At EA, we had issues in sales and marketing. We had to figure out how to generate more revenue. That’s another phase you go through as a small company: learning to be really creative with revenue generation. You can come up with literally dozens of ideas for making money.
You’ve been able to create alliances with many large companies. Is being a dealmaker a talent of yours?
I don’t think of myself as a dealmaker. I consider that more a means to an end.
You’ve given equity stakes to Matsushita and AT&T in your new venture, 3DO. Has this hurt you in terms of preserving autonomy?
No. Company control doesn’t, in the end, have that much to do with ownership. Certainly, if you are a subsidiary and one company owns a
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controlling interest, then they’ll feel like they own you and will cast a pretty long shadow. But if nobody has that kind of position, then the question is whether or not these corporate partners can gang up to disagree with management. This situation applies to any CEO at any company. If you’re off your rocker they can get rid of you. That’s the main thing the board is supposed to do. If you’re doing a good job and you’re managing an effective process, the board will support you.
It’s not really an issue.
So in 3DO’s case it’s not that big an issue?
That’s right. Ironically, with the 3DO board, even though most of the board members have a corporate agenda, they’ve helped more in developing a company strategy than the EA board did.
The EA board was just a bunch of independent board members.
It was more difficult to get them to support what the company needed to do. Perhaps it was harder for that particular group of people to understand the business and accept what needed to be done. A classic example: It took me a while to convince the EA board that we needed to move to the Sega platform. Again, conventional wisdom would say, “That sounds very risky, they’re going to sue you.” Where would EA be today if we hadn’t moved to Sega? It would be a pretty small, insignificant company. To be honest, it wasn’t that pleasant for me having to convince a lot of people what needed to be done.
If you feel very strongly about a strategy, you must figure out a way to convince people to support it. It’s one of the things you don’t realize until you’ve done it for a while. If you’re any good as a CEO, part of your job is to be smarter and figure things out before everybody else. And if you can’t, what the hell good are you? Why the hell should you be the CEO if you can’t do that? This means that if I figure out a problem and a strategy for dealing with the problem, I’ve probably figured it out before other people have.
So you had to convince your EA board of directors that a layoff was necessary?
If you go to the board and tell them that you want a layoff, they’ll be very supportive. Conventional wisdom says that management usually spends money and hires people. It implies that things must be serious if the CEO comes to the board saying that he’s screwed up, should cut spending, and reduce headcount. All the board will say is,
“You’re not severing any major organs, are you? As long as it’s only an
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arm or a leg or a hand.” Pretty procedural things will happen at that point.
That brings up the question of why you were the best CEO for EA.
EA is an unusual combination because obviously, there’s a big creative component to the business. I’m creative and I understand how to manage creative people and the creative process. I also got into the business because I really liked the product. Having a personal feel for the product helps a lot. Third, I’m a pretty good businessperson. Any business requires it, but when you look at the computer industry through the 1980’s, you’ll see that many companies were successes.
Many times the success was driven by market growth. For example, when I was at Apple, we all thought we were the cause of the success, but we weren’t. We were just lucky to be at the right place at the right time. The whole industry just took off. That’s the only time in my life I’ve had the opportunity to be in that kind of situation. It’s only later on, when you realize that things don’t always work that way, that you feel lucky. Many companies experience that kind of a growth and suddenly articles appear about what geniuses the managers are. Then the first thing goes wrong, the wheels come off, and they are suddenly losing money. Many times such market growth will hide real mediocrity in the management or in the strategy.
In games, it was really a tough business throughout the 1980’s.
There was no slack for anybody. The fatality rate was very high. In fact, out of the 135 companies at the start, only ten of them were still around five or six years later. There was incredible turnover of companies.
Tell us about the headaches you face as the manager of an established company. Is it difficult working with large corporate partners like AT&T?
Yes. AT&T has turned out to be our worst nightmare as a corporate partner. People usually think, “Big companies—solid, reliable.” Well, they change direction more often and are completely ruthless about dropping things. In fact, EA and Matsushita were the real key investors in 3DO in the beginning. We assumed that by giving them equity, we would cement them as partners, but equity didn’t really do it. The reason it didn’t is that most companies are really driven by their operating P&L statement, so partners like EA really concentrate on quarterly revenues, profits, and license terms.
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What about your VCs?
EA is a classically funded startup—we had three major venture firms who were involved and contributed well. My experience with venture capital money is that I only work with absolutely first-rate venture guys and only want first-rate thinkers if they are going to be on the board at all. Nonetheless, I didn’t let them take over the company when they wanted to. We had a lot of problems in 1987. We had to deal with product transition issues and too much expansion. So we had a layoff, shut down some businesses, got refocused, and developed new growth strategies. The board and the venture guys, by Spring of 1988, were getting really, really nervous.
The funny thing was that EA was already half way through the solution at the time they were panicking. We had already done half of what we needed to fix things, but the results weren’t going to show for six months. That was the only time when people on the board thought that they should cut my head off and try somebody else.
Some people in that situation probably would have allowed it to happen but I didn’t think that was the right thing for the company, so I hung in there tougher than others would have. At that time the VCs would liked to have changed the board in order be in a position where they could pull the trigger on me. I made sure they couldn’t do that. Some of it was politics but some of it was ensuring I did the right thing and maintained the relationship the best way I could. The downside to venture guys is that they sometimes think they know more than they do about what’s best for your company. They’re accustomed to a certain level of performance in companies and in company management. Many times when they want to take over and make executive changes, it’s probably the right thing to do. But they don’t want to admit it when they make mistakes. If they fire the CEO
and the guy they bring in screws things up, VCs say: The other guy was a disaster anyway. Well, maybe he wouldn’t have been. Who knows? I’m not here to defend anybody else but I know that the VCs were definitely wrong to think that getting rid of me was the solution, and based on what happened since, they would certainly agree with that assessment now.
When I started 3DO, I just didn’t want to go through that ordeal again. I wanted [venture capital firm] Kleiner Perkins in the deal for two reasons. First, [venture capitalist] Vinod Khosla is probably harder working, by a factor of ten, than any other venture capitalist.
There is so much more value having him involved because he’s a talented operating thinker, a strategic thinker, a
good negotiator, and
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he’ll spend time helping you. Other guys just won’t do that. A lot of venture guys are just bankers: show up for board meetings and that’s it. Vinod had a good feeling for what we were trying to do; he had a strong personal interest in it. Second, I didn’t want 3DO to be in a situation where everybody on the board had some vested corporate interest and therefore didn’t necessarily care if the company made money. Venture capitalists, on the other hand, only make money if the company makes it. It’s a nice influence to have. Although the corporate influences have never really been a problem with 3DO I think that’s mainly because of the high level of class of the individuals involved.
What’s the key to success in your business?
It’s leverage. It’s pure and simple.
What you must realize about capitalists is that capitalism is no longer like Economics 101. It’s no longer about building a better product. It’s no longer about being more efficient and offering a better product than your competition. Business is now a big Monopoly game. When you talk to venture capital guys about what they’re trying to do, they’re not trying to make a successful company or product anymore. They’re trying to look for situations where they can have commanding market share and really drive it using, frankly, techniques that are supposed to be illegal, but the government doesn’t seem to care about anymore. Everyone looks at it that way. In a business such as this one, companies are saying, “How do we achieve critical mass and control things that give me the leverage to squeeze more profit out of that critical mass?” Don’t misunderstand me: I’m not willfully disobeying the law. That’s not how I look at it. That’s the way all these VCs look at it. They want Park Place and Boardwalk with a bunch of hotels on them.
If that is the case, what advice would you give to entrepreneurs who lack the access to huge sums of capital?
There are a couple of different ways to approach this issue. The first thing to note is that someone who’s a real entrepreneur doesn’t need anybody to tell them to start a company. They’ll just do it. I once asked one of my venture capitalists, Don Valentine, if he was politically active in trying to get special tax treatment for capital gains and he said, “No, it wouldn’t make any difference in my business.” I said,
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“Gee, why is that?” He said, “First of all, my limited partners’ money is municipal, tax-free, fun money. Second, the difference in capital gains profit wouldn’t affect the behavior of entrepreneurs at all.” And he’s absolutely right. Absolutely right.
So, a real entrepreneur is just going to do it. Nobody can talk them out of it. A real entrepreneur needs to get a good lawyer and become objective about having a good plan and a good team—ensuring the team has the skills to succeed. On the other hand, you can’t tell most entrepreneurs anything. They’re pretty opinionated about how to go about things. They must learn from their own mistakes, and the ones who do learn from their mistakes and adapt will be the successful ones.
There is a second approach for people who have a desire to start their own company, but don’t have a specific product idea or vision. I think that’s a lot more difficult. Perhaps it’s possible for someone with the right training and the right business discipline. I remember a venture-funded company that was started around the same time as EA—Spinnaker. It was started by two Harvard Business School grads who had been working for Boston Consulting Group. Their approach was to look for a business to start by doing a study to determine which industry to start a company in. Right from the beginning I thought, forget it, they’re history. They never figured out how to make any money. The company is still around in some form but they’re long gone. The company just never really got anywhere. They were able to raise enough money from people who believed in that approach to starting a business.
On a personal note, what lessons have you learned about balancing your personal life with the demands of starting a company?
I’ve learned that it’s very tough to manage a family life and a business. Many people try and don’t succeed. I was married once before to a woman partially because she wanted to start her own company.
The situation provided some intellectual attraction but it didn’t necessarily make for a stable, long-term relationship. We never saw each other.
Today it’s tough to balance, but when things are busy my wife and I make the time by scheduling dates in advance and sticking to them. My advice is to either find someone who’s willing to support you and your career or to go it alone.
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ED MCCRACKEN
Silicon Graphics
MEDITATIVE MANAGEMENT
Ed McCracken is the chairman and CEO of Silicon
Graphics, Inc. (SGI), a company that designs and manufactures visual computing products. Though best known for providing the technology that created stunning visual scenes in movies such as Jurassic Park and Forrest Gump, the majority of SGI’s products are sold to companies in nonentertainment industries such as the automotive, aerospace, pharmaceutical, and petroleum industries.
SGI was founded in 1982 by Jim Clark, a Stanford electrical engineering professor, along with six other graduate students. Clark designed a microprocessor which allowed computers to display three-dimensional graphics very rapidly and enabled scientists to create visual models of complex natural phenomena. Although the market at the time was small, the company grew rapidly and revolutionized automobile design, motion picture special effects, and molecular DNA modeling.
Ed McCracken joined the company as president & CEO in 1984 after a 16-year stint at HP. Clark left in 1994 to start Netscape, the internet software company known for its popular product, Navigator.
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McCracken grew up on an Iowa farm. His father, a corn farmer by profession, attended William Penn College, but ran out of money and returned home. McCracken remembers that money was so scarce his family lived on what could be considered a subsistence farm—the family couldn’t buy anything it didn’t raise. McCracken saved for college by raising 4-H prize cattle from the age of ten.
His formal schooling began in a one-room rural school-house. A high school teacher named Illiff Leu encouraged McCracken’s interest in electronics, which he studied at Iowa State University (he donated several million dollars to the university in 1992). He received his Stanford M.B.A. in 1968 and went on to become group general manager in HP’s computer systems group until his departure for SGI in 1984.
Soft-spoken, calm, and low-key, McCracken does not fit the stereotype of an intensely extroverted and wrathful CEO; in the tumultuous environment of the computer industry, McCracken relies on meditation to improve his intuitive sense and to spur his creativity.
This creativity has certainly helped SGI’s revenues. In ten years at the helm, McCracken saw revenues go from $5.3 million to more than $1.5 billion. Today Silicon Graphics employs more than 5,000 workers worldwide. Despite its stock performance, the company has been sued by shareholders several times—lawsuits which McCracken characterizes as
“extortion and blackmail” and has testified before Congress to encourage protective legislation.
“Serious fun,” as the company defines it, is considered a vital part of SGI’s atmosphere. Ping-pong tables and soft drink vending machines are found throughout the company headquarters while conference rooms are christened after movies in which SGI technology was used. The company sponsors bungee-jumping events and lip-sync competitions, and has even held wakes for divisions that have been merged into others.
As a corollary to the philosophy of working closely with the customer, McCracken feels that long-term product planning is dangerous. “We don’t do long-term planning,” McCracken is known to say. “In fact, we try to stomp it ou
t.” McCracken feels that this allows the company to incorporate new features
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into its products, and quickly adapt to and accept the rapidly changing and unpredictable environment in the industry.
In the rapidly changing visual computing industry, the future remains unclear. Many believe that interactive programming—either video-on-demand or the downloading of television shows whenever desired—will constitute a significant portion of the multimedia industry. The question remains, however, whether the device consumers will use to watch this cyber-programming will be a PC or TV. SGI has placed its bets on interactive TV trials in Orlando, Florida—
one of the first in the nation.
Heavily involved in civic activities, McCracken was named co-chair of the National Information Infrastructure Advisory (NIIA) council in 1993 by President Clinton. The NIIA advises the government on the information superhighway and addresses controversial issues such as electronic commerce and privacy rights—significant public policy topics given the highly diverse information now available on the internet, ranging from bomb-construction to hate groups.
If, however, the information superhighway is to remain accessible to all Americans in the future, McCracken feels that proper education of America’s children regarding the information superhighway is necessary. “Students receive little or no direction about the proper conduct in today’s computing culture,” he concludes. In response, the NIIA launched NetDay in 1996, an initiative to wire hundreds of elementary and high schools to the internet.
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