Reference no: EM131742196

Established as Amazin’ Software in 1982 by an ex-Apple marketing executive named Trip Hawkins, Electronic Arts (EA) was a pioneer in the home computer game industry. From the outset, EA published games created by outside developers—a strategy that offered higher profit margins and forced the new company to stay in close contact with its market. By 1984, having built the largest sales force in the industry, EA had generated revenue of $18 million. Crediting its developers as “software artists,” EA regularly gave game creators photo credits on packaging and advertising spreads and, what’s more important, developed a generous profit-sharing policy that helped it to attract some of the industry’s best development talent.

By 1986, the company had become the country’s largest supplier of entertainment software. It went public in 1989, and net revenue took off in the early 1990s, climbing from $113 million in 1991 to $298 million in 1993. In the next 13 years, the company continued to grow by developing two key strategies:

Acquiring independent game makers (at the rate of 1.2 studios per year between 1995 and 2006)

Rolling out products in series, such as John Madden Football, Harry Potter, and Need for Speed

Activision’s path to success in the industry wasn’t quite as smooth as EA’s. Activision was founded in 1979 as a haven for game developers unhappy with prevailing industry policy. At the time, systems providers like Atari hired developers to create games only for their own systems; in-house developers were paid straight salaries and denied credit for individual contributions, and there was no channel at all for would-be independents. Positioning itself as the industry’s first third-party developer, Activision began promoting creators as well as games. The company went public in 1983 and successfully rode the crest of a booming market until the mid-1980s. Between 1986 and 1990, however, Activision’s growth strategies—acquisitions and commitment to a broader product line—fizzled, and it had become, as Forbes magazine put it, “a company with a sorry balance sheet but a storied history.”

Enter Robert Kotick, a serial entrepreneur with no particular passion for video games, who bought one-fourth of the firm in December 1990 and became CEO two months later. Kotick looked immediately to Electronic Arts for a survey of best practices in the industry. What he discovered was a company whose culture was disrupted by internal conflict—namely, between managers motivated by productivity and profit and developers driven by independence and imagination. It seems that EA’s strategy for acquiring and managing a burgeoning portfolio of studios had slipped into a counterproductive pattern: Identify an extremely popular game, buy the developer, delegate the original creative team to churn out sequels until either the team burned out or the franchise fizzled, and then close down or absorb what was left.

On the other hand, EA still sold a lot of video games, and to Kotick, the basic tension in EA culture wasn’t entirely surprising: Clearly the business of making and marketing video games succeeded when the creative side of the enterprise was supported by financing and distribution muscle, but it was equally true that a steady stream of successful games came from the company’s creative people. The key to getting Activision back in the game, Kotick decided, was managing this complex of essential resources better than his competition did.

So the next year Kotick moved the company to Los Angeles and began to recruit the people who could furnish the resources that he needed most—creative expertise and a connection with the passion that its customers brought to the video-game industry. Activision, he promised prospective developers, would not manage its human resources the way that EA did: EA, he argued, “has commoditized development. We won’t absorb you into a big Death Star culture.”

Between 1997 and 2003, Kotick proceeded to buy no fewer than nine studios, but his concept of a video-game studio system was quite different from that of EA, which was determined to make production more efficient by centralizing groups of designers and programmers into regional offices. Kotick allows his studios to keep their own names, often lets them stay where they are, and further encourages autonomy by providing seed money for Activision alumni who want to launch out on their own. Each studio draws up its own financial statements and draws on its own bonus pool, and the paychecks of studio heads reflect companywide profits and losses.

The strategy paid off big time. For calendar year 2007, the company, now known as Activision Blizzard, estimated compiled revenues of $3.8 billion—just enough to squeeze past EA’s $3.7 billion and sneak into the top spot as the bestselling video game publisher in the world not affiliated with a maker of game consoles (such as Nintendo and Microsoft). Revenues for calendar year 2012 were $4.6 billion, up more than 22 percent over 2009, making Activision Blizzard the number one video game publisher in North America and Europe. Today, its market capitalization of $14.5 billion is twice that of EA.

Kotick attributes the firm’s success to a “focus on a select number of proven franchises and genres where we have proven development expertise…. We look for ways to broaden the footprints of our franchises, and where appropriate, we develop innovative business models like subscription-based online gaming.”

Please answer the following questions.

1. How might different competitive strategies help to explain why Electronic Arts lost its leadership in the video game market to Activision Blizzard?

2. How would you use the adaptation model to advise Activision Blizzard on the best way to maintain its leadership in the video game market?

3. If you ran a small video game start up, what would be your strategy for competing with EA and Activision Blizzard?