In the Company of Giants

by Rama Dev Jager

  million—a behemoth in the software game industry. Hawkins’

  own personal fortune has swelled to the neighborhood of $200 million.

  A successful entrepreneur, a captain of industry before age 40, Hawkins might have felt content to ride his company toward comfortable revenue growth, new markets, and industry respect. But in 1993, Hawkins took the highly unusual move of appointing a successor at EA and promptly leaving to start his next venture in home computer gaming, The 3DO

  Company. The firm’s ambitious charter was to develop its own game-playing machine and leverage the technology by licensing it to companies around the world.

  Hawkins’ try at a veritable double dip is complicated by the presence of several large companies including Nintendo, Sega, Sony, and Philips, not all of whom care to see Hawkins pro-mulgate a hardware standard for the industry and capture the profits from doing so.

  An excellent dealmaker, Hawkins initially enlisted support from companies like AT&T, Matsushita, Goldstar, MCA, and Time-Warner. Nonetheless, young 3DO’s success is far from assured.

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  In the months prior to our interview, Hawkins’ notoriety had extended to the popular press; Billboard magazine anoint-ed him “the guru of interactivity” and, in a less scientific study, People magazine judged him to be one of the 50 most beautiful people in the world.

  Perhaps as a backlash to the adulation, business reporters’

  coverage of 3DO became more aggressive, criticizing 3DO’s nonexistent profits despite the company having already gone public. Some predicted imminent doom for the company.

  It was at this time that we met with Hawkins at his corporate headquarters, just a stone’s throw from Steve Jobs’ company, NeXT, to understand the creative drive behind the biggest name in games.

  “A true entrepreneur is a creative person, who

  doesn’t do things to make money—he does them

  because he has no alternative.”

  How important is it to have a completely original idea in order to start a business?

  I guess there are two ways to look at businesses: you can start one that is based on a big, new idea or you simply start one that works on an established idea. But even if it is something like starting a restaurant—obviously, there are other restaurants—the big idea may be why your restaurant is different from the rest. Yours may have a completely different approach to some common aspect of the business.

  But there is nothing novel about starting a restaurant.

  Exactly. One unseen aspect of business is that we all know about the success stories but never hear about the failures. I know what the batting averages look like in my industry because I’ve seen the turnover of companies for a long period of time. These batting averages are pretty poor. Some of them get lucky—there’s a one-in-a-hundred chance that the founders will get lucky and bootstrap their way to success. Perhaps one in one hundred times the product happens to be really good and original. But if you look at the failures—the 99

  out of 100 that fail—many also have original product ideas. With entertainment media it’s hard to tell in advance what’s a hit and what

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  isn’t. This is generally believed to be true about all entertainment media.

  The bootstrap approach to starting a business has never appealed to me. I wouldn’t want to start a company unless the idea was a big one and then I’d ensure that everything was first class—first-class money, first-class advisers, and a first-class management team.

  There’s no reason to take a lot of risk in those areas. Creating a startup in a first-class way dramatically improves your chances.

  Okay. Let’s talk about your big idea for Electronic Arts (EA). The idea was to treat computer game programmers like artists.

  Actually, EA was about three big ideas. That was one of them. The business was more than simply treating programmers as artists—as creative people. It would be more accurate to say that we brought a methodology for managing a creative process to what had traditional-ly been an engineering methodology. This translated into a certain style of recruiting, managing, and rewarding creative people. It also translated into a production process methodology that more consistently, like a cookie cutter, cranked out good titles and products. In the music profession you can’t buy a record and hear a single chord played out of tune. In the software business almost everything you buy has mediocre product value. What we did was to say, “Why not treat the talent like they’re treated in other professional entertainment fields?” That was the first idea. The second idea was direct distribution. Until then nobody had ever done direct distribution—it was all done through distributors. Frankly, nobody who is anybody in entertainment doesn’t do their own distribution. This way we could get shelf space for every product and therefore minimize our dependency on having a hit product.

  So the trick was to leverage the retail channel by providing a broad assortment of products?

  Yes. Our third big idea was technology leverage. At that time nobody had a planned approach to technology development. We were the first to invest in building a system—almost like a studio. Try to imagine what life in the music business would be like if you had no recording equipment, no professional studio gear, no synthesizers, no nothing. We built what we called the artist’s workstation, which was the system we used for creating products for multiple formats. Doing so made us efficient in dealing with the lack of standardization.

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  So, EA was really a combination of three things— a creative process methodology, direct distribution, and technology leverage. If you think about that combination as a strategy you’ll realize that you must apply more capital and commit to achieving a certain market share. Otherwise the whole model fails. It’s like getting a 747 off the ground; with enough thrust and enough lift you can fly. Once off the ground the plane is passenger-mile efficient. Most of our competitors hadn’t incorporated any of our three aspects of strategy—much less two or three of them. Had we done only one part of our three-pronged strategy we might have failed from simply being out of balance.

  It is an interesting approach. Did you understand all these points of leverage at the outset? You already had 135 competitors and were relatively late in the game.

  We clearly laid it out in our business plan. What I’m saying is that the key to risk reduction is to figure out the right strategy. The right strategy for us was combining those three elements and determining the amount of money we needed to implement that strategy. We raised more money than our competitors raised. Most of our competitors were bootstrapped companies. Brøderbund was one of the few that raised any venture capital—a couple of million dollars by 1982—but they sat on the money. We were the first company to use capital as a strategy. What’s interesting is that people frequently say that the way to manage risk is to spend less money, to take on fewer initiatives, to do less.

  So, the fact that there were so many competitors demonstrated to you that there existed real opportunity for a well-funded company?

  Yes. Now we’re coming back to entrepreneurship. Here’s a key thing to remember about being an entrepreneur: a true entrepreneur is a creative person. Creative people don’t do things to make money. They do them because they have no alternative. They have to do it. They have to get it out. So, as an entrepreneur, you don’t sit there looking at the number of competitors and think about whether you can beat them or not. You don’t have an objective, rational process. You need a certain amount of confidence in your invention. To an extent you’re insulated because there are many things that you don’t know will go wrong. If you knew in advance of all the things that could go wrong, as a rational person you wouldn’t go into business in the first place.

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  Did you do any market research before starting EA?

  I did enough. I had the idea for El
ectronic Arts when I was in college.

  I worked at Apple as a means to an end. I knew I wasn’t going to stay at Apple forever, but I knew that before I could start a software company there first needed to exist hardware to run it on. So I helped build the market for this equipment and learned from others about running a business. I’m surprised that I stayed at Apple as long as I did—four years. It was such a rocket ship ride. In 1975 I told myself that I would start my own company in 1982. When 1982 rolled around, I felt like I was a bit late because there were other companies, like Brøderbund, already out there. They weren’t doing very much, but I was definitely behind. Fortunately, I was able to meet anybody in the industry I wanted to meet. I helped start another little game company called SSI with a young game fanatic. I went to game industry trade shows, like the West Coast Computer Fair. That’s when I was able to test the hypothesis for Electronic Arts. It was clear to me that many creative people didn’t have a clue about how to handle the business side of things—I knew I could offer that to them.

  What things, in retrospect, would you have done differently?

  A paradigm shift occurred in the industry. Atari was collapsing, this was pre-Nintendo. It was a very tough time because many people wrote off the game business due to Atari’s collapse.

  Atari was synonymous with games.

  Yes. It’s unusual for a consumer product company’s economic struggles to be so well known. It poisoned the well for many consumers because games suddenly became unfashionable. It wiped out the industry for a couple of years. We should have started the company two years earlier when the tide was in. We built a boat and launched it just as the tide had gone out. It would have been easier if we had launched two years earlier or two years later, but that kind of thing is hard to anticipate.

  Let’s focus on this. The market is drying up, you’ve just launched a company and you’re sitting there in your office. What do you do?

  This is the difference between an entrepreneur and an operating executive: most entrepreneurs don’t understand how to operate a

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  business. There is a huge amount of common sense and courage involved in operating a business. You don’t need too much more than those qualities.

  Most entrepreneurs lack common sense. They may be courageous about their inventions but they’re not courageous about things like layoffs because most entrepreneurs are optimists. What you’re really looking for in a management team is the right balance between optimism and pessimism. You’ve got to conserve resources very carefully. Generally, the typical entrepreneur is optimistic to a fault and always has forecasts with hockey stick projections—“We’re about to take off....hang in there another couple of months and we’ll take off”—it’s bullshit. No entrepreneur ever even comes close to the forecast. Once you’ve been through this a few times you know it, the venture capitalists know it, and pretty much everybody knows how to deal with it.

  I’m very satisfied knowing that I’m a good operating executive because of what I did in a series of crisis situations. I’m not interested in being labeled as an entrepreneur in the classic sense. Most of these new companies either come out of the chute and fail or they start growing and the entrepreneur gets the ax because he doesn’t manage the growth. Or the company may grow nicely for a while, but the entrepreneur doesn’t know how to build the management team.

  Often when these young companies start to go fast it feels like a World War I biplane trying to go Mach II: the canvas peels off the wings.

  Do you think having an M.B.A. gave you the necessary skills?

  Probably the most valuable course I took as an M.B.A. was Interpersonal Dynamics. The second most valuable was finance, which explained net present value. I’m not sure there was anything else. I certainly learned technical details about cost accounting and how the accounting system works, but I could have learned that in college. In retrospect, had I not gone to Stanford, I could have gotten started in the industry two years sooner and wouldn’t have been any worse off, because those were two pretty interesting years. As it was, I practically worked full time my second year in business school—I just couldn’t wait. Everything was happening and I wanted to be there. I did market research and consulting projects pretty much from the spring quarter of my first year.

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  So the M.B.A. didn’t help?

  Like I said, entrepreneurship is about being creative. You must be able to think big. You must be able to see things differently and come up with big ideas—not just the product and company concepts, but creative ways of managing the business. If you’re going to run a business successfully there are many general skills you need, but much of it comes down to common sense and courage. You’ve got to face reality.

  If you took a hundred middle managers, you would find that the majority of them wouldn’t be able to tell a subordinate he or she wasn’t performing. Another thing very few managers can figure out is when a workforce reduction is needed. People are generally unable to deal with confrontation or bad news, but frankly, if you’re not dealing with the bad news, you’re going to fail. I don’t mean to say that you should have a culture based around criticism, per se, but if you don’t know what’s going on, you won’t learn very much. These are not things that you must, or can, be taught in school.

  Business schools are incredibly arrogant. At Stanford I took a course in sales force management that tried to teach me how to manage a sales force of 400 people, but I could not take a course in how to sell. I had to go to an outside school, like the American Management Association, to get a course in selling. The same applies to public speaking. There are basic skills that are fundamental to doing almost anything in life that a place like Stanford Business School won’t teach you.

  Then what are business schools’ value?

  They’ll teach you esoteric things. I would never hire a Stanford or Harvard M.B.A. from a consulting firm like McKinsey or Bain & Company. It’s just total bullshit. It’s absolute, total bullshit. They can’t help me. Maybe they can help a Fortune 500 company that is completely clueless about its business. But you can’t tell me that some kid fresh out of school is going to teach me something about my business that I haven’t observed myself. If that’s the case, boy, I’ve really screwed up. If that’s the kind of help I really need, how screwed up must I be?

  Some say it’s the hand-holding and reassurance they provide management.

  Right. Sometimes it’s just politics. Sometimes big companies have to line up outside credentialed resources to justify what they want to do.

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  You mentioned the need for courage to survive a difficult business cli-mate. Can you give us an example of a serious threat that almost put EA under?

  It happened continuously. The first seven years were like that.

  And how did you handle it?

  For example, we had three layoffs on three different occasions in that seven-year period. A couple of times we reorganized and shut down a couple of companies we started. Managing these crises is the most important skill I, as a business person, have. It’s probably the most important one for many people. You’ve got to be resourceful.

  Common sense and courage, combined with creativity, is resourcefulness. It’s the ability to recognize what is really happening. The first step is: collect the data. You’d better have your finger on the pulse.

  The second step is: analyze and figure out what’s wrong and why it’s wrong. Then you’d better have the courage to fix it, and fix it now.

  Some companies fail because they don’t study what’s going on, and don’t have a reasonable picture of what’s happening. Others have a reasonable picture of what’s happening but don’t want to believe it—

  they’re in disbelief. At others, people may understand what’s happening, but are afraid to deal with it.

  To me, that is what resourcefulness is all about�
��collecting information, analyzing it, figuring out what’s wrong, and coming up with creative ways to fix problems right away—and pulling the trigger. It’s incredibly scary and incredibly stressful. It’s not much fun having a layoff. It’s not much fun shutting down a business that you started.

  We shut down our first business in Japan after a year. It was almost like Dunkirk. It was something like, “Whoa man, we don’t have a clue here. Let’s get the hell off this island. Let’s get out of here. Pull up stakes! Get out! Get out! And let’s not come back until we figure things out.”

  If your executives are not doing the job, you must be able to pull the trigger. We brought in someone to be our lead marketing guy. I thought he was great. He thought he was great. He had great credentials, yet we had to fire him three months later. Again, you must have the ability to figure out what is really going on.

  So, given EA’s poor start, how did you turn it around?

  Like I said, the tide had gone out. We hit our forecast the first month. The second month we were off. The third month we were off

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  by more. The fourth month we had a layoff. We cut back spending, hunkered down, and tried to conserve cash. That improved things quite a bit. We looked at the executives who weren’t really cutting it and got rid of them. We regrouped. We fired sales reps who didn’t produce. CEOs in companies like this one will spend a certain amount of time running every department. You probably can’t afford a full team at any one time anyway. So, at any given point in time, the CEO is running more than one department anyway.

  You can’t afford a full team?

  That’s the way I look at it because you can’t afford to spend the money. I would say that EA is pretty typical; I usually did three jobs aside from what I was supposed to do. When you’re small and growing, that’s the way it is. Later, when the company gets big and there is an asset to protect, you can afford to keep the CEO in a purely strategic role figuring out how to grow and defend the asset. In the beginning, you’re just paddling as fast as you can. There is a benefit to doing the job yourself because you learn how things get done. It makes it much easier to hire people for those jobs because you really understand the different requirements and it’s easier to manage them. One of the more valuable aspects to a startup situation is that you’ve had your hands in every part of the business. I’m not talking about being autocratic or looking over people’s shoulders. It’s a matter of not being disconnected and out of touch.