The King and I: An interview with EA's Larry Probst

GameSpot takes the pulse of Electronic Arts; company's CEO takes us behind the scenes at E3.

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When you take a meeting with Larry Probst, there's not a lot of joking around the table. As the chairs huddle, as the speaker and interviewer get in their final tuck, business begins without delay--which isn't surprising given the responsibility to consumers, retailers, the industry, and the thousands of employees Probst carries on his shoulders. You don’t drive close to $3 billion in annual revenues by shootin' the breeze.

The clock started ticking on this conversation with EA chairman and CEO Probst just hours after E3 '04 had opened it doors. Already, the waiting area had the look and feel of a back stage or VIP lounge in Vegas or 42nd Street. Dark suits, backslapping and smiles in abundance, an air kiss or two...all that was missing were the cigars. You bump into all the right people at EA's executive suite.

It was early in the news cycle at this year's event, but that didn’t prevent Probst from addressing some key facets of EA's business model: the best use of licenses, globalization, the competition, and the costs involved in putting on another extravaganza in LA.

"Larrry's right this way," someone says. You put the water bottle down and walk toward the back meeting room...

GameSpot: The booth looks impressive, Larry. What value do you get from the spend?

Larry Probst: You know, there are a couple of different camps within EA. Some people think we should be here, and some people think we should not be here--because it’s very expensive. One camp will tell you that we’ve got the best spot in the exhibition hall because we’re right there when you enter the exhibition hall. The first thing you see and the first thing you’re exposed to is Electronic Arts. So if we were to not show up one year, we would lose that spot. That’s certainly a consideration.

That same camp would tell you it’s important to be able to demonstrate our leadership to multiple constituencies at the show: the press, Wall Street, the development community, editors...you know, it’s a long list. Now the other camp will tell you that this is really, really expensive, [that] we don’t get a lot of bang for the buck.

GS: Where do you stand?

LP: I come down sort of in the middle but tend to favor the "we need to be there" camp.

GS: Are there any gradations in that theory?

LP: I think there are particular years where you really need to be here. For example, when new hardware is being debuted--and by new hardware I mean a new console. I think you really have to be there and show up with products you’re going to be launching with that hardware…to support that hardware platform and to make a statement: that we’re going to be there, we’re going to be there in force, we ‘re going to be prolific, and we’re going to have market share. Anytime that you’re anticipating new hardware being launched, I think it’s imperative that you’re there.

Hypothetically, if we were to not be here this year, and, hypothetically, a hardware company was to debut some hardware next year, we would want to be there, but we would have lost our spot in the front of the exhibition hall. And I don’t think anybody would be very comfortable with being at the back of the hall, being the 26th thing that somebody got to when some big news event like new hardware is dominating the show. So you have to think not only about this year, but subsequent years down the road.

GS: Now that you're here, and after your booth is up and running, how do you read the competition's booths? What can you learn?

LP: We have armies of people here that go to every competitor’s booth, look at every product, and take extensive notes. When we go back next week to Northern California, we have all of our people that attended the show synthesize all of the information and figure out what surprised us, what was not what we expected, where we need to double down.

GS: Any "for examples"?

LP: A prime example is a few years ago when we came to the show and saw Sega’s football game. Our development guys looked at it and said, “Oh, my god, their game looks better than ours, plays better than ours, and they’re going to launch in three months!” I mean, they went away from the show, doubled down, put more resources into the team, and caught up in terms of quality.

At the same time we said, “You know, even if we get people on quality, we have to outmarket these guys.” And so, coming right out of the show we said, “OK, new game plan. We’ve got to double down on the resources, we’ve got to outmarket these guys, we’ve got to get really aggressive.” And that plan won the day. We ended up with 80 percent market share, and Sega got 20 percent. And at the show, arguably somebody could have said that was going to be reversed, because Sega had a much better looking game. So E3 gives us an opportunity to look at the competition and we’re--and coming out we’re very systematic about what we need to do.

GS: Electronic Arts is arguably in growth mode and has been for a while.

LP: [interjects] Well, it better be or I lose my job.

GS: And as you get bigger, as you strive for a more globalized business model, how do you maintain the creative edge?

LP: I think everybody understands that one of the key growth drivers for our company, longer term, is going to be how good we are in developing new intellectual properties. Last year we had 27 titles that sold more than a million units. I hope at some point in the future we’ve got double that number. The way you get there is to constantly develop new intellectual properties--or through our copublishing partners create that kind of success in the marketplace or go out and license.

But growth requires us to be on our toes creatively and constantly look for new concepts and constantly try to develop new intellectual properties that we can turn into long-term franchise that we can [iterate] multiple times. And when lightening strikes--for instance, last year Need for Speed Underground was a product that we started to get some exposure to, probably back in February of ’03, and the technology that we were shown just blew us away. We didn’t believe it was really the game they were showing us.

Everybody just got so excited, and we just marshaled the resources and got the whole organization behind that product--actually brought it in a quarter early from when it was supposed to ship, and it turned into the best-selling game at EA last year.

Now we’ve got this significant new Need for Speed Underground franchise. The other people in the creative organization look at that and say, “You know, if I can do that kind of high-quality work, the organization is going to rally around me, and you know, my product is going to be a home run.” Our development guys will tell you that we actually have more new things in the pipeline right now than we’ve ever had in the company’s history. Now, not all of those things are going to finish. A lot of them are in prototype stage or preproduction stage. And out of X number of things, probably [only] 20 percent of those are ever going to see the light of day and become a commercial success. But we understand that’s what drives our growth longer term. We need to keep putting down bets on things that can become significantly launchable products.

GS: Speaking of product EA has gotten behind, and on the subject of original IP or licenses, now that you've shown the movie industry how successful you can be with a Harry Potter license, for example, what's the next Harry Potter or other AAA license going to cost EA? Isn't your own success going to drive the cost to license sky high?

LP: One of the things that we need to think about is moving further up the food chain and securing the video game rights earlier on as opposed to going to a movie studio, for instance, to get those rights. That process, that strategy, is in process.

GS: The organization is asking itself what?

LP: Is there a way to move up the food chain and access an intellectual property before it has been broadly exploited and is very, very expensive? At the same time, we’re never going to pay the highest rates in the industry. We don’t have to, because our licensing partners understand they’re going to get a really high-quality exploitation of their property, and we’re going to sell more units than anybody else because we have this global publishing scope--we’re strong in North America, we’re strong in Europe, we’re strong in Asia, we’re strong in Japan. They’re going to sell more units.

GS: Facts that you can apply to the deal points, I presume...

LP: I can tell you for a fact, Harry Potter as an example, that [deal] came down to Microsoft, Nintendo, and EA. And EA got the license, and we were probably--not probably--we were the lowest bidder of the three in terms of the monetary commitment. Warner Brothers looked at it and said, “We know EA is going to give us some really high-quality titles. These guys are going to exploit this on multiple platforms, not just on the Xbox, not just on the Game Cube, in the Game Boy, but those platforms plus PlayStation 1, PlayStation 2, PC, you name it. And as a result, they’re gong to sell more units. So the guarantees may not be the highest, the royalties rates may not be the highest, but the game is going to be the greatest from Electronic Arts, because multiplatform, publishing strategy, global distribution network, and these guys are the best at building games on a consistent basis. So the Time Warner guys went with what was on paper the least attractive financial offer. The nature and scope of our business wins the day more so than the money side.

GS: If the plan is to move higher up the food chain, what would the impact be? What could it be? Why keep licensing films when you could make them?

LP: We don’t have any particular expertise at film making currently. But it might result in us identifying a literary property, for instance, and then codeveloping that with a movie studio so we both [would] have some sort of intellectual property rights to that property--where we might have video game rights, wireless rights, and the movie studio has the movie rights and the merchandising rights. I can imagine models where we plug in further up the food chain and, as a result, it’s more of a partnership in developing that property as opposed to a licensing relationship. That makes sense to us longer term. And we’re having discussions like that with our partners already.

GS: Discussions initiated by EA?

LP: Not necessarily. We have a highly developed relationship with Warner Bros, for instance. And I don’t know who came up with the idea, but we’re talking about that sort of approach to the properties longer term. And they might get more financially involved on the video games side. [And] we might get more financially involved on the movie side, if it makes sense.

GS: When does EA look beyond movies and music for licensed content? For example, Random House and Simon & Schuster now have manga divisions. Does EA ever look beyond the movie and music industries for licensable content?

LP: We are absolutely willing to consider different genres of product…anything that we believe is going to expand the demographic of this business. If we can expand the age demographic, if we can expand the gender demographic, that’s a good thing for us, and we will absolutely look at those kinds of opportunities.

GS: Globalization was a fairly obvious theme in the EA organization. What markets look most attractive to you, and what are the steps that you intend to take to move into those markets?

LP: Well, we already have a global business. Last fiscal year our international business was 45 or 46 percent of the company total. We’re already well deployed outside of North America, particularly in Europe, and we’ve got a reasonable business in Japan, [though] we’d like it to be larger. Asia is an emerging market. You’re going to see us put a lot of effort and a lot of energy and a lot of resources into developing that business in Asia. We think that four to five years from now, somebody could have a billion dollar business in Asia--and we’d like that to be EA and not someone else.

GS: What will it take to be the company that wins?

LP: I’m not going to lay out the strategy for our competitors to follow, but I will tell you that one of the things that is important is building the capability to develop content locally in those markets. That clearly is a requirement to be successful in Japan, and I think it’ll be a requirement to be successful in markets like Korea and China for instance. It also doesn’t take a genius to figure out that it’s difficult for a Western-based company to enter a market like China on your own. It probably makes sense to find a strategic partner--at least initially, until you establish a business there.

GS: Everybody watches out for EA, Larry. Who do you watch out for?

LP: We’re really focused on what we’re all about, and making sure that our strategy is the appropriate strategy and that we’re executing well against that strategy. Certainly, we pay close attention to the competition--we’re constantly reviewing and assessing what they’re up to. I talked about what we do after E3, where we go through every company and every product that was at the show. We pay attention to what’s going on with the Microsofts, the Sonys, and Nintendos of the world because those are the guys that build the installed base that we create software for. We’ve got the radar on 360, looking at the competition, the hardware companies, what’s going on in the wireless business, what’s going on in telecommunications business...anything that might change the game on us. [That includes] what’s going on in the retail community, what’s going on with consumers. There’s a lot of stuff we worry about.

GS: What genres do you think EA is the weakest in?

LP: Whether you want to call it children’s or kids market, [it's] that under-10-years-old demographic. Obviously, Harry Potter is a very strong franchise against that demographic, but that’s pretty much the extent of our portfolio. If we have a hole, it’s probably that under-10 demographic. It would make sense for us to actively be involved against that demographic.

GS: As consumers' time becomes more crowded, what form of entertainment do you think poses the most competition to the game industry?

LP: Right now, I would say television, but I don’t get too hung up on this. I’ve got two sons who are in the core demographic. [They've] been playing video games their entire life. They do everything. They listen to music, they watch television, they play video games, they go to movies, they go to concerts. And they seem to have plenty of time for all of the above. So if you ask me what’s the most direct competition to playing a video game, I suspect it’s television because you’re playing the game on your TV and the easiest thing to do is to just switch off the game and turn on the television program. It takes more effort to get in the car and go to a movie, or go to a play... I’ve got to answer television.

GS: Have you been exposed to any news just this week that’s making you rethink EA strategy?

LP: Too early. We have to see what unfolds over the next couple of days at the show, and then we have to go back and do our assessment meeting, and I’m not going to answer that question.

GS: When you walk the show floor, where did you go first?

LP: It’s pretty predictable. I go to the hardware company booths first, and then I go to market-share leaders after EA, in rank order. You start out at the Activisions, the THQs, and so on and so forth.

GS: What’s the personal investment, that personal challenge behind your commitment to the EA brand?

LP: This company is about delivering great entertainment experiences to our consumers. And we have to continue to raise that bar and make the entertainment experience more compelling all the time and certainly more entertaining, more compelling than the competition. We’re about quality, we’re about winning, we’re about doing the right thing, we’re about competing. We like to come in first. We don’t like to come in second in anything. And we like to do it the right way--the fair, honest, and ethical way.

GS: Thanks, Larry.

LP: My pleasure.

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