The Electronic Arts IPO (with Trip Hawkins)

One more time. This is Tripp. We're on Santa Barbara Radio. Great. And there's our opener.

Welcome to Season 4, Episode 7 of Acquired, the podcast about technology, acquisitions, and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. With 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 listened to the Lyft episode, and of course, the home of Sonos, if you listened to that episode. And today we sit here with Trip Hawkins, the founder of the most legendary gaming company in the world, Electronic Arts.

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 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.

For 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. If 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.

It'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 of you guys are listening and getting value out of it. It's been super fun. All right, listeners, now is a great time to tell you about longtime friend of the show, Vanta. So, David, I want to paint a picture that many founders listening will recognize. You're about to close your biggest customer yet. The product team has hit a bunch of milestones. The sales team built this fantastic relationship. Everyone of the potential customer is fired up. Your legal team has the contract done. But then an email comes in from the security team. Ah, yes. It's usually a very polite email asking something like,

Before proceeding, could you share your SOC 2 report? Or do you mind sharing your ISO 27001? If you don't have one, that deal just went from closing this month to closing next quarter, maybe. Now you have to go find an auditor, go through every system, write the policies, and then prove that you follow them. Right. Or you could just use Vanta.

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All right, David, it is time. It's time. So excited to dive in with the trip here. So per usual, we'd like to start way back at the beginning on the 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 came here about 100 years ago. Oh, wow. You didn't start early enough, David. 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 is they were willing to leave some other place and head to one of the most remote parts of the planet.

So growing up, you loved sports, right? You were a jock, 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. Those 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 at the time that I realized that I was a strategic thinker, I'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'm going to play these things in real life. So I'm becoming a jock in real life, and I'm watching on TV, and I just had this craving for more interaction with it. I 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 it had these little circular pieces of paper. 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, whereas Ty Cobb had a much bigger pie slice for hitting a single. And you would put the thing on a spinner and you'd hit the spinner with your finger. I remember this. I had one of these growing up in the 80s, too. Yeah, so a lot of people remember that one. They don't remember my favorite one, which is called Stratomatic. And 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. And heck, I was about, I don't know, 10.

when 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 then I realized, oh my God, there are more ways to roll a seven than a 12. And how many more ways are there? And why is that? And which guy do I want? If I'm going to play my friend and I want to win, I better figure out 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 and 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 loved the games too. And we all loved it. We all kind of 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. And that's when, as soon as I heard about computers and I could kind of see it with my own eyes, I was like, 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, Tripp, that's going to take 40 years, I'll go, oh, never mind. But you don't know that. So next thing you know, you spend 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. You were in high school, right? I didn't know it was going to turn out to be a $100 billion 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 Bomber, right? 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 Aiken Computation Center at the same time without having ever actually met. And honestly, those of us who were really serious about it, we would go there at night. These are timeshare systems. 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 on a machine at night when you had 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 collegiate 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 lettered in football as a freshman. And then I realized that, wow, this is so time consuming that I can't do everything. So, you know, I would have loved to have done it all. In fact, you know, 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. And you would play with, you know, different dormitory groups.

And that was a hell of a lot of fun. So, you know, when you're doing that, we went undefeated and unscored on. We only played six games. And, you know, it was really hard to have an elaborate offensive playbook because, you know, 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 line of defense. So that was, for me, probably the highlight of my football life. That's amazing. So was it at this time, or was it at Harvard, where you realized you wanted to start a company and started laying in motion all the plans that would... Well, I'd 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 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, you know, silkscreen game board.

and paper parts and things that you had to, you know, have perforations on so you could punch them out and dice and, you know, had to figure out who am I going to buy dice from. Yeah, so you're building a full tabletop game of your own. Yeah, 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 I didn't get very far. So I lost every penny. And this is during undergrad? I'm in high school, basically. I'm basically learning two things. One, wow, ouch, 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. And then the second thing I learned was, man, this is so much fun. I got to do this again. This is amazing. 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.

It wasn't too long after that, where it was in 1975, and I'm in 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 if they only charge you $10 an hour, you can basically do computing from home. And I said, wow, that's incredible.

It's happening. It's finally happening. And then he said, well, that's not all. Shoot, Intel just announced the invention of the first microprocessor chip that can combine all these things on a single chip. And I think, yeah, well, dang, well, that's going to get into homes. And this is in the summer of 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. He became an Apple dealer later on. And literally, my colleague walks away, and I immediately start sketching it out and saying, OK, how long is it going to take for the hardware costs 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. And that is exactly what I did. You bided your time a little bit until that. It's, you know, listeners might expect, OK, 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, you know, 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 timeframe, 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, often it's really not even remotely an overnight success. That's the point of this show. And so pretty much, you know, there was about a decade before Electronic Arts was founded where I'm planning the whole thing. And then it 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.

announced Stadia, which is their play on the idea of cloud streaming games. And I thought, yeah, my initial thought was, yeah, 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 and Microsoft are now, you know, joined forces. And they have no first party titles. Right. How are they going to, how can they fix that problem? Then I was, wait a minute, wait a minute. EA didn't have that in the beginning. I didn't have that in the beginning. If you are in the long game, then you're saying, shoot, nobody 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. Well, let's build infrastructure in the platform. How do we hang around this long enough?

And frankly, if Google thinks, yeah, we just want to be the leader 10 years from now. So which young, super talented data scientists, machine learning, AI experts are young indie developers now that are going to grow in their careers to the point where five, 10 years from now, they're going to make a hit. That could be the next League of Legends or the next Call of Duty, the next Fortnite. Yeah, if you're willing to plan ahead like that. Most of us generally are way too impatient for that. We want it to happen now. And of course, Google could maybe even acquire electronic cars 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. Yeah.

You have this thing unfolding over a 20-year period. And 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. 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. And 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. And 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 about the customer in 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 the headquarters of Fairchild Semiconductor. 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. It 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 so they can 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. It 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. I'd like to offer to do 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 give me the addresses of a couple hundred customers, I'll design a questionnaire and work with you on making sure your questions get answered. And we'll basically try to understand more about who your customers are and what they want. Of course, secretly, I'm thinking, yeah, do they prefer football or baseball? And is there going to be a demand for that? Because that's what I want to make. So he says, OK, sure. I continue on my drive to Stanford. And I said, OK, now I'm going to go get course credit for this. So I didn't get paid. But I was able to build it into my curriculum that way. And then there I am in the library at Stanford not 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 see video games on it. And he puts it on the copy. He was making a copy of a couple of pages from this thing. And I said, what is that? And he said, yeah, this is a study I wrote last summer for this market research firm about these simple little Pong machines that the semiconductor companies had been making. And he had done a market analysis of it. And 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 cover to cover. And I realized, dang, this is cool. I could do a report like this about personal computers. Yeah.

And nobody had done a report about personal computers. They were too new. I mean, just think about that statement. I know. So this would have been what, like 1977, 78? Yeah, this was 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. And I go talk to that same market research firm. They're down in San Jose. And I said, yeah, I'd like to. 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. Heart of Silicon Valley. And he's a research firm. Yeah.

And I explained it to him. He goes, you know, yeah, we do business with all these big manufacturers and technology companies. They don't care about that. We have no demand for that. Amazing. And I'm kind of doing an eye roll like, 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 mainframe computers and so on. So I tell you what, why don't you do that for us this summer?

And 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 77. That's where the Apple II made its debut. And I was there. Wow. And, yeah, it was a very heady, exciting time. Did you meet Stephen Watts there? They were probably there. I didn't meet them. I remember seeing the Apple II and thinking, wow. Yeah, did that feel in the moment like, oh, my God, I'm a part of the world changing right now? Could you feel that it was? You could totally feel that. But the other thing that really jumped out at me was recognizing it's that one.

I know all these companies. I'm looking at all their products. The Apple II 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 looks like it's part of the past, like a bunch of buggy webs and carriages before the car is invented. I assume you're going to get into this right now. But the home computer market at this time was dominated by Radio Shack, right? Right. Yeah, the TRS-80 also known as the Trash-80. It was a very convoluted system. And among other things, it didn't even have color.

So it was basically, in fact, it 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 doing a lot of volume. Anyway, so they allowed me to do the study. I got entree at all these companies. And so that included Apple. And I went down to visit one of the first handful of office workers there.

And the most amusing part of this was there were only a handful of people there at that time. This is probably 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 walk around the corner and their entire software effort is one guy. I'm pretty sure this was Randy Wiginton. He's one of the very first engineers. And he was working on a Star Wars ripoff where the company didn't have a Star Wars license.

But the first Star Wars movie had come out in the summer of 77. And they thought, hey, let's do something where we have bitmap graphics and we can do something where you're like Luke and you're trying to blow up the Death Star. And we're going to do that in some really simple graphics. Unbelievable that Steve Jobs would later buy Pixar from George Lucas. And yet Apple at this point didn't have that 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 and says, you're going to have to stop doing that.

And sure enough, he's from Fox. Oh, wow. 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. But this is like the cowboy period. You're asking for permission. You're just doing stuff until they stop you. 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 produced a 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 one day, not too long after that, and the phone rings. And I pick it up and there's this guy yelling at me and saying, why the hell are you calling Radio Shack the market share leader? This is incredible. And it turns out it's Steve Jobs.

And he's seen this flyer that says a radio shacks and 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. And the Apple II was, 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, well, who is this dude that's outing us and making us look bad, making us look like lawyers? So he calls me up to berate you. You turn the tables and then... Well, here's the other thing about how intimate Silicon Valley is, that he had to know somebody that knew my home number.

So we knew somebody mutually. Did you trace back how that ended up? Oh, yeah. But at the time, I didn't understand how that worked. But he and I were having this conversation. Of course, I'm having to hold the phone handset about a foot away from my ear because he's yelling so loud. I managed to tell him, yeah, 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 the study and show it to you.

And this is a study that in today's dollars would cost about $2,500. There's no way Apple can afford it. So I know that being able to come in and show it to them. Right. They're like, look at this. $2,500 is that free value? Steve's probably very pleased with himself that his one phone call yielded. Oh, totally. And of course, 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 it very flattering. I think you guys are great. Okay. And then I said, oh, and 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. And it's all based on this idea that I know something about the market. I know something about customers. I'm just a kid. Did 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 Markla came in to be the adult supervision. And he and the two Steves each had about a third of the company.

So 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 an elite, leading venture guy in the 1970s. And had come from Fairchild. Yes. And Intel.

And so he went and met with the two Steve's when they were in the garage. And he thought, yeah, this is way too early for us. And then he told Markla to talk to them. No way. So he was kind of trying to turn Markla into the angel that would help get it a little more legitimate. Okay, so Mike goes and meets with them. And they're pretty much unkempt, uncivilized people. Later, Markla would tell me that these are the days when Steve wasn't showering, right? Yeah, well, literally my first week at Apple, I figured out what a hazardous person Steve was. And towards the end of that first week, I'm standing next to Mike, and Steve's down at the other end of the hall going by. And I said to Mike,

Mike, we really need to do something about that. And I pointed at Steve and I called him a that because he's a thing, right? And Mike says, Tripp, look, come here. He pulls me to his office. He closes the door and says, Tripp, you have no idea how much better he is now than a year ago. A year ago, he was like the wild man from Bordeaux. He was completely uncivilized. I had to teach him where you put the fork and the knife at a table setting. He's basically explaining almost as if you had to teach him what a fork is and how you use a fork. And he was just asking me, Tripp, try to be patient. Look at the progress. This guy can do a lot for us.

So those three guys got together. That's amazing, by the way, that Mike, I mean, these were the days of the first thing investors and adult supervision did when they came into the company was fire these people, right? It's amazing that Mike saw that there's a very high turnover rate. Yeah, saw that Steve had the potential to become the greatest of all time. Well, and Woz made brilliant technical contributions in the first several years of the company. So he recognized the talent in both of them. And the only thing about Mike, though, is that he didn't want to run the company either. So none of them 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 Scotty.

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 he's really the chairman who's still the big boss. And occasionally over the next, say, 20 years, he would have to be CEO for a while during some interim phase. But, you know, he just always remained connected with the company. He was always in some critical role on the board. And it kind of outlasted everybody if you look at his total tenure. But at any rate, so Mike was my first boss. And then Steve was my boss later.

But I collaborate with Steve a lot initially because on my second day at the company, Mike said, Tripp, you know something about business. Can you find a way for us to sell these to businesses? And that hadn't really happened yet. Because only consumers were buying the Apple IIs at this point. It was really just hobbyists. 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 II was a huge, turned out to be a huge business. And it lasted much longer than anyone else thought, which is a good thing is it kept Apple alive. Because then Steve and 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? So 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 Macintoshes heralded today, it was not a best-selling product. It was not by any means. Well, and ultimately, the financial struggles of Mac is what got Steve kicked out. 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. And 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 sue Microsoft, Microsoft said, well, here's the license agreement you guys gave us. And Bill had just outsmarted Steve in the legal paperwork. 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. And 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. Steve saved Apple.

But he destroyed it first. 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. Was it at Apple that that's where you kind of started coming to this? I think one of the things I had learned from some of the courses I'd taken in business school, that you probably don't want to start a company.

The term distinctive competence was already around in those days. You better be good at something. But I had latched onto the notion that you'd better have a big idea. And I don't know how that seed first got planted. There are people like Jim Collins later, they would call it the BHAG, 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 it 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.

And the hedgehog's 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 going to be the year. Wow, so that's been back to you this whole time. The whole time, the whole time. And I'm working with these incredibly creative software people like Bill Atkinson, Larry Tesler, 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, their personalities. It's almost like they're divas. Well, like you said, most of them either didn't go to college or dropped out or, you know, they're, they're like, they're like Picasso's. Yeah. Yeah. And, and boy, you've really got to think about how to manage 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, 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've got music and film and television and 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. Again, I don't think anybody saw that before I did. I mean, I was thinking about that pretty early. So as you're talking about this and, you know, eventually talking to downtown, do people think you were crazy? Like, were they like, oh yeah, this is like, you're onto something? Plenty of people thought I was crazy. Like the head of economics at Harvard. I had a lot of people try to shut me down and tell me not to do it. Okay. So you get this idea.

It's 1982. The time is coming. You're seeing you're in the industry. PCs are coming into homes. What was the first step to electronic arts? So again, 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. It's a billion-dollar company at this point, right? Yeah. Well, in terms of revenue, it's in that range. And the market cap is even, I think, more than that. I've kind of forgotten. 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 we had about 25 guys on an assembly line in the back assembling a couple hundred of these hobby machines. And four years later, we had 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. 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. So there was just chaos. And then just various ways in which tension was growing. And the company 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. So those seeds were already getting planted. And I was hanging around because I thought, you know, I'm working on products that 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, I felt like, wow, this company has been so good to me. They've been so loyal to me. This has been such an insane, fabulous opportunity. I've learned so much here. And that's actually maybe the best advice I would give anybody starting their career is don't think about the money at all. If 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 man, for me, the learning curve at Apple was...

Incredible. 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've stayed. but I can see it coming and I'm thinking about it all the time. And then one day, a fellow employee dropped off a 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 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 round. They raised $3 million and Valentine led that deal and joined the board, right? And the price per share was $3 per share. If you adjust 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 adjust for splits. And that's when Valentine's sold out. You know, so you can see, you know, it went from $3,000 to $42,000. He didn't do that bad, but then from $42,000 it went to like $100,000. 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? Why is he doing this? And we were just laughing about it because we both knew that $42 was actually still really cheap. Where 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 curiosity about what did Valentine think we were doing wrong that made him want to jump off the bus? I was always curious about that.

Has he ever talked about that? I'm sure Don would never admit that he ever made any kind of mistake about any investment. At any 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 in to pitch him. And Don had intimidated the guy so badly that he passed out in his office. And in that moment, I'm thinking, I want Don Valentine as an investor. I want him on my board. Because I want someone that tough that's willing and able to stand up to me. I'm going to need that. So you knew at this point, 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 also realize, particularly you hang around someone like Steve, it was a real blessing for me to have a really great relation with him, work closely 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. And 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 had not actually met him. So I could contact him and I go over to the office and I'm thinking, you know, he's an older guy. He's kind of traditional.

And 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 would quit in the middle of the project. And that's not all what he says. I asked him, what do you think I should do? And he said, you need to quit Apple as soon as possible. Come over here and start this company right now. And then literally he's saying, we got extra space. Come over and you can start it right here. Because he's thinking, yeah, I want to control this thing and have the inside track on it. And 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, right? And what he said to you?

Yeah, this is classic Don Valentine. So he 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 boardroom, 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, you better be the dude that's got the vision for this thing. And you'd better know it. I'm going to bring the fire. You got to bring the fire right back. And you better have some conviction about what you're doing because I'm investing in you. He's basically saying, if I'm the smartest guy in the room, then 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. And 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... And then we're going to invent new contracts, new packaging, new marketing methods, and a new channel of distribution.

Because up to that point in time, nobody had sold software of any kind directly to retailers. 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 do our core competency as this big umbrella of distribution, services, infrastructure. I mean, it's much more so the way we think about a game publisher today. They become much more bifurcated. 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 1980. So it comes like Broderbrand. If you look at Doug Carlson and his brother, those guys did a fabulous job. They were really classy competitors to have. In fact, we used to regularly play softball against them. 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 for the first 10 years. We were like more of a portfolio. We had all these singles and they always had a home run with the bases loaded. 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 cards. But they didn't know distribution, right? Well, here's all the things that really were not true until electronic cards. One was that nobody had given an advance to a developer ever. Oh, wow. Nobody had a really good... So nobody was financing... Nobody had a really good contract about how this is going to work. Nobody had figured out the business model of exactly how 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 we 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.

But 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? Wow. And I'm studying that. And of course, I've already done software contracts at Apple.

And I went to my lawyer that I'd worked 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 him 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. Of course, the funny thing about that. Didn't it look like records or something? They were like record albums. And this starts with me just being cheap because I'm looking at the baggies. The first generation of hobby packaging was just like a baggie with a disc in it. And I said, yeah, well, that's really not even professional.

So we're going to have to do something. And I said, yeah, but it can't be very expensive to make it. And I said, well, record albums are selling at retail for $9. So they can't really be spending a lot of money on the album cover. We'll just go to the record manufacturer. 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 clued us in on the fact, well, 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 that's where we were able to design.

The standard software box thing. A folding album that 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. And of course, again, ironically, the media loved the 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 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. I kept naming games. Your games? And he kept saying he had them, and I realized after a while, oh, yeah, you know what? He's a software pirate. Oh. So this guy is getting all these, because everybody was pirating games. Wow. And I realized, yeah, the reason he doesn't know Electronic Arts is because he doesn't have any of the packaging. Wow. So maybe he's not noticing the logo when it pops up on the screen. It took forever for Electronic Arts to really have brand power.

and for individual artists to really have brand notoriety themselves. All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. So David, here's a question that I do not think most enterprise CIOs or CEOs could actually answer today if they were asked. How many agents actually run inside your business? Yes, I don't think anybody really knows. And of course, then there's the harder questions like, what can they access? And who gave them that access? And is any of this paying for itself? ServiceNow has an answer to all those questions. The super intelligence control tower.

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They know how work gets done, helping support over 100 billion workflows a year across more than 90% of the Fortune 500. The world's most complicated businesses, like many that we've covered here on Acquired, already run on ServiceNow, and now they're running their AI there too. If you're trying to turn AI ambition into real outcomes, just go to servicenow.com slash acquired and just tell them that Ben and David sent you. Going back to the original financing and starting in Sequoia. So you mentioned that Don wanted it to start in Sequoia's office so 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 $2 million. What did the terms end up being on that?

Yeah. So I did accept Don's offer. I basically had funded the company originally myself. That's right. You put like $200,000 into it. It was closer to $300,000. And I was basically just running it myself. I was the only person. So I 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 I thought, well, I don't want them working in my home. So I'll take Don up on his offer. And the next thing you know, 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'm at home one day and the phone rings and it's John Doerr. I didn't know who John Doerr was. And next thing I know, I've got Brooke Byers and John Doerr kind of whining and dining me and trying to figure out how to get on the deal. I already knew Ben Rosen. Ben Rosen was the leading semiconductor analyst at a time when he worked for Morgan Stanley. And he became one of the first VisiCalc spreadsheet users.

He was clearly 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 on LJ7 ended up starting a venture firm. So I had a relation with Ben from my time at Apple. It ended up that different firms were competing. Dave Marquardt from his firm, he couldn't get into EA, so he invested in this other company called Microsoft. Whoa. That worked out really well. Was he August Capital? Yeah. That's what he's called now, but it was a different name then. I forgot what that other company name was. And of course, for listeners, John Doerr from Kleiner Perkins Caulfield and Buyers. And of course, you mentioned Buyers as well. Yeah. So I ended up allowing Sequoia to lead because 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.

You know, they really wanted more. And so we ended up doing another round six months later at a price four times higher. Whoa. And again, this is a thing that was happening that was different than what had happened before. Hardly anybody had raised any money. Yeah. And so here's an electronic guy saying, well, we've just raised more money than any game company ever. You're like the Uber of game publishers. And I've got the best lawyers and the best PR firm. And 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.

It's like this is one of those things where I had to get my ass kicked later many times and realize, you know, 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 OK to be in the top five or the top ten. How much of the company did you sell to raise that two million? I think it's not that different than it is today. I think after those two rounds that EA did it, they probably own close to half. 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 our own cartridges and probably fending off a big lawsuit because we're reverse engineering the Sega Genesis. We're going to get into that. Knowing all of that, it's like, okay, let's do a mezzanine round.

And 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 in $8 million, which is kind of shocking by today's standards, that money has been sitting in EA's bank account ever since. I mean, they've 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 a 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. Some of them just, no, this is not it. This is not the winning name. And it rather rapidly boiled down because, of course, I'm pushing for the idea that 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. Right, of course. So United Artists for me, for a couple of years already at that time, was a great source of inspiration because it was a similar kind of 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 known as Chase, he said, well, we're not the artists, they are. And it was like, oh, okay.

And this is about 2 o'clock in the morning. Yeah. And everyone goes, oh, yeah, that's true. Yeah, okay, Electronic Arts then. They being the developers. Yeah, so we're serving the artists. We're Electronic Arts. You're about the arts, but you are not the artists. We're a partner 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. They don't actually have any meaning.

At any rate, 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 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. Because to start a company, you can't do saturation bombing with advertising. You don't have the capital to do it. And 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 in it, that's what's going to have to drive it.

So 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. So from May through December, I own the company. And I'm paying for everything. And then we didn't really have to have a board meeting until December.

Now there's venture investors. So Brooke Byers is on the board from Kleiner Perkins. Don Valentine's on the board. So Waz actually was on the board from the very beginning. Was he the independent board member? Yes. 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 re-enters the story, is Dr. J and Larry Bird go 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 could get the retailers to play it. Wow. Mostly the retailers. Even like John Madden. John Madden has never played Madden football. He would get his sons to play it. 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. It's going to be embarrassing and I don't want to humiliate myself. So no, you do it. And 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. But with that one-on-one game, basically, if you press the button, the guy would shoot the ball and it might go in.

That's all you have 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 I can make this other kind of shot and I can do this. And then pretty soon you're realizing, I got this. It's so funny, last night in preparation, we played a little bit of the latest NBA Live game. We couldn't even figure out how to play basketball in it. It's just like, it's such a different world. 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, but technology in general, is that the people that make it.

understand it really well because they're 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 can have this 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. You 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 know, 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. They're 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, you eventually get all the way out to the dudes that are scuba diving. And yeah, there's just no limit. Yeah, that's what, that's what you want your game design to do. Wow. So everybody can use that water. Yeah. So this game comes out. I believe this was the first.

certainly athlete, but celebrity endorsement of a video game, period, ever, right? Yeah, what was new 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 appeared in a video game, either being themselves or being an actor, even. So it was the first of its kind in that way. Back to the idea of records and the packaging and the distribution. I mean, this is...

this is just the next step in that process, right? In that breakthrough. Yeah, and of course, I really wanted to make games like football and baseball. 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, you know, 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. J and Larry Bird was really the start of EA Sports. And I wanted to do a team game, but with 8-bit technology, it's kind of limited. And I thought, well, how about just two guys? 4K memory. And, 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. And so I was a huge fan of Joe Namath, a huge fan of Dr. J. And those guys broke all the rules. They went to the rebel leagues. They got outrageously paid. They did crazy things with their hair. They wore crazy pioneering the use of white shoes and football and the ABA with a multicolored basketball. And then obviously their style of play. Just super creative. So these guys were the rebels with that pirate swagger. And that's pretty much something you see that's really common with good entrepreneurs. They've got that swagger.

Example number one. Yeah. So anyway, so here I am. I'm this guy. I worship this guy. And Dr. J 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 in his sort of... Yeah. So he's just a hero to me. And I'm just delighted by the concept of see if I can do a business deal with him. And we were working with a lawyer that knew his agent. And so we had a pathway. And 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. And he had...

kids 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 to the same thing. John absolutely became true. Yeah. We knew that players and coaches are going to use the football game that we're making because when I was playing football in high school, this would have been.

90 99 to 2003 my coach who was his first year as head coach was my freshman year and or my sophomore year and he would assign he was like go on madden draw the plays like you create the plays on madden that we're running in our playbook right input the stats for all of us who's what i think your stats are and then like go home and learn the plays yeah learn to read defenses yeah it 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 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. Wow. So way back to the beginning of the story, football is always your dream. What came next after that, after you saw that? The Dr. J game, it was pretty successful for us.

made me think, yeah, this is really going to work. And I thought, 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 while 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 it could work because no one had really done it before. And so it had to be incredibly validating that 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 sigh of relief almost. Yeah, and again, you're noticing that there's an audience that wants a more authentic sports experience that's a 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, but 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. And 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. Because 16-bit technology, it's already coming. But it's not there yet. But it turns out it was going to be a while. And 8-bit wasn't really quite good enough. So we thought, OK, this will take a year. And of course, it took four. I knew that, yeah, to make a really effective game, you're going to have to do it literally like a football play.

The offense is at the bottom, the defense is at the top, and you're moving up the screen. And then, of course, you're going to want to try to present that with a little bit of a 3D view that's a little bit like it's behind the quarterback. 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...

the broadcasters and the game companies keep referencing each other and get inspired by each other's ideas. So they're sort of co-evolving. It was a year or two ago in a game. I wish I'd written down who did it. A wide receiver ran parallel to the end zone to run out time on the clock, which is a Madden move. This happened in an NFL game. Madden 2000. I did that all the time. But for the first time, it happened in a real NFL game. It's amazing. Okay, so this is 1984. The technology is not there yet. John Madden, obviously we'll 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, you know, maybe we just pay a coach a consulting fee and it doesn't have to be, we can just make up our own brand and own the brand. But I thought, you know, if we're going to have a brand name and we're going to be paying a royalty, who's the biggest brand? Human being. And I instantly thought of Madden 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 the guy was always going to be on TV. And he's the ace hardware man. He's in the Miller Lite beer commercials, breaking through barriers. And of course, I think probably most listeners don't remember this, but his Hall of Fame 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 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 that it was easy to find out, okay, who do I talk to? And I had a flight in New York City to meet with his agent. She agreed there was a good proposition. And then she sold John on it. And not so long after that, it got turned over to a more junior agent who really became John's kind of personal agent, this guy, Sandy Montag, who has worked 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. And he wasn't at the Madden Cruiser yet. He was still taking Amtrak. He eventually got tired of the limited train schedule. 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 John insisted on something that the technology arguably couldn'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. J game.

I was the designer. And to come into that meeting with John, I had already done a lot of work on design. I had probably at least a 60-page design 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. And 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. You 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 the heck do you actually command and control those kinds of people? And what do you find with John is 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. And that includes the fact that every third word out of his mouth is the F word.

And yet he's an incredibly intelligent guy and a brilliant strategic thinker and 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. He could see, you know, obviously you approached his agent and the agent said this guy, but like he became so involved, he could see that this was a project worth doing. Yeah, 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, always very direct. So the whole thing comes up about Skelet and he just says, well, that's not football. That's all he had to say is, okay, next question. So it's funny, the media has blown it up into this big thing. I was going to 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 on 11. Right. And he just said, yeah, no, we all want the real thing. Yeah, we all want the real thing. So we'll just suck it up and figure out how to make it work. And ultimately we did. I mean, that 8-bit Apple version.

that was the 8-bit product that also got onto the IBM PC. And that came out in 1988. Came out in 88. And it won awards. And the guys that reviewed that game said, this is kind of unbelievable that this thing actually works at all. And people were really impressed. Like, how did they manage to do this on an 8-bit machine? But of course, it took forever. I was going to say, a lot of blood, sweat, and tears. I mean, do you want to share the story of the nickname of Madden? Yeah, well, 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, it has no asset value.

because we've decided that you're never going to recoup it. So we're going to cause, in your financials, it's going to 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, essentially, why am I not hearing this from my CFO or some of the other executives? They're too scared to tell you. And that's when I learned that, yeah, none of them wanted to tell me. And that's when the auditors were sent directly to me to tell me. And that's when I learned that, yeah, they actually call this project Tripp's Folly. Wow, wow. By the way, Walt Disney had that happen to him. Walt's Folly.

was the film Snow White. Oh, wow. Which, of course, started it all. Yeah. Snow White was the first full-length animated film. Everybody thought, you can't do that. It's got to be a short. Yeah. And Wells said, no, I don't think so. Meanwhile, I think as of 2013, Madden had done $4 billion in revenue as a franchise and has only continued to grow from there. Yeah. So that was a pretty good folly. Yeah. Sometimes folly is, 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, now is a great time to talk about one of our favorite companies, Lagora, the agentic operating system for legal work. Yes, most of you have dropped a contract into a chatbot by now. But as a lawyer, how far can that really take you? It's never seen your firm's precedents. It doesn't respect confidentiality. And you can't check where its answer came from.

So Legora's founders approach this the way that great founders do. Early on, the team moved into the office of a big law firm in Stockholm and learned, for months, how the work actually gets done. A couple of thousands of enterprise customers and 100,000 users later, they still work that way. They employ 100 legal engineers on staff. These are lawyers sitting inside of firms and legal departments to deploy Legora onto live situations like the deal closing this week or the policy review due Friday. The product has gotten very powerful in a short period of time. A year ago, the goal was a good answer from a chatbot. With a Legora agent, you hand it the work and it comes back with a plan.

Tasks like running diligence on a data room or reviewing a new vendor contract get completed inside the tool you use every day, like Microsoft Word, and against your own precedents and playbooks. Every finding is sourced, the lawyer directs the work and signs off before the system executes any steps. Every legal team can get access to the same AI models, so the models themselves do not give you an edge. What you can do with your own data, people, playbooks, that's the whole game. Today, over 100,000 legal professionals at more than 1,800 law firms and in-house legal teams in over 50 markets use Lagora. And when Lagora goes head-to-head with its top competitor in a pilot, it wins 70% of the time.

A demo is one thing, but what matters most is an associate who reaches for it at two in the morning during a closing or whether a general counsel trusts what it says before the board meeting. So if your legal team wants to check it out, whether you're at a firm or in-house, go to lagora.com slash acquired and be sure to tell them that Ben and David sent you. So the game finally comes out for the Apple II, like I said, ported to the IBM PC. But that wasn't the market. And that wasn't what made Madden. And 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, at IPO, I think the market cap was $60 million to then $2 billion a couple years later.

Yes. So in the mid 80s, the whole industry is struggling to grow because the console market had imploded with the collapse of Atari. And that had acquired kind of a bad image, 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 very much was. And they didn't understand that. And the NES came out, what, like 86, 87? Yeah. So the NES had come out in Japan and they brought it to America in the mid 80s.

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 $100. And 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 circuit board and cart chips. It's not the incredible efficiency of, say, an optical disc. Nintendo didn't view...

maybe even their own first parties, they didn't view game developers as artists. That's right. In fact, they knew 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 why pretty much forever, it's been about, for Nintendo's platforms, it's always been more about the first-party games that Nintendo's making. But I was really worried that there was a hardware problem.

between the business model of Nintendo and the lack of multimedia features, since 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 Apple's next-gen machines. Well, anyway, when we started EA, the first development systems we bought were Sun workstations with that processor. And then CoinOp machines started using that processor. And we licensed games like Marvel Madness from Atari, CoinOp. And we were able to port it to the Commodore Amiga, the Atari SD, which also came out in the mid-'80s 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. They were going to come to market first with 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. And 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 either did that, like the guys at Broderbond. Yeah, yeah.

Or they said, well, if I'm going to be in the console market, it's going to have to be on 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. So just being a third party in that business model has never really worked out that well. Anyway, so I'm looking for a different kind of answer. And I think, OK, 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 were going to do because they had not had a third-party program for their 8-bit machine. So maybe they're still going to do that and they'll just have their own games. So we get the machine and we're thinking, wow, 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 infringe copyright law. And then we'll be able to make our own games for it. We don't have to be a licensee. Wow.

That's when, basically, I decided that it was time to take the company public. Yeah, you know, they're going to sue us. And we're going to probably be tied up in court for a while. We need some more ammo before we go into that battle. What did your board think about this, by the way? It took a little while to get everybody behind it. Were they fired up? Did they see the potential here, too?

You know, I think there's two layers of that. First of all, you've got to get the management team in support of it. And once the management team believes it's a good adventure, then you go pitch the board. Because the board wants to make sure, you know, they're going to look around the room and go, is everybody in on this? Or, you know, why would they support it if they can tell there's factions in the management team that don't believe it's a good idea? And, you know, thankfully everybody was in. And off we went. And I compare this to what Lawrence of Arabia did by attacking Aqaba from the rear. And this was a turning point.

in World War I and 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. But at any rate, we embarked on that adventure and there was some really heroic work done by Jim Nichols and Steve Hayes and David Maynard to go into 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 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. 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. 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. Yeah, wow. 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. However, in the context of a clean room, it's covered under fair use. 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, David Maynard, Jim Nichols, 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. These guys are the greatest heroes in the history of electronic cards. Wow. And Jim Nichols, always a serious alcoholic.

dead at a very young age. 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. Wow. Oh my goodness. And it's just what those guys did. Anyway, it was going on for months. We knew that the product was going to come to the U.S. in the fall of 1989. And we're thinking, well, hey, we're beginning to figure this thing out. And 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.

Yeah, they've always been good at DRM. You know, 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 the Nintendo, but then we realized that, you know, because of the patent, we'll get our ass kicked. So let's not do that. And as a result, you know, 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 that introduced that chip. And we're worried, well, what if Sega does the same thing? Well, they didn't. Wow. So, okay, the coast is clear. So their entire mechanism, just to 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.

Although the Supreme Court has recently had a few things to say about that. And also there's iPhone jailbreakers. So famously, Craig Hockenberry with Twitterific for the first iPhone before there was an app store figured out, reverse engineered 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 and 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. You got fresh 8 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 Budokan and Populous. Oh, yeah. And by this time, by the way, I was talking to third-party game publishers where we handled their distribution and competitors. I'm going around talking to a lot of people saying, hey, 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 like what Epic is doing now, challenging the Steam Store and Google Play.

And I'm really so delighted to see that, by the way. I mean, 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 creators of the game 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. So anybody wants to come along and choke that to death and control it and prevent certain things from being viable. Yeah, not a fan. You're right. It ends up like.

in a creative art form like this, it ends up killing it. I mean, 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 of apps that actually make money. Is your offer to all these other game publishers joining your lines, hey, we've effectively recreated a software development kit, or we created one, and you can have access to this amazing documentation. 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.

And 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, well, yeah, but you really ought to do that. Anyway, so I called up the chairman of Sega, who actually is the founder of Sega. Sega was started by David Rosen. He started it in Japan while he had been an 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 games to go on a military basis. So that's how Sega actually got started. I did not know that. I just thought it was a Japanese company. And of course, it then became a pretty big business globally. And eventually Nakayama-san, who was the leading distributor into the channels in Japan, he ended up buying out the company. And David Rosen had actually sold it to an American company before that. And so he was out of it.

And like Amazon brought him back in as chairman. Wow. So I called up David and he's basically saying, 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 and 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. Pretty much. And I'm just saying, well, you know, maybe we should get together and talk about it. All right. So we end up having this meeting and it starts us down the road in this process of discussing ways that we could actually partner.

And unbeknownst to me, they're all terrified because 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-a-dope 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 ready to do it yet. And meanwhile, I've got guys in the next room, you know, reverse stationery machine, and they don't know. And what are terms to become an official licensee? Well, there was a lot of discussion about that, as you can imagine. So my idea was...

to pay them very little. Their idea was to pay them a lot. 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 per disc. They actually, it turns out, were really worried that I was having, they had heard about, they're out trying to convince other people to do third party deals. And they're all saying, hey, Trip just came to see me. Trip made me a better offer. So if you really, but they're all saying no to me. I mean, none of those people 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. Sega's actually worried that I'm going to tank.

They're a third-party program. I did not know that. I found that out much later. Meanwhile, I'm thinking, I don't have to make this deal with Sega. 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. And we get down to the point where, okay, we're pretty much in agreement on everything else. The only things at issue is they would like to get $2 per unit forever. And I want to cap it at a million units. And everyone on my management team is saying, Tripp, 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 going to sue us. And I really am convinced that what we're doing is completely legally correct. And 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 to 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.

realize the power of Madden football at this point. No, 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 get on a plane, I go to CES and David Rosen and our lawyers hunker down. And they agreed to what I wanted. So we never had to go to court. And again, I didn't really understand at 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 bluff the whole time. I was just a little lucky there. Wow. And didn't have to go through that harangue of six months of the stock price getting trashed. But by the way, when EA went public, the market cap was $80 million. Okay. Sorry.

But 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 going to do Sega. But the market's going, who the hell is Sega? Sega's got no position in this business. We don't know if that's going to lose the money or what. You know, 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. And the company was worth $2 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 are making our football game, which they 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. Oh, so he was spokesperson for the Genesis console. Yes. Wow. And their entire business. So they had a studio, an outside studio developer, making that football game. Oh, man. And they found out that that game was going to miss Christmas.

So they contacted me and said, hey, so Nakayama gets on the phone with me 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. And 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. And then I thought about it and go, well, wait a minute. We can do both. So I go back to a second and say, okay, here's the deal. In six weeks, we're going to hand you the game. That's going to be John Montana football. You're going to 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. So it took out 90% of the plays. 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 fake 3D angle with a scaling of the sprites so that it looked like the players were a little more like 3D objects. So he could just remove that scaling factor. The safety is back at the end. Well, in Japan, by the way, the sports games were known as big head games where it was a little cartoony with a baseball player with a really big head. So, okay, we're going to give him that. I knew that didn't sell in America. And now we're going to give him a really plain 2D top-down camera view. Wow. And then we took out some other stuff and felt, okay, now it's not threatening. It's not going to interfere. It's not really going to, it's going to be an arcade thing.

And of course, what we did with Madden was a great market compromise is we had a meeting of the minds in the developers community around Madden where we said, OK, 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 I think what Jim Simmons did in building that first version was among the...

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. And that was the debut of our first hockey game. I remember that hockey game. Wow. Huh. 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? The console game, Madden 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 where every year you got new cards because the players have changed teams and they have 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 first version of Madden had come out, we had started doing a player disc every year. And it was a little awkward with the 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.

And we were kind of faking our way through this for a while. That very first version of Madden. Which now is a very expensive license. Indeed. Although it's actually a fair deal. Totally. 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-brake, cut the wheel to the left. I mean, you 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 since you started, right? Well, no, no. The first couple of years, you got to invest and spend money and build distribution. And 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. So can 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 in order what they do. And we're going to try to figure out how to be shared 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 there's just 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, two of which I 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. And big companies maybe have an ESOP, employee stock ownership plan, but you're not going to get very much. I just always believe in everybody sharing in that.

And then you've got to have some long-term plan for how you're going to get to liquidity. Were you facing pressure from shareholders saying, hey, we really should, you know, it's been however many 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. 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 took 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 probably way too early. But it was almost like the company had no shot at even remotely trying to do what it was going to do if it didn't go out ahead of things. And this is your gaming hardware business later that you started after EA? Yeah, it actually was started at EA. It was kind of a skunkworks inside EA. And then it ended up spinning out as a separate company. And it's a very sad, sordid 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 Niki Lauda and Ederton Senna, where they really know how to push a car to that very edge where just a little bit more, 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 was that kind of experience for me. And I really had a genuine interest in getting a platform out there that had...

that could solve all of these issues that were 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 in a somewhat longer time frame. But probably the most classic mistake I've made the most in my career is being too early. Just a lot of us entrepreneurs, we see something, 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 an interesting issue for entrepreneurs to figure out what is the right timing of your ideas. Last question on the EA IPO and sort of 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 in 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.

I think in the end, it's a happy outcome for everybody. I'm sure a whole lot of long-term employees were delighted that we went public. None of us was delighted with the stock being flat as a pancake and even trailing down after the first two years. Hey, look, we saw it with Facebook. We're potentially seeing it right now with Uber. Sometimes it doesn't... This is something that has been...

i understand it as a entrepreneur uh startup employees like you you can come to look at the ipo as like the end game right it's really not it's 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 on uber and lyft what happens after the ipo matters just as much if not more for your ultimate valuation uh and liquid where you decide to catch yeah and again in hindsight i can clearly see that uh 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 it public. And I think if you're going to 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. I mean, 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 in exchange for the cryptocurrency. And yeah, a lot of those chickens have come home to roost.

Should we bring it home to grading? I think we should. Tripp, 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.

And 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 what we're here to litigate. The really interesting thing to me is what an incredible negotiating position it gave you with Sega. And if you sort 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 1 million unit cap. Yeah, 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 going to end up with shareholders that are going to 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. 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. And 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. It's funny. We hadn't really talked about that as a benefit of going public yet on this show.

When you're buying companies with all stock and you're 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 a lot more. One of the ways it's different is that 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 you're public and 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. Yeah.

David, 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 an A for sure. The grading, I think, is most interesting on the show for IPOs that just happened. Like we just did Lyft, 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. And this is exactly what you would have painted the scenario as an A. It 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. Yep.

Right on. All right. I think that is all we've got. That is all we've got. Thank you, Chip. 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 favorite companies, Statsig. Yes. There is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep.

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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 and VCs and explore some of David and my personal theses, you should become an acquired limited partner at glow.fm slash acquired. And we will see you next time. See you next time.