John Pleasants has stayed behind the scenes at Electronic Arts as its No. 2 executive. He is president of the global publishing organization and chief operating officer, running everything except EA’s game development studios themselves. Recruited by EA chief executive John Riccitiello, Pleasants joined in 2008 with the mandate to make EA embrace new business models and services as the Internet rips apart the old ways of selling games. We caught up with him at the E3 trade show last week.
VentureBeat: What is your job at EA?
John Pleasants: I’m in charge of the publishing organization, which is mostly sales and marketing in the different countries of the world. I oversee central technology. That ranges from animation to online groups, online technology infrastructure, e-commerce infrastructure, corporate development, game testing and central services groups, and EA interactive. That includes our Pogo online games business, our mobile business and our social networking business. We have a few studios in Asia.
JP: Yeah, he tells me what to do and I do it. (Laughs). To some extent, I do his old role. I don’t manage the game studios, which have been broken up into clusters of studios called labels. I joined in March of 2008.
VB: And you came from outside the industry?
JP: Yes. I worked in online and Internet companies for many years. John and I knew each other. He invited me to come interview for this opportunity. I was attracted because it had scale. I had grown Ticketmaster to 4,000 people. It had scale. I very much wanted to get back into online and media. Nothing was more ripe for the convergence of the Internet and media than games. EA was a transformation play, going from a software company to a live services company. That’s cool, challenging and intellectually stimulating. And games are just fun. I felt comfortable coming into a big company with an established way of doing business and shifting it to a new business. Ticketmaster was the example of that for me. I joined and it was barely online. By the time I left, about 80 percent of its revenue came from online. Everything had changed with that. The people changed. The revenue sources, the business model changed. The relationship with clients changed. That’s the same thing that’s happening to EA.
VB: How do you look at this whole shift from software to Internet services? Everyone from Microsoft to Autodesk is doing this.
JP: Ticketmaster was a software and infrastructure company that moved to a direct-to-consumer model. For anyone in software, the move is going to be like moving from Blockbuster to Netflix, record label to iTunes, Siebel to Salesforce.com. They all carry elements that are directly parallel to us. If you believe all games will eventually be services — as I do — then the idea of game teams that make a game, ship it, and then do something else goes away. They will now ship and day one begins when the customer gives feedback to the live service. The way you distribute will be different. The way you charge will be different. There will be more permutations in pricing. Merchandising will be much more important. Co-marketing will be much more important. You have to have persistent identification and entitlements for a user, no matter where they are or in what game they’re playing.
JP: Those are the macro trends. You need cross-platform identities, live services, flexible business models. It’s like dynamic pricing in airlines. You and I could sit next to each other but pay different prices depending on how we got there. That’s down the road. There’s a lot to do to get to that vision. But we see elements of this everywhere in our business now. We have the FIFA Soccer game online in Asia. It is doing very well. We sell nine million units of FIFA a year as console games. There are probably 250 million people who play interactive soccer games around the world. We have 5 million of them in Korea. We’d like to touch 30 million with a different product. I think that will be incremental and will stimulate the core business. I don’t sleep in the shadow of fear about cannibalization — we’re a $45 billion industry going to a $55 billion industry over the next two years; that’s a great place to be — it’s just that the revenue will come from different places.
VB: Timing is going to be very important in this shift.
JP: You have to move with the moment. One can always move faster. But we are doing a lot of smart things.
VB: Do you believe the online models catching on in Asia will happen here in the U.S.?
JP: A lot of the trends in Asia are going to grow here. But you won’t wake up tomorrow and find that the U.S. and Europe look like the Asian game industry. The games are different. There are cultural differences in what works. A lot of the motivation in Asia was thwarting piracy. Korea’s Nexon started a lot of it. The online model grew quickly as a necessity. Here, we do have piracy, but we still have a very robust console business with $60 average prices on new games. That has been flattening in terms of growth. It’s low-single-digit growth now in the core software business. But there’s a lot of innovation that will keep the console business healthy for a lot of years to come. Lastly, I’d say that Asia is not just a monolithic place. Korea is a very different place from China when it comes to games.
VB: You mentioned cannibalization. That isn’t something to take lightly. We’ve noticed an astounding number of free games coming online in the past couple of years. Companies have not been able to monetize that free stuff in a way that compensates for lost sales. How worried should traditional game companies be?
JP: I’d be worried if the traditional game companies were not moving quickly to embrace these new areas. One place where free games are more rampant than anywhere else is the iPhone. We’re in a privileged position now where we have five of the top 20 paid games on the iPhone. I don’t think there’s another publisher that has five of the top 100 paid games. We are in the No. 1 position there. That is a tens of millions of dollars business for us, not a hundreds of millions of dollars business. You could say that won’t even move the needle for us on our overall revenues.
Is it cannibalizing our business? At some level, people only have so many hours in the day. If they play free or cheap games on the iPhone, that may be cannibalistic. But there was no iPhone a couple of years ago. It’s a new game platform. We launched our Tiger Woods golf game on the iPhone. I can’t think of a better way for us to sell Tiger on the Wii platform than to have you play Tiger on the iPhone while at the office and then continue playing it when you’re at home. The iPhone version may be cheap. But it may also be stimulating [demand for console games]. So I’m going to conclude that this creates a growth opportunity for us.
We will grow to a $55 billion business. But the mix of how we get those dollars is going to change. The mix today is different from what it was two years ago. In the U.S., I’ll say that there is a $200 million to $500 million social gaming business today. On Facebook, there are 80 or 90 million people playing social games. How many of those people will say they are gamers? I’d bet that more than half of them say they aren’t. They don’t realize it, but they’re new gamers. That’s maybe 50 million people who have come into gaming through a single online destination. Now I have 50 million more people to market to. There’s a displacement going on, but I look at it as an opportunity.
VB: How do you reconcile the tough times you’ve had with what appears to be a good strategy. You focus on high-quality games. No one will argue with that. You’re experimenting with new business models. That’s great. EA is smart about cutting costs. But EA is losing a large amount of money.
JP: If you look at cash flow, we made money from that perspective last year. It was a small amount of money from a cash flow perspective, but it was positive. This year we plan on making quite a bit of money.
JP: There’s no question that in a world where games are a service, the cost to deploy any one game should be coming down over time. We have been investing in infrastructure for that. You can make games faster and then test them and revise them. We had big teams in high-cost locations. We had $2.3 billion in costs and were on track to spend $2.6 billion last year. We took $500 million out of that run rate through internal cuts. None of that was pleasant. But we did take the cost structure down significantly. At the end of the day, you have to make hits. If we don’t grow our revenue and we have $2.1 billion in costs, that’s not good enough. If we grow revenue by a billion, then it’s OK to have $2.1 billion in costs. You look at the bang for the buck you get from your investment. Our operating margins this year are double digit, but they’re low double digit. That’s unacceptable to us as a management team. We want to double the operating margin over time. To do that, you either grow revenue or cut costs. We want to grow revenue or shift revenue to higher-margin products. We are making fewer titles to focus on quality. If you make fewer titles, you have to make more revenue per title. It’s a hit driven business. You are only as good as your hits. EA used to have lots of hits. If you looked at the top 30, we used to have 10 games on it. Last year, we had four. If you do the math on it, your cost structure is not right.
JP: I don’t want to sound like I’m countering my boss. But I think quality is an overused word for a dynamic equation. Trends are changing. You have to have quality, following the right trends. You have to make quality stuff, but it can’t be in a category that is disappearing or becoming a niche. John has been vocal about saying that our marketing didn’t work well. We didn’t manufacture hits. To make a hit, you have to both make the right thing through high product quality and also hit the market in the right way.
VB: I don’t want to sound too simplistic. But there was a shift toward Nintendo’s Wii, which had simpler, intuitive games. The market moved away from the super-realistic 3-D games on the PlayStation 3 and the Xbox 360. Is that why EA had a tough time?
JP: We are the No. 2 publisher on the Wii, behind Nintendo. I don’t feel too bad about that. But the problem is that our market share is in the mid-teens. We used to be well above 20 percent share on the top platform. So we are not as strong as we could be. It’s not just about cartoon graphics versus realism. It also has to do with the user interface, the gesture-control technology. EA had great success with Sony on the PS 2. But when the Wii came out, a big proportion of our investment was in the other platforms.
VB: Activision Blizzard also has a big cost structure. But they have World of Warcraft, with millions of paying subscribers. Is that the critical difference between them and EA, between making money and not?
JP: Activision Blizzard is propelled by three things. There is no other game like WoW in the world. They are also propelled by Guitar Hero and music. And they have Call of Duty, one of the best shooting games in the world, which came from a former EA team. That’s a big backbone for them.
VB: Is it evident to you what your backbone will be a few years from now?
JP: You have to start with EA Sports. There are lots of great titles there. FIFA, Madden, Tiger and NCAA. We’re the best in the world at that and it feels good. Sports isn’t growing like it was. We’re doing lots of new interesting things to grow, like launching EA Sports Active on the Wii. That was a great move for getting us out of our shell. We have a few other tricks up our sleeve in the coming years. We also have the Play label, headed by The Sims. It doesn’t scare me to say that The Sims could be twice as big as it is today. I’m not making a prediction or being literal. The Sims games are just a great way to express creativity.
Our Hasbro relationship has potential and it is just getting started. Littlest Pet Shop Online has the potential to rival Disney’s Club Penguin. On the Games label, we have more than half of our original intellectual property. We have Need for Speed. It sells 4 or 5 million units. It has to get back it’s mojo. It used to be a 9 or 10 million unit seller. We have the right teams in place. We alternate them. That’s the way to get it back. We have Mass Effect, Dragon Age, Medal of Honor, Battlefield. We have to get three of those titles to run at the 5 to 10 million unit sales rate. If we could do that, and get the Sims and EA Sports to grow, we wouldn’t be having these conversations about our cost structure. We would be busting $5 billion in revenues and hitting 20 percent operating margin. Everyone would be cheering because we’re making hits. (Note: he’s not making the prediction that will happen).
VB: Some companies are diving into making user interfaces on their own. You’ve had Rock Band with the band instruments. Activision is launching the Tony Hawk skateboard with its game. Ubisoft is launching a camera with a fitness game. Does EA need to do that?
JP: We did that with our $60 EA Sports Active game, where we gave arm bands and velcro straps. We do think about this. We did our Nerf gun game last year with the plastic guns. Directionally, I feel like we are a software and services company. I don’t feel like we will turn a $60 game into a $99 game because we added a lot of plastic things into the box. That’s not our driving force.