Wednesday, April 18, 2012

4th Quarter Collapse: How A Videogame Company Choked In the Clutch

"I trained all those would-be heroes. Odysseus, Perseus, Theseus. A lot of "yeuseus." And every one of those bums let me down flatter than a discus. None of them could go the distance. And then there was Achilles. Now there was a guy who had it all, the build, the foot speed. He could jab. He could take a hit. He could keep on comin'. But that furshlugginer heel of his! He barely gets nicked there once, and kaboom! He's history." --Philoctetes, Disney's Hercules

Years ago I interned at a major competitor to Electronic Arts (EA), a videogame production firm that at the time was (and still is) well-known for its Madden NFL franchise, an American Football sports simulator. Things were going hot--both the firm that I worked at and EA were about to release the newest iteration of our yearly football simulators. We had the edge--we had the better presentation, we had the accolades (here and here), and the customer and industry analyst perception gulf between the company I worked at and its publisher and the giant EA was rapidly diminishing due to the equalizing perceptions in quality. To sweeten the deal, the game was only $19.99 in the era of expensive modern videogames. And yet, the year afterward, it all collapsed. How could this happen?  

The story is a reflection on both companies, really. It is the combination of EA's inability to operate outside the box (until the 11th hour), and the company that I worked at's inability to protect its advantage. The strategy should have been almost perfect; if we were evaluating "good" strategy according to Rumelt's three criteria (diagnosis, guiding policy, coherent actions), it was clear that the company I worked at had a plan. 

The diagnosis was simple: we knew that the games were at a point where our technology matched or superseded EA's, and that the market was inclined to buy our product based on its brand (we were attached to the number 1 sports network in the world at the time) and production value. We knew that EA had commanding market share, because they had been in the market longer against niche competitors that never really "competed" with them. And we knew that what we had to do was expose our product to the public to the point where enough people could get their hands on the game. Market share was the key. 

In the months before the final builds came out, the marketing team made the bold decision to release the game for $19.99. This was the dealmaker. At the time, the $59.99 videogame was the standard, primarily for paying the publisher. The approximate cost breakdown is listed below:
At the time, we had a unique relationship with our brand provider and our publisher. The highest level executives working on the game's release concluded that internal costs could be abated from $59.99 down to $19.99. Although I do not know the exact price cuts, I would guess that the majority came from the publisher waiving a large portion of its costs, and then a combination of a dominant relationship with suppliers (i.e. Wal-Mart and Target) and perhaps decreased royalties for all parties. To put things into perspective, the price was not only cheaper than a game that had been out for a couple years, but it was almost as cheap as games that were dated nearly 10 years before 2004. That's fairly significant. 

If we were to ask the authors of "Types of Strategy: Which Fits your Business?" to evaluate the low-cost strategy, they might not have agreed that it is true "low-cost" leadership (we didn't necessarily do anything past that one strategic year to keep prices that low and we didn't change our production processes, although we certainly could have if sales projections worked out and offset the premiums to the publisher and brand providers). However, they would have agreed to a certain extend that we competed on differentiation (same game, but with different value propositions based on presentation mechanics, graphical, and sound quality), and they would have certainly agreed that we were banking on the "network effect" to drive conversation about the price, which could bleed into discussion about the product characteristics itself (which was exactly what we wanted). 

On the other hand, EA operated as any industry leader would--they figured they were in a place where they could stay the course and protect their lead. The strategy was to build a game around a solid core mechanic (which they had) and to add new features piecemeal with each game iteration. Naturally, improving on "good" or "great" is difficult, and improvement in videogames is especially difficult due to the fickle nature of the consumer. Before our game hit the shelves on a hot July day in 2004, EA wasn't actively seeking to "crush" or "destroy" the place that I worked at. They were coming off a good sales year where the copies of the PlayStation 2 version of their last game jumped nearly 25%. Was it a realistic strategy for long-term success? Maybe, but with the technology gap closed or superseded, I doubt that EA could tout their mechanics engine without developing it for much longer while they fiddled with new features.

The aftershock was sudden. One EA exec recalled that "It scared the hell out of us" when our game was released. Although the focus of this particular story is on the football game, we also released our basketball, hockey, and baseball titles at the same price. We were going to hurt EA on every front, and we did. Madden 2005 PS2 sales took a dip to 3.2 million copies, virtually erasing their jump in sales from the previous year.  Even though EA had achieved record sales, they were scared. Suddenly, my workplace was on the verge of really doing something--if they could continue to compete, perhaps John Madden's iron grip on the galaxy of American Football simulations could be broken. 

I, as a lowly QA guy at the time, cannot tell you the full story from here. All I know is that in 2004, our figurative fourth quarter, EA stole the game at the last minute by entering an exclusive licensing agreement with the NFL Players Association and the NFL (NFLPA/NFL). It was dumbfounding. We were barred from making American Football games for the next 5 years (EA eventually extended this contract past 2013). Not that I know what the strategic elements in the negotiations were, but I have the feeling that the negotiation team for our company and our publisher believed that the NFL would not enter an exclusive licensing agreement with a single competitor. They were wrong. Now it was our turn to get burnt. The move was genius; it probably exceeded the strategic boundaries the negotiators had in mind, and certainly was a move that showed a lot of muscle that they hadn't considered. The point, however, is clear: they failed to adapt when the opposition pulled the trigger on their Hail Mary. They failed in the clutch.

I posted the quote from Hercules in the beginning because I think it adequately expresses the situation that my employer and their affiliates faced: you can have all the right product characteristics, the right marketing strategy, and the right shock factor, but without a way to counter the counterblow, everything could be for nothing. One mistake, and we saw the clock tick down to zero as the losers of the game. 

Looking back 8(!) years now, if you were the negotiating team for the company I worked at, how would you have worked with the publisher and the brand provider to ensure that the NFL and NFLPA did not enter the exclusivity contract? How would you have protected and nurtured your new inroads into the American Football simulation market?

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