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told the 3DO hardware manufacturers that they would have to absorb losses of $200 million over the next fifteen months in order to sell the 3DO machine at competitive prices. When they balked at the prospect, Hawkins turned to the software developers and unilaterally renegotiated the software royalty. Henceforth, 3DO would require software developers to pay a $3 surcharge on every disk sold—above and beyond the $3 royalty they were already paying. A “Market Development Fund” would be started with this money. Some of the funds would be used to advertise and promote the 3DO machine, while the remainder would be given to hardware manufacturers as an inducement to more-aggressive pricing. Hawkins observed: “If I don’t have software companies, that’s one problem. But that’s not as big a problem as if I didn’t have hardware manufacturers.”29

By mid–1995 the price of the 3DO machine was down to $400 (with $150 worth of software thrown in). Cumulative sales passed half a million. Progress, surely, but as of early 1996, 3DO’s future remains uncertain. It no longer has the 32-bit game to itself. Sega is shipping its 32-bit Saturn machine at $400. Sony has launched its 32-bit PlayStation at $300. Looking to leapfrog them all is Nintendo, whose 64-bit Ultra machine is due out in April 1996 at a price under $250.

The flaw in Hawkins’s strategy was relying too much on other players who didn’t share 3DO’s incentives. That led to problems on both the hardware and the software fronts. 3DO’s hardware was never cheap enough. In 1986 Nintendo introduced its 8-bit video game machine at a startling $100, an amount widely believed to be below cost. In 1992 Nintendo and Sega were selling 16-bit video game machines for $100. Why weren’t 3DO’s machines selling for $100 in 1995? Nintendo and Sega were able to sell the hardware for $100 because they could look forward to making money through future software sales. Matsushita and the other hardware manufacturers had no way to make the money back later.30 That’s why they weren’t willing to go down to $100.

The mistake was separating ownership of the software income stream from hardware manufacturing. Hawkins started correcting the problem by handing out equity for each machine sold, but that was late in the game. His second tack, the Market Development Fund, smacks a bit of robbing Peter to pay Paul—only, Peter hasn’t been paid yet.

Likewise, there wasn’t enough 3DO software, especially early on. Games had to be developed in anticipation of machines that hadn’t yet been sold. Others didn’t have as much incentive as 3DO to take that gamble. Hawkins started correcting the software problem by developing games in-house, but, again, that was late in the game.

Paying Yourself a Complement The lesson of the 3DO story is: don’t rely on others. To develop two complementary markets hand in hand, it’s usually better to do it yourself. That’s why Nintendo and Sega developed both hardware and software themselves. That’s why Intel created ProShare. And that’s why 3DO made its life doubly difficult when it tried to leave development of hardware and software to others.

Sometimes people object to the idea of entering a complements business themselves. They say: “We won’t be able to make money there.” That misses the point. You can’t look at two complementary businesses separately and insist that they each make some “target” rate of return. If the accounting rules say you’re falling short in the complements market, that’s okay. Just think of it as your right hand paying your left hand to play the complements game. The only question that really matters is whether you will make more money overall.

People sometimes object to playing the complements game on another account. They say: “It’s not our business. We should stick to our knitting.” But it’s no good clicking your knitting needles if there’s no demand for sweaters. You’d better get out of your rocking chair and prod the market.

Bringing in Complementors

1. Form a buying coalition on behalf of your customers.

2. Pay complementors to play.

3.