--:-- Ryan Knudsen: Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen.
--:-- Lauren Thomas: It's Friday, October 3rd.
--:-- Ryan Knudsen: Today, we're talking about Electronic Arts, the gaming company behind blockbuster hits like Madden. They're the ones who say, "It's in the game."
--:-- Lauren Thomas: EA is the gaming company behind blockbuster hits like Madden. They're the ones who say, "It's in the game."
--:-- Ryan Knudsen: But EA's built iconic digital worlds, set records, and made billions. And in the process, let's just say it's had a complicated relationship with gamers.
--:-- Lauren Thomas: EA's built iconic digital worlds, set records, and made billions. And in the process, let's just say it's had a complicated relationship with gamers.
--:-- Ryan Knudsen: Some fans harbor complicated feelings about EA, but investors love it. And one group of investors in particular, Jared Kushner, President Trump's son-in-law, Silver Lake, a big tech private equity firm, and Saudi Arabia's sovereign wealth fund.
--:-- Lauren Thomas: That's right. And those investors just decided to shell out a ton of money to buy EA. Well, it was the biggest leveraged buyout of all time.
--:-- Ryan Knudsen: Believe it or not, it was a $55 billion take private of Electronic Arts. The biggest leveraged buyout of all time.
--:-- Lauren Thomas: And the Kingdom of Saudi Arabia is putting up the biggest check.
--:-- Ryan Knudsen: This record-setting buyout is happening at a time when the video game sector is under pressure. Studios, including EA, are coming off industry-wide layoffs.
--:-- Lauren Thomas: All of which has left me with a big question. You could boil it down to, well, why is this deal happening in the first place, and why them?
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--:-- Ryan Knudsen: Today, EA is one of the biggest publishers of video games. But when it got started in the 1980s, it was just a scrappy team of developers, led by Trip Hawkins, an early Apple executive.
--:-- Lauren Thomas: And he saw an opportunity to create video games, but really through this more artistic lens, even, the developers and the people that were creating the video games thinking of them as artists.
--:-- Ryan Knudsen: And that's actually how the name Electronic Arts came to be.
--:-- Lauren Thomas: And the company really started out making computer games. And then you got to a period of time and it was all about the consoles.
--:-- Ryan Knudsen: Throughout the 90s and early 2000s EA pumped out hit after hit.
--:-- Lauren Thomas: It was mainly known for its sports franchises like Madden and FIFA, which is now called FC.
--:-- Ryan Knudsen: But it also made classics like one of my favorite games in middle school, Command & Conquer Red Alert.
--:-- Lauren Thomas: Acknowledged. Affirmative. Affirmative.
--:-- Ryan Knudsen: But over time, EA's reputation started to sour. Partly because of its record buying up beloved studios and later shutting them down.
--:-- Lauren Thomas: And partly because of how, like a lot of gaming companies, it started to charge players within the games themselves.
--:-- Ryan Knudsen: EA declined to comment on the record.
--:-- Lauren Thomas: In the past, the company has emphasized that in-game purchases are optional.
--:-- Ryan Knudsen: Many customers are still frustrated. It's almost like the game is an entry fee to a theme park, and then every ride is ticketed.
--:-- Lauren Thomas: Greed and microtransactions. Predatory. Minimal innovation while maximizing monetization.
--:-- Ryan Knudsen: EA are kind of seen as the spearhead of this, and it's kind of central to their business model now.
--:-- Lauren Thomas: One common advancement in in-game monetization was EA's use of loot boxes, digital treasure chests you can buy with real dollars to unlock a mystery prize.
--:-- Ryan Knudsen: YouTubers would unbox their loot hauls for fans.
--:-- Lauren Thomas: Welcome to a $100 loot crate opening in Star Wars Battlefront II.
--:-- Ryan Knudsen: Annie up $30, and you might score a random part for your race car, or a weapon upgrade, or a new character.
--:-- Lauren Thomas: Oh, an assault marksman. I do like the assault class. That's pretty good for me.
--:-- Ryan Knudsen: Frustration over this practice boiled over in 2017, when EA released Star Wars Battlefront II.
--:-- Lauren Thomas: The game cost about 60 bucks. But to play as one of the most popular characters, Darth Vader?
--:-- Ryan Knudsen: Your destiny lies with me. Players faced a choice. Either spend roughly 40 hours completing missions, or pay EA extra money to unlock him right away.
--:-- Lauren Thomas: The backlash was loud. On Reddit, one player wrote, quote, "Disgusting. This age of microtransactions has gone way too far. Leave it to EA, though, to stretch the boundaries."
--:-- Ryan Knudsen: Electronic Arts, the company, went on and responded from like a corporate Reddit account and said, basically, this is a way to make gamers feel good about their accomplishments and have a sense of pride.
--:-- Lauren Thomas: And people just lost it when they saw that. EA's reply drew enormous backlash on Reddit, more than 650,000 votes in total.
--:-- Ryan Knudsen: The Guinness Book of World Records later called it the most downvoted Reddit comment of all time.
--:-- Lauren Thomas: For players like William Worrell, who lives in the UK, it started to feel less like play and more like a cash grab.
--:-- Ryan Knudsen: A lot of other gamers felt the same way.
--:-- Lauren Thomas: So twice in a row, it is, I believe, a publicly voted poll in 2012 and 2013. They did win the worst company in America.
--:-- Ryan Knudsen: I believe that the trophy that you get for that is in the shape of a small sort of emoji dog turd.
--:-- Lauren Thomas: The poll was run by Consumerist, a watchdog site that called out corporate misbehavior.
--:-- Ryan Knudsen: Readers cited buggy launches, microtransactions, and how EA had closed some of the smaller studios it acquired.
--:-- Lauren Thomas: Since then, under new leadership, EA has tried to turn itself around.
--:-- Ryan Knudsen: I think it's important to go back to COVID times. And during the pandemic, that was an era in which the gaming industry really exploded.
--:-- Lauren Thomas: But then obviously coming out of that, there's been a bit of a downfall. Demand has dropped off.
--:-- Ryan Knudsen: EA has made layoffs. And there's also just been this glut of video games.
--:-- Lauren Thomas: In January, after the company reported its soccer and Dragon Age games had weaker-than-expected sales, the company's stock fell 17%, the biggest drop in nearly two decades.
--:-- Ryan Knudsen: Even so, EA is still a juggernaut. It's one of the biggest video game companies in the world, and it has some of the richest intellectual property.
--:-- Lauren Thomas: It has longtime licenses for the NHL, NBA, Star Wars, Marvel, and its own internal IP.
--:-- Ryan Knudsen: And gamers, despite their grievances, continue to buy and play its games.
--:-- Lauren Thomas: The company's value has multiplied roughly seven times since that worst company ever award in 2013.
--:-- Ryan Knudsen: Throughout all these ups and downs, there's been one investor who long had his eye on the company. A man named Egon Durbin.
--:-- Lauren Thomas: So you got this private equity firm Silver Lake. It's run by Egon Durbin.
--:-- Ryan Knudsen: And come to find out, he has had his sights set on Electronic Arts for quite some time.
--:-- Lauren Thomas: And long thought of it as his white whale, kind of a dream deal.
--:-- Ryan Knudsen: The problem was that for years, EA was too expensive for Durbin's Silver Lake to acquire on its own.
--:-- Lauren Thomas: Until Durbin met up with Jared Kushner, who finally helped put the white whale within reach.
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--:-- Lauren Thomas: Egon Durbin, the co-CEO of Silver Lake, had long wanted to make a deal for EA.
--:-- Ryan Knudsen: He'd become friends with EA's CEO. The two men have gone on surfing and golf trips together.
--:-- Lauren Thomas: But Durbin and Silver Lake didn't have the cash to buy EA alone.
--:-- Ryan Knudsen: Not until he met Jared Kushner and proposed an idea.
--:-- Lauren Thomas: So in comes Jared Kushner, Trump's son-in-law.
--:-- Ryan Knudsen: He has this firm, Affinity Partners, which is an investment firm that he basically created after he left the White House in Trump's first term.
--:-- Lauren Thomas: So he went off and created this investment firm.
--:-- Ryan Knudsen: He's done a few small deals, but he's got some money that he's looking to put to work as well.
--:-- Lauren Thomas: Kushner himself was a gamer as a kid.
--:-- Ryan Knudsen: And now, crucially, he has relationships with the Saudis, specifically Saudi Arabia's PIF, or Public Investment Fund.
--:-- Lauren Thomas: The PIF is one of the largest sovereign wealth funds in the world, backed by the kingdom's oil money.
--:-- Ryan Knudsen: Kushner had become close to Saudi's Crown Prince Mohammed bin Salman, who was also a self-described gamer.
--:-- Lauren Thomas: And Kushner had been looking for a way to strike a deal with him.
--:-- Ryan Knudsen: And a key part of it was really PIF, this sovereign wealth fund.
--:-- Lauren Thomas: And they had already, you could go back and see, they have a track record of being very interested in gaming and actually already had almost a 10 percent stake in Electronic Arts prior to this deal being announced.
--:-- Ryan Knudsen: So why is Saudi Arabia's investment fund so interested in a video game company?
--:-- Lauren Thomas: You know, this is a part of the world. It's oil and gas wealth really drive it.
--:-- Ryan Knudsen: But you've seen the kingdom has been very vocal about the fact that they want to diversify away from that.
--:-- Lauren Thomas: So take this – all this oil money, this wealth, and how can we then pour that into other industries to diversify our wealth so that we can have our hands in all these different industries?
--:-- Ryan Knudsen: And the crown prince over there, Mohammed bin Salman, has actually said, you know, he wants to create this gaming empire globally.
--:-- Lauren Thomas: Globally. He has this goal, these aspirations to do so.
--:-- Ryan Knudsen: So I think for them, this deal was certainly a way to achieve that goal.
--:-- Lauren Thomas: The Saudis are already investing heavily in the e-sports industry.
--:-- Ryan Knudsen: The kingdom has spent billions buying a mobile game maker, as well as taking stakes in Nintendo and the video game publisher Take-Two Interactive.
--:-- Lauren Thomas: It's also invested in sports leagues like Live Golf For Saudi Arabia owning a piece of global entertainment culture also helps the kingdom project some soft power and improve its image.
--:-- Ryan Knudsen: The kingdom has received criticism for its human rights record.
--:-- Lauren Thomas: And so they have a lot of money.
--:-- Ryan Knudsen: Silver Lake has a lot of money.
--:-- Lauren Thomas: Affinity has a lot of money.
--:-- Ryan Knudsen: And yet this deal is a leveraged buyout, which is still going to saddle Electronic Arts with a lot of debt afterward.
--:-- Lauren Thomas: Can you explain what a leveraged buyout is and why it was used in this acquisition?
--:-- Ryan Knudsen: Yeah, exactly. So like you said, there's some equity on the table that this consortium is putting in, but then you've also got a debt piece.
--:-- Lauren Thomas: There was a big loan that was taken out to the tune of $20 billion.
--:-- Ryan Knudsen: $20 billion in debt.
--:-- Lauren Thomas: A leveraged buyout means you're buying the company, in this case EA, with a lot of borrowed money.
--:-- Ryan Knudsen: But the debt doesn't just sit with the buyers. It's loaded onto the company, meaning EA itself now shoulders the burden of paying back the loans that were used to acquire it.
--:-- Lauren Thomas: And that's why leveraged buyouts can carry baggage.
--:-- Ryan Knudsen: So sometimes there can be this, like, negative sentiment attached with it.
--:-- Lauren Thomas: But they're difficult to pull off, especially the bigger you get.
--:-- Ryan Knudsen: You know, you need more debt. You have to go out and find these sources for financing.
--:-- Lauren Thomas: Lauren says there are advantages to being a private company, though.
--:-- Ryan Knudsen: When you're a public company, you have this scrutiny from investors.
--:-- Lauren Thomas: You have quarterly reports that you have to do.
--:-- Ryan Knudsen: So the argument is kind of as a private company, you could just do more, make bolder bets, and potentially act more quickly.
--:-- Lauren Thomas: Without having to address that investor base.
--:-- Ryan Knudsen: This is why some gamers are worried about this acquisition.
--:-- Lauren Thomas: Lots of players already say they feel like EA nickels and dimes them too much, and they worry all this debt might put even more pressure on the company to squeeze them for money.
--:-- Ryan Knudsen: And you can see this sentiment in the reactions people have posted on social media.
--:-- Lauren Thomas: You can kiss your favorite EA titles goodbye.
--:-- Ryan Knudsen: All your favorite sports video games are about to go down the tube.
--:-- Lauren Thomas: Let's be real, they're probably going to try and profit some way.
--:-- Ryan Knudsen: This is one of the main criticisms I'm seeing from gamers, is that you're putting so much debt on this company and you're creating new pressure points for EA to make more money.
--:-- Lauren Thomas: Right. But the chief concern that gamers have is that you're upcharging us for everything.
--:-- Ryan Knudsen: Games are too expensive.
--:-- Lauren Thomas: Once we buy a game, we have to pay more to unlock certain characters and stuff like that.
--:-- Ryan Knudsen: Yeah, I get that.
--:-- Lauren Thomas: It's a totally logical fear that would come up in this new era where, yes, we're looking for ways to cut costs.
--:-- Ryan Knudsen: But that doesn't necessarily mean that all of those costs in turn are going to be passed on to the end user.
--:-- Lauren Thomas: Because in turn, that's just going to push more people away from the platform.
--:-- Ryan Knudsen: Right. And then that's the last thing that EA would want.
--:-- Lauren Thomas: I mean, it's interesting because, like we said, at its core, Electronic Arts, you know, it started as this company that was trying to make software artistic and think about it in this artistic way.
--:-- Ryan Knudsen: Now the company's got to think of ways to kind of address maybe arguably its most important community the gamers, right?
--:-- Lauren Thomas: Who, to your point, are all trying to understand what does this deal mean for us?
--:-- Ryan Knudsen: Before we go, a quick heads up that the fourth and final episode of our series Camp Swamp Road will be dropping in our feed on Sunday.
--:-- Lauren Thomas: If you haven't started listening yet, go back to episode one.
--:-- Ryan Knudsen: There's a link to the series playlist in our show notes.
--:-- Lauren Thomas: I promise you, you will not regret it.
--:-- Ryan Knudsen: It is so good.
--:-- Lauren Thomas: That's all for today. Friday, October 3rd.
--:-- Ryan Knudsen: The Journal is a co-production of Spotify and The Wall Street Journal.
--:-- Lauren Thomas: Additional reporting in this episode by Miriam Gottfried and Isabella Simonetti.
--:-- Ryan Knudsen: The show's made by additional music this week from Catherine Anderson, Peter Leonard, Billy Libby, Bobby Lord, Emma Munger, Nathan Singapak, Griffin Tanner, and Burad Sessions.
--:-- Lauren Thomas: Fact checking this week by Mary Mathis.
--:-- Ryan Knudsen: Thanks for listening. See you Monday.
