Co-Opetition - Adam M. Brandenburger [51]
3DO’s strategy was to make money by licensing software houses to produce games and collecting a $3-only royalty fee—hence the company name. To bring in companies to manufacture the hardware, 3DO licensed its hardware technology for free.
3DO was founded by Trip Hawkins. As a Harvard undergraduate, he designed his own major in strategy and game theory. In 1982 Hawkins, then twenty-eight and a veteran of Apple Computer, had his first big success founding the software house Electronic Arts. The company became known for its computer and video game titles. In 1991 Hawkins gave up the reins at Electronic Arts so that he could devote himself to his new company, 3DO.
Hawkins saw a huge potential market in interactive home entertainment. He observed that Americans spent $5 billion a year going to the movies compared with $14 billion on home video rentals and sales. That arithmetic suggested that the $7 billion a year people spent playing arcade video games should translate to a $20-billion market for home video games. In fact, the home video game market was only $3 billion. Hawkins’s plan was to correct the imbalance and capture the missing $17 billion.27
In May 1993, 3DO went public at $15 a share, and by October the stock price was $48—putting the company’s value at nearly $1 billion. Hawkins was off to a great start. Investors were obviously enthusiastic, but would consumers share their enthusiasm?
In October 1993 the first 3DO machine came to market. Manufactured by Matsushita and sold under the Panasonic brand for $700, the machine came with Crash ’N Burn, a high-speed 3-D racing game. Few other 3DO games were available, and those that were seemed expensive, around $75 a title. By January 1994 Matsushita had sold only thirty thousand machines. These disappointing sales caused 3DO’s stock price to retreat to the low $20s.
The economics of CD-ROM-based software made it hard to get the ball rolling. Development costs for CD-ROMs ran up to $2 million per title—due to the sophisticated graphics and audio—compared with half a million for 16-bit game cartridges. Manufacturing costs for CD-ROMs were considerably lower, roughly $2-$4 per disk, compared with nearly $10 for game cartridges. The problem with this economics is that it requires a mass market. A base of thirty thousand machines didn’t exactly constitute a mass market, and so software houses weren’t willing to invest in writing games for the 3DO machine.
Hawkins realized that he had to crack the chicken-and-egg problem. First, hardware. It was too expensive. Recognizing that it wasn’t enough to invite people to play in the hardware game, Hawkins decided to pay them to play. In March 3DO offered hardware makers two shares of 3DO stock for each machine sold at a low suggested retail price. Matsushita responded by lowering the price of the Multiplayer to $500, and Toshiba, GoldStar, and Samsung declared their intention to manufacture 3DO machines.
Next, software. There simply weren’t enough games. Hawkins’s old company, Electronic Arts, had made a big commitment, with twenty-five titles under development. But Hawkins decided that 3DO needed to get in on the software game itself. As product manager Amy Guggenheim explained:
Looking back, it was not our original intention to do our own title development. We wanted to be a licensing company. But after we launched the system, it became clear that the one company that had 3DO at stake was 3DO. It quickly made sense for us to do software development. By putting some leading-edge titles out in the market place, we benefit everyone. We benefit customers, we benefit software licensees, we benefit hardware licensees. For now, we really have to control our own destiny.28
Then back to hardware. It was still too expensive. In October 1994 Hawkins