditional." "Because I want someone that tough, that's willing and able to stand up to me. I'm going to need that."

These quotes discuss Trip Hawkins's approach to seeking venture capital, his desire for a strong and challenging board member, and his ambition for Electronic Arts to lead the gaming industry.

• The concept of Electronic Arts as a system modeled after Hollywood.
• The focus on finding independent, creative artists and offering them a suite of services and support.
• The innovation in software contracts, packaging, and direct distribution to retailers.

"In that original business plan, it says that the company is a system." "We're going to build a system modeled after Hollywood."

Trip Hawkins explains the business plan for EA, which was to create a system of support for software artists, mirroring the structure of Hollywood, and to innovate in areas such as contracts and distribution—pioneering a new era in the gaming industry.

• Trip Hawkins incorporated the company as Amazing Software on May 27, 1982.
• The initial name received mixed reactions from employees and the public.
• The name was changed to Electronic Arts (EA), inspired by the concept of software as an art form.
• The name Electronic Arts was chosen to signify that they serve the artists (game developers) rather than being the artists themselves.
• The importance of a company name is highlighted, emphasizing that its significance grows with the company's actions and reputation.
• The media's role in spreading the word about a startup is vital due to limited advertising budgets.

"Okay, so when I incorporated the company on May 27, 1982, it was called Amazing Software. And it's funny because some people loved it and others hated it." This quote explains the original name of the company and the mixed reactions it received.

"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." Trip Hawkins shares the thought process behind the name change, drawing inspiration from United Artists and the concept of artists in software.

"And electronic arts 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." The quote highlights the strategic decision to create a name that would engage the media and help in marketing the company.

• Trip Hawkins founded the company in 1982 and initially funded it himself.
• Venture funding was secured in December 1982, leading to the formation of a board.
• Board members included representatives from Kleiner Perkins and Don Valentine, with Steve Wozniak as an independent board member.
• Additional independent board members were added the following year.
• The company's early titles, such as Dr. J and Larry Bird Go One on One, were significant in the sports gaming market.

"Well, actually, I founded the company in 1982, and the venture funding happened in December of 1982. So from May through December, I own the company." Trip Hawkins discusses the timeline of the company's founding and the acquisition of venture capital.

"And then we didn't really have to have a board meeting until December, when now there's venture investors and know." The quote indicates the shift in company structure following the investment, necessitating formal board meetings.

• The design of early games like Dr. J and Larry Bird Go One on One was simple yet engaging, allowing even retailers to play.
• The game's design encouraged players to learn and improve, reflecting the philosophy that great games are simple to engage with but offer depth.
• The game represented the birth of EA Sports, even though it was not yet called that.
• Trip Hawkins used his admiration for sports heroes like Dr. J to influence game design and business decisions.
• The game's success validated the potential for sports video games, a market that was not yet established.

"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." This quote emphasizes the importance of accessibility in game design, a principle that was key to the success of early EA titles.

"It was the first time that any kind of celebrity had appeared in a video game doing either being themselves or being an actor even." Trip Hawkins discusses the novelty of celebrity endorsements in video games, which Dr. J and Larry Bird Go One on One pioneered.

• The Madden series aimed to create an authentic football simulation, which required a design that accommodated all 22 players on the field.
• John Madden, known for his coaching and broadcasting career, was selected as the brand name for the football game.
• Madden's involvement was deep, insisting on an 11-on-11 player format to maintain authenticity.
• The development process for the Madden game was lengthy and challenging, leading to the nickname "Trip's Folly" internally.
• The game's eventual success proved the value of pursuing authenticity and detailed simulation in sports games.

"So we're going to dive in here and open up a chapter on EA Sports." David Rosenthal signals the discussion's shift towards the impact and development of the EA Sports brand.

"And of course, what a perfect rivalry. I mean, they were already banging heads and both of them played on great championship caliber teams, and then it was a matter of making a design that worked well for what the platforms could do then." Trip Hawkins explains the strategic choice of featuring Dr. J and Larry Bird due to their existing rivalry and the need for a design compatible with the technology of the time.

• The video game industry faced challenges in the mid-1980s, with the collapse of Atari and the dominance of Nintendo.
• Electronic Arts saw potential in the Sega Genesis, a 16-bit console with advanced multimedia capabilities.
• EA reverse-engineered the Sega Genesis legally to develop games without becoming a licensee.
• The company's decision to go public was partly to prepare for potential legal battles with Sega.
• The success of EA games on the Sega Genesis, particularly the Madden series, contributed significantly to the company's growth.

"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 them back to the United States." Trip Hawkins describes the proactive steps EA took to obtain and analyze the Sega Genesis console to understand its capabilities.

"So they're off doing this for a year, and they're doing that heroically, knowing that they won't get to be able to make games for it." The quote reflects the dedication and sacrifice of the EA team members who reverse-engineered the Sega Genesis, knowing they would not personally benefit from the development of games for the platform.

• Chells, a key contributor to a project, was a serious alcoholic and died young.
• His commitment and sacrifice were pivotal in solving a critical problem.
• This emotional memory is a driving force for continued passion and dedication.

"And I'll just treasure this guy forever, because he was the one who stuck with that and did the heavy lifting in the end that figured it out and made that sacrifice. And it still, to this day, kind of makes me want to start crying."

The quote highlights the profound impact of Chells' dedication and sacrifice, which remains a source of emotional inspiration.

• EA faced challenges in creating games for the Sega Genesis, similar to the Nintendo security chip issue.
• Nintendo used a security chip to enforce DRM, which EA avoided infringing due to patent concerns.
• Sega Genesis lacked a security chip, which EA saw as an opportunity to develop games without legal repercussions.

"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."

This quote explains the technical and legal barriers EA faced with Nintendo's security system, which influenced their decision to focus on the Sega Genesis platform.

• EA formed alliances with third-party game publishers and competitors, similar to Epic's challenge to Steam and Google Play.
• Trip Hawkins emphasized the importance of creative freedom and opposed restrictive control over the gaming medium.
• The success of EA's games like "Budokan" and "Populous" was tied to these strategic partnerships and market understanding.

"So 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."

The quote reflects Trip Hawkins' philosophy on open platforms and creative expression, which shaped EA's approach to partnerships and market strategy.

• Trip Hawkins considered partnering with Sega despite EA's ability to operate independently.
• Sega's founder David Rosen initially resisted the idea, warning of legal and technical retaliation.
• EA's negotiations with Sega were influenced by a strong bargaining position and the potential impact on EA's public stock.

"And I'm just saying, well, hey, maybe we should get together and talk about it."

The quote captures the initial stages of negotiation with Sega, indicating a willingness to explore partnership despite the risks.

• Madden football became a cornerstone for EA's success in the console gaming market.
• EA's strategy involved both maintaining the Madden franchise and adapting it to create "Montana Football" for Sega.
• The success of Madden and its adaptations exemplified EA's ability to leverage its gaming franchises.

"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."

The quote demonstrates the confidence in the Madden franchise's potential and the strategic decision to protect and capitalize on its success.

• EA went public in the fall of 1989, a strategic move that enabled further growth and acquisitions.
• The IPO provided leverage in negotiations and facilitated a transformation in the company's market value.
• Trip Hawkins reflected on EA's profitability and the timing of the IPO in relation to business opportunities.

"And it took another, I don't know, maybe a year or two, and the company was worth 2 billion."

The quote illustrates the significant growth EA experienced post-IPO, highlighting the importance of the public offering in the company's history.

• Trip Hawkins discussed the challenges of being too early with innovative ideas.
• He emphasized the importance of timing and market readiness for entrepreneurial success.
• The discussion included reflections on previous ventures and the lessons learned about pushing boundaries.

"A lot of us entrepreneurs, we see something, we 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."

This quote acknowledges the common entrepreneurial pitfall of being ahead of the market, stressing the need for patience and strategic timing.