How EA’s John Riccitiello sees the past few years of struggle

Like many seasoned executives, Electronic Arts chief executive John Riccitiello believes that learning from failure is essential to success. He said so in a recent commencement speech at the Haas business school at the University of California at Berkeley, where he graduated in 1981.

Riccitiello’s speech revealed a few tidbits about how he has dealt with the past few years of struggle at EA. It also shows why he has stayed the course on a major effort to turn around EA’s business and adapt to a new world of games, even though others have taken pot shots at his strategy.

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“I’ve had first-hand experience with failure, and I have had the opportunity to learn and recover from it,” Riccitiello said.

EA has had to deal with mass layoffs, a decline in the core game business, a shift toward high-quality games, the crash of traditional licensed games, and the rise of mobile and social network games. Dealing with that change and facing criticism along the way hasn’t been easy, Riccitiello said.

In the early 2000s, EA was by far the most successful company in the video game business. EA ruled on the market-leading PlayStation 2 platform and had a huge market capitalization and was on every “best of the best list.” By 2008, the story was much different. With the transition to the Xbox 360, the PlayStation 3, and the Wii, EA’s product quality suffered, its development costs skyrocketed, and EA had stopped growing.

EA cut 1,500 employees and paid as much as $400 million to acquire social gaming firm Playfish. On top of that, the video game industry was about to get hit by the internet, which had undermined the traditional business of music, movies and newspapers.

“We were facing a world going through unbelievable change with the rise of smartphones, social networks, and more recently the iPad — each of which has turned out to be a platform where gaming is the No. 1 application.”

Riccitiello said that the Haas concept of “students always” (where you’re always learning) shows you how to deal with failure and set yourself up for a bigger win. Your failures will play out very publicly for all to see.

“Everyone fails,” he said. “Everyone falls down. Everyone loses a game or gets a bad grade.” When that happens, fail well, Riccitiello said.

He pointed to the fact that Harry S. Truman went bankrupt with his clothing store at age 38. Twenty-three years later, he was sworn in as president of the United States. He also pointed to Steve Jobs’ humiliating exit from Apple and his triumphant return in 1997 after which Jobs turned the company into the most valuable tech company on earth. He noted how, in the face of skepticism, the Apple team held on to their faith “when faith was all they had.” Not many companies recover like Apple, Riccitiello said.

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He noted how John Chambers ran Wang Laboratories in the 1980s and the computer company went out of business after it stopped innovating. He left in 1990 and the company was later sold. “For many executives, that would have been the end of the line,” Riccitiello said. “Time to negotiate a severance. Write a book blaming someone else. Retire to a life of golf.” Instead, Chambers took the lesson to heart and succeeded with his next company, Cisco Systems, which now has 70,000 people.

Four years ago, EA found itself on the wrong side of change. “Our profits were in rapid decline before they went entirely negative,” he said. Riccitiello said he told employees that the company had to go through a radical change or accept a “shrinking share of a shrinking pie and eventually die.” EA had to adapt to the digital gaming world, which included everything from smartphones to downloadable content on the consoles. EA also had to dramatically improve game quality and push beyond retail games into online distribution. And, for the first time, EA had to dramatically cut headcount.

“We knew it would be hard but we had no idea how hard,” he said. “We had to do these three hard things when the press and the financial analysts told us we were crazy — that the cutting was great, but the investment in digital was just not a good idea. It proved very hard to hear the negative drumbeat while tackling very hard challenges at work.”

Riccitiello said, “I lost a few friends in the process: smart creative people who just couldn’t stomach the transition.” Many left the company to head to other game companies (such as Zynga) for a quicker profit and payout. He was surprised and heartened at how many stayed purely on faith. Riccitiello said EA could have scaled back on its ambitious plan to satisfy analysts or the press.

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“I wish I could tell you that it has all paid off. That, like Truman, Jobs and Chambers, we have been fully vindicated. Not yet. Yes, we’ve had a few wins but there is much more to do,” he said.

EA’s game quality is up, its costs are down and its profits are up. EA’s digital games business has grown to more than $800 million.

“I would argue we failed well,” he said. “We are students of our own failure. We used our failure to shape and impel us to a better strategy. One that we believe will ultimately succeed in ways that our previous strategy, even if perfectly executed, could never have done. … Trust me. Sooner or later, you’re going to get knocked on your ass. Will you fold? Or will you fail well?”

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