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AKATKIN

POSTED BY akatkin ON 09/22/2011

EA CEO John Riccitiello Speaks On Disruption, Turnaround And Job Creation

Earlier today EA’s CEO John Riccitiello spoke at the U.S. Chamber of Commerce in Washington, D.C. as part of the Chamber’s CEO Leadership Series. Riccitiello spoke broadly about the tech sector and the way the industry handles disruptive cycles of rapid creative destruction that can alter the playing field overnight, as well as how that EA has transformed itself in the face of a massive expansion of video game platforms and audiences. He also offered several recommendations for job creation in the U.S. and the steps America needs to take in order to kick start growth once again.

As Riccitiello explained to the audience, in his view there is a large and growing gap between the economic performance of the tech sector and that of the broader U.S. economy, and there are real-world lessons from the high-tech economy that could help provide a model for America’s economic revitalization. “In tech, the most impressive and profitable operations are constantly being destroyed . . . and replaced with even better businesses,” Riccitiello said. Meanwhile, in the rest of the economy “cycles move slower . . .  and the disruption creates longer periods of pain across large regions and sectors.”

This process of creative destruction and rebirth is something Riccitiello is intensely familiar with. As he stated in his speech today, “in the past three years, my company, Electronic Arts, survived a near death experience. We were very nearly ruined by one of the biggest tech driven transformations in history,” namely the explosion of mobile computing and ubiquitous broadband. “For EA, survival and success meant transformation . . . We put the company back on track by embracing the very thing that threatened us.”

Speaking to an audience of policy makers, public and private sector leaders, Riccitiello put forth three broad concepts to kick start the job growth that, from his perspective, could pave the way for the economic turnaround that the U.S. economy needs. His suggestions focused on how we can hire the best talent from America’s colleges and universities, the importance of teach STEM (Science, Technology, Engineering and Math) at home and in schools, and the opportunity to use U.S. Tax Policy to attract jobs.

America, Riccitiello argues, “must embrace disruption and force a turnaround . . . there are no half-way measures if we want to fix this economy.”

The full text of John Riccitiello’s speech is included below. A video of the speech is available on the website of the U.S. Chamber of Commerce.

 

Disruption, Turnaround, Boom

Is Tech The Model For America’s Economic Revitalization?

 Thank you Chairman Brady.  And thanks to Tom Donahue and the Chamber for inviting me to Washington today.

I’m a videogame guiy and this is a very different venue for me.  I can’t remember the last time I spoke to so many people who tuck in their shirts.   

Most of my audiences want to know where to put the sunflowers in Plants Versus Zombies… 

…or whether to blitz or play “Cover-2” defense on Tony Romo in Madden NFL

I want to start by acknowledging a sincere debt of gratitude.  This year, the Supreme Court ruled on a case involving censorship of videogames.  I’m happy to say the Court ruled in our favor, recognizing that the same 1st Amendment rights as authors, artists and film makers also apply to the video game industry.

The battle through the appeals process was long and expensive, but we were backed by an industry coalition that included MPAA, our retailer partners, and of course our own Entertainment Software Association – led by Mike Gallagher.  And a crucial part of that win was an amicus brief filed in support of our case by the US Chamber of Commerce.

This case was a BIG milestone.  Aside from the legal protections, it marked another step toward the recognition that games are mainstream entertainment for millions of Americans. It was a team effort and together, I think we moved the needle on both the law and the culture.  Thank you. 

Today I want to speak to three  topics:

First, I want to talk about the tech sector and how the often terrifying cycle of having whole industries created, destroyed and recreated is not only healthy, it’s fundamental for survival.

Second, I want to discuss how EA dealt with this dynamic – the construction, destruction and reconstruction cycle. 

The broader story on tech and the specific story on EA… It’s a tale of how companies prosper by aggressively attacking economic threats…..a story which reflects an opportunity for a larger turnaround in the American economy.

Finally, I want to offer a personal perspective on what it takes to create good, high-paying jobs in America – jobs that will make us competitive in a global economy.

I see an unfortunate gap between the economic performance of key parts of the tech sector, and the rest of our economy.  I see two economies on such radically different trajectories that it’s hard to believe they co-exist in the same country.

In tech -- Silicon Valley, North Carolina, Austin and Boston – we are witnessing the most dynamic period of creative destruction and economic construction in history.   And that construction is creating new and very high paying jobs.

Economic disruption is a constant everywhere….but today in tech, economic cycles turn, not over multiple years, but in months….large companies and fortunes are built, erased, and built again with frightening speed.

In tech, the most impressive and profitable operations are constantly being destroyed…and replaced with even better businesses.  And these businesses are hiring a rapid pace.  Job openings exceed the number of qualified workers and wages are skyrocketing.  And companies with only a few years in operation are assigned multi-billion dollar valuations.

Some say that tech is in another bubble.  They might be right.  If so, you can expect another bubble right behind it because tech is resilient.  Bubbles pop but the ideas and the investment dollars and demand for more engineers, quantitative marketers and business managers with a global perspective never stops.

Over to the rest of the American economy.  Cycles move slower….federal and state governments intervene…. and the disruption creates longer periods of pain across large regions and sectors.  Unemployment is now above nine percent and more Americans than ever before are on government assistance. 

In the entertainment world I work in -- we’ve seen the Internet and other new technologies disrupt some of the largest and most entrenched institutions in our country – newspapers, music labels, and television networks.   In each instance, an old world model was disrupted.  And, in most cases, new and better business sprang up to take the place of the old.  I know it does not feel great to be part of the old business; but the new is most often bigger, better and offers higher paying jobs. 

Apple reshaped the music industry……Netflix, Hulu and YouTube are offering movies and shows we used to watch on TV…….the Internet is increasingly delivering news to the marketplace while  newspapers are still sorting it out with aggregators like Huffington and Drudge.

When I say creative destruction, what I mean is seeing the economic value and high paying jobs at newspapers replaced by economic value and high paying jobs at Google.  From my perspective, this is a good thing.  We can all identify the winners….and the losers.

If that sounds smug, believe me I’m not.  In the past three years, my company, Electronic Arts, survived a near death experience.  We were very nearly ruined by one of the biggest tech driven transformations in history….one that we’re still working to lead.

Let me explain.

When you take a long view of economic history, a handful of technologies stand out for having catapulted us forward…and for touching the lives of almost everyone on earth.  The printing press…..the internal combustion engine…..the affordable transmission of electricity… the airplane and the CPU.

I believe that we’re experiencing another one of those events right now – an explosion of cheap, powerful, broadband connected computers, consolidated into a global network of mobile phones, affordable personal computers and tablets. 

Behind that wave is a stunning confluence of technology -- powerful CPUs and ubiquitous broadband are mobilizing and democratizing access to the Internet – dramatically scaling the number of people with immediate access.  These technologies are transforming entire industries from retailing to tele-com, finance and entertainment – and, in particular, videogames.

Electronic Arts was founded in the 80s and for almost thirty years, we measured our potential audience by the number of people who owned consoles.  Every four to five years, our industry moved forward with the introduction of a new console system.  I am sure you recall, Nintendo then Sega, then Nintendo again, then Sony.

By 2000, the total universe of gamers was about 200 million people worldwide.  Our business model was stable and our audience was growing nicely with each new console upgrade.

All of that changed over the past five years with the  advent of ubiquitous broadband, smartphones, tablets and social networks.

The size of our audience – as well as our tidy demographic focus on adolescent boys – exploded.  Our universe went from people who could afford an expensive console….to everyone who could afford a smart phone…..by some estimates – 1.5 billion people. 

Here’s a bar chart that tracks the growth of EA’s audience – this isn’t total players, just the ones who have registered our games.  As I said, a nice step change from the simple days of focusing only on the smaller console game market.

You might think a 500 percent increase in audience size is a good thing – but it hit us like a tsunami.  Disruption moves with shocking speed.  It’s taken down big players like AOL and Netscape and humbled many industry sectors from print newspapers to local retail banking.  In 2008 and 2009, everyone in my world seemed to agree EA was going to be another casualty of technology disruption.

They say there are no second acts in the Valley.  But that’s not true.  Steve Jobs radically transformed Apple from a computer company to an innovation powerhouse.  Further north, Jeff Bezos transformed Amazon – a brand new company -- from an online bookseller, to a digital Mall of the Americas.

For EA, survival and success meant transformation -- uprooting the fundamental culture and the business model the company was built on.

We began with the realization that we needed to change the culture – focus on product quality and innovation.  We cut the number of major titles we produce each year by two-thirds, while increasing the number of platforms we create content for by 300%.  We created brand new properties and revitalized established franchises – evolving our games from solitary, play-alone experiences to rich online communities of friends and fresh content.

Here’s an example – SSX, the snowboarding franchise we originally launched in 2000 is back with a whole new look and feel.  SSX is built on an engine – or program – that uses data imported from NASA satellites.  We use that data to build 3D snowboarding tracks mapped onto every major mountain range from the Alps to the Andes, the Himalayas to the Rockies.

Not exactly a hallmark of private sector partnership with government – but it’s probably the most fun use of NASA’s satellite data I can think of.  Take a look: 

 Another creative destruction transforming the game industry has fundamentally altered the relationship with consumers.  The old “ship-it-and-forget-it” store model has given way to a 365-day online relationship with the players. 

Today, the game launch is just the first event in a series content downloads and services which can go on for years. 

There are patches and maps -- new furniture for your Sim.  New weapons for your soldier.    New monsters for you to battle.

Uniforms, stadiums and updated player rosters for our sports games.  If you’re following the Redskins on Madden NFL and Kedric Golston is injured or traded, we’ll update the roster that same day. 

Here are some charts showing the top games on iOS, Facebook and other mobile services.  We experimented with new platforms and pricing that radically changed the size and demographics of our audience.  Instead of limiting ourselves to $59 games sold to 10 million young men; we needed to add $6 games sold to 100 million men, women, boys and girls. 

Lower prices is a scary proposition, but let me show you how it scales:

How many people in this room purchased a $59 copy of this week’s top selling game, Gears of War 3?.....

OK, now how many of you downloaded Angry Birds on the phone or iPad?

That’s a good illustration of how scale can radically change a business model.  Here is another:

Last month we launched The Sims Social on Facebook.  It’s a 2-D game that looks a like the original Sims we launched in 2000 – but allows players infinitely more choices and social interactions.  Another big difference – it’s free. 

Free with an option to level up with new features -- micro-transactions that are denominated in pennies but consumers can purchase them in packages up to $100.

Here’s a look at The Sims Social :


 

In just 30 days after the launch, more than 30 million people have registered to play The Sims Social.

Those Micro-Transactions?….They add up to Macro-millions

The Sims Social now hosts  11 million players every day….more than there are readers of The New York Times, The Washington Post, The Wall Street Journal, The Baltimore Sun, USA Today COMBINED.

Let me put it another way:  if our audience for The Sims Social all moved to one state…..they’d have 15 Congressional Districts.

Outselling newspapers and influencing Congress isn’t the way we measure success. Today EA is one of a small number of companies worldwide that generates more than $1 billion annually in digital goods and services sold direct to the consumer on the Internet. 

We put the company back on track by embracing the very thing that threatened us…..we ran straight toward the thing that was threatening our comfortable market share…..social networks, smart phones and tablets.

That’s the ethos of the American tech sector.  We embrace disruption because with disruption….comes the opportunity to be bigger and better.

I didn’t come here to suggest that every struggling company should make social network games….or that everyone who has lost their job should find a new one on the Internet. 

I studied economics at Cal and I know that the President and Congress are facing an extraordinarily complicated set of problems.

But in that process, I’d urge everyone – in both the public and private sectors -- to treat our economic challenges as a turnaround. 

America must embrace disruption and force a turnaround.

Our political leaders must avoid playing at the margins, they must create meaningful change.

Embrace change and resist the instinct to retrench into old systems. 

Study the lessons of Apple, Amazon and EA – cut costs, embrace innovation and invest in the products and services the world will use tomorrow.

This is a turnaround – there are no half-way measures if we want to fix this economy.

I want to finish this talk with some perspective on job creation.  I am not a policy expert so I’ll stick to what I know – a few broad concepts that could pave the way for more jobs and a stronger economy.

I will start with immigration.

EA has game development studios in ten countries.  Here in the States, our creative centers are Orlando, Austin, Salt Lake, Los Angeles, San Francisco and Seattle. 

Cost is a big consideration in where we locate but increasingly, the pinch point is technical talent.  At EA, we employ nearly 6000 people who are directly involved in creating our games  – 3,508 are engineers.  Yes – 3,508 engineers.

It’s not enough.  We need a lot more.

Trust me when I tell you, we offer high wages and great benefits.  But we still have trouble recruiting the technical people we need to make games in the United States.

Vivek Wadhwa -- an academic and Washington Post columnist -- estimates that 60 percent of Engineering Ph.D.s and 40 percent of the Masters graduates educated in this country – leave this country to work somewhere else – in many cases, China and India. 

I don’t hear much debate…. Policy makers want these people to stay in the US, pay taxes, and build businesses that hire more Americans.  As a CEO, I want to hire them to stay here and make games.

I love the simplicity of Congressman Jeff Flake’s STAPLE Act.   When a foreign student earns a graduate degree in engineering from an American university, we should staple a green card to the back of that diploma. 

I’m told that both Democrats and Republicans support this idea – but that it’s being held as a bargaining chip over other provisions in the immigration debate.

Come on……Pass this law so we can hire these people in the USA rather than overseas

My next suggestion for generating jobs, is closely related to the first.  But it’s not a call to Congress – it’s a plea to American parents.  We need to educate our children for the jobs of tomorrow’s economy – prioritize STEM – Science, Technology, Engineering and Math.

Here’s a couple of data points:

  • The unemployment rate in California is 12.4 percent.  For college graduates over the age of 25, the rate is about 4 percent.  I’m going to guess that the unemployment rate on qualified engineers in California is significantly lower.
  • According to the U.S. Bureau of Labor Statistics the market for computer software engineers will grow by 21 percent by the year 2018.

That’s the data – allow me to put it in context.  One commitment from just one company:  I project that between now and the end of this decade – 2020 – Electronic Arts will hire an additional 5,000 engineers.

Many of them are not even in high school yet.

Many of them are living in countries outside the US…. but will get their education in the USA

For every engineer we hire – two more support jobs are created.

I believe the world is rapidly dividing into people who understand numbers, and people who don’t.  Federal and State governments need to prioritize STEM education in our schools.  Parents need to make sure that kids take those classes and learn those skills.

Parents should get involved in their kid’s education.  When your child asks if they should study music, art, literature, tell them yes, they should take all those classes………….after they finish their math homework.

As the federal government and all 50 states struggle with tax and revenue issues, there’s a lot of focus on what corporations do and don’t pay on their taxes.

Last week, there was a story in the New York Times detailing how videogame companies made perfectly legal use of the tax code to pay less than the statutory rate. 

The story was odd but I believe the thesis was that companies shouldn’t take advantage of tax incentives designed to promote jobs….and that companies that do business overseas, are dodging their obligations at home.

I’m not going to rebut every line of the story, but here’s an important point:

Companies move to locations where they find agreeable tax treatment.

That’s not going to change.  And, I believe America can better use its tax policies to attract many more jobs.

In North American cities like Austin, Texas and Orlando, Florida offer tax treatment that attract high-paying jobs in videogame production.  Up in Canada, Montreal and Vancouver offer similar advantages.

In each instance, the game studios they have attracted serve as incubators for other high-paying jobs and economic activity. 

I don’t believe America has to provide dollar-for-dollar subsidies with job markets like Romania, India and China.  .  But companies are rational actors and tax and regulatory issues weigh heavy in our decision process – it’s impractical to think patriotism is going to counter that. 

So let’s resist the demagoguery about off-shoring jobs and paying taxes in foreign countries.  Having American companies win overseas is fundamentally good for America.

Let’s recognize that our tax policy is probably the government’s most potent tool to attract and create jobs in USA.

So it all boils down to three simple proposals.  Three smart things to win the global competition for jobs:

First, allow American business to hire the best talent from America’s colleges and universities – give them a green card to work here in the U.S.;

Second, teach our kids quantitative skills / STEM so we can compete with the worlds best.

Third, recognize that tax policy impacts jobs in a meaning way that can promote US jobs in a very positive way… we can and will win jobs in America.

I hope I didn’t come off as a typical CEO coming to Washington to give orders.   I have enormous amount of respect for people who work in policy – both elected and career.  Your work is hard and we owe you a debt of gratitude that goes beyond your salary.

I have an enormous optimism for the future of this country.

We need to embrace change.  It’ll be scary.  There will be risks.  This takes real leadership.  Working together, we can do this.  Thanks very much for listening