How To Make Video Games And Not Get Zapped

Lawrence F. Probst knows it's tough not to be greedy. After all, the highly lucrative home-video-game market is a highly lucrative but volatile $2 billion business. A smash hit can make a company. But a headlong rush into faddish video games can also send a company reeling if a new game fails. As CEO of Electronic Arts Inc., Probst prefers a measured approach--and that has saved his software maker plenty.

Last year, Electronic Arts founder and Chairman William M. "Trip" Hawkins III, a former marketing director at Apple, turned to 40-year-old Probst, a seven-year Electronic Arts veteran, to lead the company. His charge: to diversify beyond its stable $265 million computer-game-software business into the alluring but perilous world of home video.

Last spring, Electronic Arts ordered several hundred thousand copies of its first program for the Nintendo Entertainment System, Skate or Die II, a sequel to its popular PC-based skateboard adventure. When inventory arrived last fall, Probst already knew there was a software glut. He ordered an immediate price cut, from $50 to $35. Probst also scaled back production of a second program, thus avoiding any discounting. The result: Electronic Arts broke even on its Nintendo Co. products, while competitors took a bath. A similar leap from computer games to video sent rival Software Toolworks Inc.'s earnings into a tailspin.

Meanwhile, the rest of Electronic Arts sparkled. PC hits such as PGA Tour Golf and John Madden Football helped turbocharge sales and earnings: Both were up 40%, to $101.8 million and $9.1 million, respectively, for the fiscal year ended Mar. 31. Hawkins also scored on video games for the new Genesis system from Sega Enterprises Ltd., which contributed 25% of Electronic Arts' earnings in their first year of sales.

SIZABLE FEAST. Electronic Arts' unique structure should keep it hopping. Hawkins set up the company like a 1930s-style movie studio, with about 100 independent game designers under contract and in-house producers to manage them. Unlike other video-game makers, Hawkins doesn't rely on megahits for profits, and no one game accounts for more than 6% of revenues. "We wouldn't mind having a 'Batman.' We just don't want to run the company on it," he says.

Hawkins figures that by the end of the century, most homes will have a machine that might be a combination of computer, video-game player, and compact-disk player, creating an $8 billion software market. His goal is to feast on a sizable portion of that market. All Larry Probst has to do is make sure the company doesn't make a hog of itself.

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