Transcript: Laura Lang, John Riccitiello, Brad Smith by Megan Barnett @FortuneMagazine July 18, 2012, 4:33 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons [cnnmoney-iframe src="http://fora.tv/program_landing_frameview?id=16168&type=clip&autoplay=0" w=614 h=384] STEPHANIE MEHTA: Good afternoon, everyone. That’s a hard act to follow in terms of sheer brain power, but we’re going to try. So, this panel could just as easily be called the innovator’s dilemma panel. The companies represented by the CEOs in front of you are companies that, over time, have been true innovators. They’ve developed best in breed products, but they are also facing technological and social changes that these executives are trying to grapple with, and we’re going to have a great discussion about it this afternoon. And we’ll open the floor to questions pretty early, so please be prepared to jump in. As the panelists are getting settled, I want to go ahead and open with our polling question, because I think it’s an interesting way of setting the tone for this conversation. Music, please. So, the question is: What in your opinion is the number one barrier to business model change at a mature company? Is it: a) technological; b) cultural; or c) financial? And you vote by texting your answer to 42345, and we’re going to post the results shortly. Meanwhile, we’re going to jump right into the conversation. I’m going to start with John Riccitiello in the center, he’s the CEO of Electronic Arts, EA. John, you have been pretty candid about your company’s shortcomings in the area of social gaming, which has obviously become a very popular phenomenon. I don’t want to repeat history, or go back and rehash that, but what are the lessons you’ve learned as a result of acknowledging, yes, we weren’t early in this space, how are you ensuring that EA doesn’t miss the next wave? JOHN RICCITIELLO: Well, first off, I wonder if it’s a wave or a puddle. So, as a starting point, the fastest growing part of the gaming industry is mobile, followed by pure PC digital micro-transactions followed by social. So, social is interesting, it’s part of the mix. Follow here for all #FortuneTech coverage. And sometimes I would argue that jumping too fast on things can get you into a position where you don’t get the return on investment. In our case we focused on social, we focused on mobile, we focused on the digital PC micro-transaction business, and seen very, very substantial growth. We’re proud of our businesses there. We are number two to Zynga on social. We beat them in mobile. I think the biggest lesson, at least in terms of what you’re asking, is this you’ve got to have a clear-eyed vision of where you’re going. And in our world it’s not so much about the intermediary between us and the consumer. And as long as we’re focused on that, and getting the product to them regardless of the channel, I think we see expanding margins, expanding growth, and frankly a happier customer, a better experience, and for a while there investors got tied up in whether it was a Facebook game, or whether it was an iOS game, or whether it was an Android game. And, frankly, for us they’re all growing. So, I think to best answer your question focusing on the consumer and what they’re looking for is probably the best answer to that, and not getting so hung up as to whether it’s a social game, a mobile game, or a PC-based game, because right now it’s the same application across all three for Electronic Arts. So, they’re not really distinct. People want to think of them as distinct, but they’re really all one and the same. STEPHANIE MEHTA: How does your legacy experience help you with that philosophy, because in the traditional gaming worlds, for lack of a better term, the consoled makes are often a channel between you and the consumer. So, I mean, because you are this mature company and because you’ve seen this movie before, do you sort of feel like, yes, we get this? JOHN RICCITIELLO: That’s maybe the best follow-up question I’ve ever heard given the first question you opened with, asking the audience about business model changes, and what the challenges are. So, we come from a business that made packaged goods games. So, we would spend two years writing the code, five gigs of code, put it through the retail channel on a disk. And the minute we shipped it, we were done. There wasn’t another line of code to write, there wasn’t anything else to do. Frankly, that was a massive cultural barrier to what is mobile, social, PC micro-transaction. These are all sustainable business, 24 hours, 365 days a year, new code published every day, every week, new content every day, every week. Monetization every day, every week. And what we’ve actually been doing these last couple of years is taking our core business, and turning that into a service business. So, by way of example, a couple of three years ago, our FIFA business, most of you might know what that is, it’s one of the largest videogames in the world, it used to be a ship it and forget it business. We shipped it in September, we’d sell several hundred millions dollars worth, and by November no one else was playing it. Usage pattern like this. This past September we shipped it, we put that, if you will, the social model behind it, micro-transaction model behind it, we’ve had no fewer than five million players a week since September, no more than about five-and-a-half, no fewer than about five. It’s been a consistent business for seven months transacting every single week. And it’s the difference between perhaps making a canned episode for a TV show and putting on a Broadway play. We perform every single week. And one of the best parts of our investing in mobile and social PC micro-transaction, the service businesses, is we’re way ahead of the game in taking what is our transitional business and transforming that. And to answer your question about the hardness of the three, in this regard it’s cultural. If you’ve got teams that are wound up to build products, and then take six weeks vacation because they’ve killed themselves for two years, that’s a massive cultural transformation. STEPHANIE MEHTA: So, let me follow up on the culture question with Brad, and then I’ll go to you, Laura. You helped inject some cultural change in Intuit a few years ago by acquiring Mint. When does it make sense from either a cultural perspective, or from a technology perspective, to buy it versus to build it organically? BRAD SMITH: It makes sense when you’re intellectually honest with yourself and you ask the question, who is better serving the customer, and what’s the time to market for me to close that gap if someone else is doing it better than me? And that’s the hardest thing if you have an entrepreneurial company with really great people, and I believe our company has a lot of really great people in it, to step back and say in this particular case we missed it. And so what we try to do every quarter is, we have operating reviews, and we have a concept called pick a fight with the new guy. And what I say is, I have a suspicion that I have a lot of insight on your primary competitor. I want to know about three people coming out of dorm rooms, garages, tell me about a competitor I’ve never heard about. Show me how they’re performing, tell me what you like about what they’re doing that we’re going to be gin to adopt immediately. And if they can actually do something better than us, should we consider acquiring them. And when you do that you get the organization understanding that that inspiration doesn’t have to just come from inside, it also comes from listening posts outside. Our favorite line or turn of phrase is, it used to be called plagiarism, now it’s called benchmarking. You can actually go out and learn from someone else, and if they’re doing better than you, bring them into the house and let them do it. And so that’s what we’ve tried to cultivate. And I have to say, you were very kind saying that I injected that in with Mint, but that’s actually a part of the company’s track record from many, many years ago, is let’s be inspired by innovation whether it’s ours or someone else’s and if it makes sense to be together, let’s bring them into the company. STEPHANIE MEHTA: The other thing I discovered in the green room, which I’m proud to say, is that Brad Smith is a loyal People Magazine reader. BRAD SMITH: There you go. Katie and Tom, I’ve got to keep up with the latest. (Laughter and applause.) STEPHANIE MEHTA: So, Laura Lang represents the oldest company on the panel. So, you’re talking about serious cultural change. How do you take brands that are 80, 90 years old, and transform them for the way that readers want to consume media today? LAURA LANG: Well, the first part of it, and I’ll pick up on a theme that was already discussed, is you have to really understand where the consumer is. The first thing you have to do is say, let’s get a shared understanding of exactly what’s going on with the consumer. Where are they? Where are they spending their time? What are they consuming? Twenty percent of all media consumption right now is mobile. That’s something we really need to understand, and it’s growing. And so we have to think about not just how you create great journalism and storytelling for a magazine, but how do we think about doing that across the places where people are. And making sure that the organization understands that we have a fabulous ability to do this, we just have to adapt it to where our consumers are, and put the consumer in the middle. And a great example of that is some work we did to better understand where people were. So, one of the things we learned is, we went out and did quite a bit of research, not just about magazines, but in general how did people consume media throughout their day. We learned some interesting things. People wake up in the morning, and it really doesn’t matter how old you are or what generation, and you go for headlines. You turn on the TV. You get headlines. You get to your smart phone, you get headlines. Wherever it is you consume it. As you travel through your day, your consumption changes. You might be somewhere where you can get to a tablet or a computer. But what happens is, you begin to change how much of a story that you want. And then ultimately when you’re on your own, and usually in the evening, you’re ready to get immersive. And how that plays out. A great example is Tom and Katie. You brought it up, so I think I’ll add to it. BRAD SMITH: There’s more? LAURA LANG: The news broke ‑‑ BRAD SMITH: Time for a scoop. LAURA LANG: The news broke on a Friday afternoon, and it was a People scoop. And we saw an amazing spike instantly to People.com through mobile. It all came in through mobile. It was incredible, immediately, right. Then over the course of the next day or two people found time to look for photos, to get what was happening, and by the time the actual magazine came out there had been a lot of discussion, interest built, and the content that was actually in the magazine expanded on the story that was told, starting with Friday afternoon through mobile. It was a way to understand how do people actually consume and how do we tell stories in different ways. STEPHANIE MEHTA: So, how do you institutionalize that? I mean now you have the knowledge, now you understand how the consumer is using technology to consume media, or technology to do financial transactions, or mobile and social to entertain themselves in a gaming environment. How do you make sure that you’re serving that need? You have the knowledge, now how do you execute on it? Let’s go to Brad and then we’ll ask the others. BRAD SMITH: Yes, you know, this is part of that cultural change management that you alluded to in your question, and we all learn from each other. We had Eric come and talk to us, Eric Schmitt, a couple of years ago, because we saw this transformation happening first in the consumer business, it’s been increasingly in small business, where the computer moved to the palm of our hand. These were not phones, these were actually small computers and people were beginning to do things that we historically thought were desktop and Web-based only. And we said, how do we transform our engineering focus and begin to think about it? And what Eric shared with us and we’ve adopted is it’s interesting how you can change a culture’s focus with the questions you ask. So, when you sit down with an engineering team and say, I’m sure you’ve done really great work on the desktop and I’ll give you that, I want to see what you’ve been working on in the mobile environment. And after a couple of meetings they’ll show up and be ready to talk to you only about mobile and you’ll begin to shift the focus of your energy towards the place that you need to have people focused. The other is rooted in what you see the customers doing. When you take time to observe customers and see how they’re living their lives, we go out and do these follow me homes. We do 10,000 hours of going out and observing customers in their natural environment, and we were surprised that we weren’t seeing as many PCs. We were seeing people do everything on the tablet and the phone. And at first we were puzzled and then we stepped back and said, you know, there’s a fundamental shift here and if we want to design things for the customer we need to do it the way the customer is working now. So, it’s a combination of the questions you ask and the ability for them to go through an experiential exercise where they actually see the world shifting around them. And I think that shifts the energy, the focus, the resources in the right place. STEPHANIE MEHTA: John, do you want to follow up on that? JOHN RICCITIELLO: Look, I frankly think there’s almost nothing tougher than what we’re talking about and we’ve gone through a couple of phases in my company. The first was we recognized what we were doing wasn’t going to work five years from now. So, we needed to fundamentally change the way we build and support products. And the problem is, safety for a middle manager, safety for frontline programmers was doing it the old way. So, we needed to make it safe to do something new, we needed to make it heroic to do something new, even if originally it wasn’t rewarding. We needed to push it, prod it, support it, get out in front of it, and sell it. And what I found in that process, it’s sort of an intriguing one, is at first the disbelief lived inside the company and outside the company people were ignorant of what we were trying to accomplish, no matter how many times ‑‑ we were talking about this earlier, no matter how many times we told them. We finally got to a critical mass where inside the company, from the constant questions, the constant reinforcement, that safety was building tomorrow, not rebuilding yesterday. That was a particularly tough inflection point. And within Electronic Arts right now had essentially a zero-digital business a few years go, $1.2 billion last year, we’ve guided to $1.7 this year, staggering growth. But, those outside the company are still looking at us through the prism of 2004, 2005, and 2006. And that’s still a major drag that we have to unshackle ourselves from and have the courage, the bravery to continue to move forward, because there is almost nothing harder than business model transformation, systems transformation to support product becoming a service. It’s hard. It takes time. It usually takes longer than you want, and every support infrastructure you’ve got, and all the lung power you’ve got to tell the story is a critical part of making that true. STEPHANIE MEHTA: I want to go back to the external communications, but very quickly, John, a quick example of a reward, or some way hat you made change seem heroic. What’s some way that you incented the staff? JOHN RICCITIELLO: Well, like one of the things we have in our company is we have a thing EA Action, where we sort of recognize big events in our company. And they were invariably packaged goods products, and they were units, like how many units we sold. Now we do an awful lot of that around mobile games and social games, and reaching peak subscriber numbers, or reaching peak micro-transaction numbers. You know, in the floor that I work on, and literally in many places around the world, we’ve got monitor walls that are probably as big as this, tracking users minute-to-minute. It’s a fundamentally different way to look at the business and identify winners and losers, heroes or not. And then other areas of the business like, for example, in mobile, one of the things is that we didn’t have the initial success that we wanted to have on iOS, because iOS, as we started to move into that platform, moved pay to download into a micro-transaction model. We were two to three quarters later than we wanted to be, in terms of realizing the rewards, realizing a number one position against the platform. It would have been really tempting to restructure something that was two or three quarters late, take the cost out before we reap the benefit. I actually took ‑‑ we took, my management team took expenses out of some profitable, but older businesses that weren’t going to be sustainable businesses and doubled down there. Now, we’re reaping the benefits of that and people got promoted, they got expanded responsibilities, even though the near-term financial rewards weren’t there. And that external thing you talked about, all of the external reference points are about instant profitability, the exact opposite of what I’m talking about. That’s why it takes a little bit of courage to get through some of this stuff, because the external world wants to see you five years ago the way you were, and the only proof point they’re willing to look for is sort of what happened yesterday. STEPHANIE MEHTA: Let me take a quick break, then Laura, I’m going to come to you. We’re going to take a look at the results of the polling question. We should have the answer about what the most difficult part of cultural change is. And, as you guys were saying, the number one answer was B, cultural with 74 percent of the votes. Laura, let me ask you about something that we talked a little bit about, all of us on the panel have talked about the pace of change and the pacing of transformation, because in your business you have customers, and I just sat through some focus groups with some of them, who do not want to give up that paper product. They love their magazine. They do not want to move to a digital platform. They don’t care about mobile. They don’t want a long-form piece on their mobile device. How do you manage that change when a lot of your existing customers, the very people that you are trying to serve, don’t want to go along for the ride? LAURA LANG: I think that is probably this notion of cadence. How fast is probably the hardest thing to get right, because you have internal people and there’s a cadence for getting the internal teams to change, and then there is how everyone outside sees you. You know, before I joined Time, Inc., I ran a digital agency called Digitas. And it started as a direct mail company, which most people don’t remember and eventually became the world’s largest digital agency. And one of the challenges that we continually had was this issue of cadence, because if we went too fast we would get ahead of where the market was. We would be selling brilliant ideas to clients who weren’t ready for them. But, if we didn’t push then we would get left behind. And so what we had to do was get this cadence of how fast do we push our internal change and at the same time being respectful of people out in the marketplace, who were the clients. And I think that what really became important was understanding at a really emotional level, not just facts, not just that people are moving here, or X percent of time is on mobile, but really getting and understanding kind of emotionally of that moment, where you could have the courage to make the change, because in the end when it really works is you’ve given the organization the courage to take that risk and to move forward, and so that the stakeholders ‑‑ and you know, no one ever gets it 100 percent right, you know. There’s really no way to always guess right on how fast it should go. And today in particular if you go too slow the business model could just go away and if you go too fast then you’re going to lose a lot of what makes the culture happen. So, part of this is getting that cadence right, and I do want to pick up on just one other thought that you mentioned about taking risk. One of the biggest parts of change is making it safe. No one wants to change, no matter what anybody says in a meeting, no matter what anybody says intellectually, wow that’s great, we’d like to go there. When it comes to what do you do every day you don’t want to change. It’s scary. It’s risky. And a lot of times people get shot for it. And so what you have to do is you have to create very visible ways for the culture to say, you know what, I’m going to try that. And I often say to people we have to fail fast. We will know we’re succeeding if we have to ‑‑ if we fail fast, because if we try something and we wait too long to get out of it, that’s a mistake. And if we don’t try it, that’s a mistake. So, let’s get that fail fast mentality, and it would begin to get the organization on the right cadence of change. STEPHANIE MEHTA: Good examples of failing fast from any of the panelists, anything where you’ve tried something and killed it right away. In Laura’s case, if you want to bring up an example from Digitas that would be good, too. BRAD SMITH: Yes, actually we have. We’ve tried to cultivate a culture, and it’s a work in process, where there’s no power point, no persuasion, no politics. It’s experiments, small teams no bigger than two pizzas can feed, put something in front of customers, and we look at the data. If the customer is adopting it we double down. If not we shut it down. We have 1,800 ideas right now that are alive inside the company of about 8,000 people. STEPHANIE MEHTA: Eighteen hundred ideas? BRAD SMITH: Eighteen hundred, small teams, they move in cycles of days and weeks, and then if they don’t work they shut them down. And we celebrate at our annual get together the biggest failures that enabled us to succeed faster, and we hold them up in such a high regard that it’s part of the Scott Cook Innovation Awards. These were the innovations that actually changed customers’ lives. These were the innovations we thought would work that failed, that enabled these teams to go faster, and they get the exact same recognition. STEPHANIE MEHTA: Any examples that you can think of off the top of your head? BRAD SMITH: Quicken Online. STEPHANIE MEHTA: Quicken Online. BRAD SMITH: Gave birth to Mint. Yes, we’ve got quite a few, many more in the small business arena. We’ve tried things. We’ve tried some things in healthcare that didn’t work. Quicken Health Expense Tracker; we shut it down after multiple years. I could go on and on, and on. There’s plenty of them. STEPHANIE MEHTA: Laura, you turned me on to an interesting Pinterest page. LAURA LANG: Yes, for those of you who haven’t seen it, there is a wonderful Google Graveyard Pinterest page, which actually chronicles every single product that has been launched and killed. And I love that page, because I think it says a lot about what the culture enables. And one of the things I did when I was at Digitas is we were constantly getting together for our annual planning process and saying, let’s make an investment in this new capability, or in this new client, or in whatever it was, and yet nobody would ever go back and say, god, that really didn’t work. There was nobody who ever went back and said did we do what we said we would do. So, we actually put in a process, no decks discussion, of a quick review of, wait a minute, it’s three months in, is it working? Do we like it? Do we need something else to make it work, or should we just give up and put the money somewhere else. And that was actually such an important part, because people said, wow, I’m going to get my shot, yet if it doesn’t work I know somewhat else will get their shot. And we made sure we rewarded the folks who took the shot. In fact, often they were given other assignments in recognition of what they had attempted to do. STEPHANIE MEHTA: I want to get to the whole issue of communicating with your investors, especially for the two companies that have public shareholders directly that they deal with in just a minute. But, let’s open it up to questions. There’s a question right here, gentleman in the maroon shirt, if we could get him a mike. And please stand up and identify yourself and fire away. QUESTION: Dave Smith with Media Smith. The magazines obviously need a certain scale to survive, and there’s going to be a point at which some haloed publication that still has a lot of readers that don’t want to move has so much critical mass in other vehicles, whether it be online or mobile, or tablet, or whatever, that you have to face the point of shutting that down because you can’t afford to print it anymore if it’s smaller than a certain size. How do you reach that both from an internal standpoint, and how do you communicate that to the customers who are going to feel disenfranchised? LAURA LANG: The first question that I would ask is what really is the economic model, right? Do we have to live with an economic model of the last ten years, or can we look at a different one? For example, the old economic model was there would have to be scale in print. Going forward, where you have a world where people will pay, where people will pay for content, where scale might be defined differently because of new technology, the answer might actually be very different than it would have been five years ago. We might be able to do a lot of niche printing if there was the right economic model to support it. And in the world of digital scale is defined very differently. And so my hypothesis, and I have not been there long enough to know all of those answers, the first question I asked, though, is do we need to take, do we need to assume the same economic model that we had before? STEPHANIE MEHTA: Question back here. QUESTION: Hunt Wopp (ph) from YouTube. John, you talked a little bit about starving some of the existing business units in order to double down on iOS, and that’s a really interesting statement given that resources are scarce and sometimes looking forward isn’t just about taking risks and failing fast, it’s about shifting resources of the timing of which can also be tricky. So, I’m wondering if you can talk a little bit more about that mind-set at EA, and how you go about as a management team deciding when the curve of an existing business is cresting or it’s not necessarily something you would invest in if you were starting the company today, but you don’t necessarily want to kill it, you’ve got a cash flow coming from it? JOHN RICCITIELLO: So, that gets to the core of one of the greatest challenges that we’ve had to face in our business. About five years ago, the current management team came into place, and we spent a lot of time trying to understand our business, analyze what was working or not working. And we concluded that there were sort of two gigantic problems. One is the traditional packaged goods model was one where almost everything was profitable. The title number one in the industry was profitable, title 150 in the industry was profitable. And our expectation was all the profit was going to be concentrated in the top 30. And we were always a company that had lots of entries in the top 10, the next 10, the next 10, the next 10. We made more content, in fact we had 73 packaged goods products in a given year in those days. Except if only the top 30 were going to be profitable, 73 is kind of a challenge. So, one issue was, our core business was structured in the wrong way. It was designed for quantity, not a narrow cast at the top of the charts where the profits lived. The second issue is that everything, at least in my perception, was going to go digital. And that was something that wasn’t a cultural insight of the organization that had always worked a different way. It almost sounded like smoke, or hocus pocus. And so what we needed to try to do was go from a large number of packaged goods titles to a small number of services that then extended from a packaged good to mobile to social to PC micro-transaction. And just by the numbers, we’ve gone from 73 to 15. Last quarter we shipped zero packaged good products, none, which I don’t think that’s ever happened in the history of our company. The challenge we’ve had is, while we’ve been pretty clear minded around what we wanted to achieve, and you’ve been asking a question about investors, is I would argue that investors have been a lot like that horn. They’ve been beeping on and on and on and on about ‑‑ and it’s noisy, and it’s complicated, and it’s distracting, and it’s confusing, and it’s all of those same things to the people that work at our company. And so by way of example, when you’re dealing with the fact that our profits were up, and our stock is down, that’s not a normal consequence, right? That’s one of those things where you wrestle with it, and it’s tough. And I think at least at this point in time, what we’ve been trying to do is be absolutely clear about where we’re going, absolutely supportive of tomorrow not yesterday, and communicate like crazy to investors even when they’re not with us in the short-term. Lots of companies have gone through periods where investors haven’t been with them in the short-term, whether it’s Amazon, or Apple, or eBay or others, and we take stock and heart in what others have done before us, and now what we need to do. But it is not a free lunch, it is not easy, and we have our fair share of distracters and detractors, which I will admit add to the challenge. STEPHANIE MEHTA: Time for one last question, Mr. Serwer. QUESTION: Hi. I want to ask, I think, about something I think all of you face, which is choosing platforms. And it’s not only OSes, but it’s social media, and I would love to know a little bit about how you’re navigating those waters? Has it gotten to the point where you’ve kind of institutionalized a process? Like, okay, here comes another platform, this is what we do, we look at it, and decide, boom, boom, boom. So, how do you guys decide, because it seems like that could be a pretty important decision going forward for your businesses? BRAD SMITH: Yeah, I think at the end of the day, Andy, what we have to do is put our wood behind fewer arrows. And it’s a very difficult premise, because everyone has a sexy value proposition, and this is going to be the next big thing. But you have to ultimately look at who has the audience today, who has the consumer, who has the small business adopting? Are they delighted, and is trajectory still moving in the right direction? And then we have to be willing to say no. Strategy is not only what you’re going to do, it’s what you’re not going to do. And that’s a very tough conversation, especially when you get passionate, and sometimes philosophically inspired employees who say, I just disagree, you’re missing the train. But if we can keep ourselves disciplined, and say it’s all about where the consumers are running to, and let’s make sure we’re building for that particular opportunity, then I think we’re able to stay on top of things. But it is very, very difficult. I will say it comes with a lot of constructive debate. You have to separate passion from principle. And you have to be willing to just say the consumer decides, and that’s where we’re going. And so that’s how we make our decisions. LAURA LANG: Yeah, I would build on that and say it is critical to focus and take bets, because the organization, certainly in my experience, does not have the resources to chase everything. And a good strategy helps the whole organization be able to say no, not just one person at the top. And that’s the challenge is to be that clear and that focused to say, this is our bet, this is what we’re going to win, and we’ll keep looking at it. We may change direction later, but a thousand points of light in a resource-constrained world is hard. STEPHANIE MEHTA: I think we’re going to have to call it a day at that. I just want to take a moment to thank our panelists, Brad Smith of Intuit INTU , and People Magazine fan; John Riccitiello of Electronic Arts, and Laura Lang of Time, Incorporated TWX . Thanks again.