The 3DO Company

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The 3DO Company

600 Galveston Drive
Redwood City, California 94063
U.S.A.
Telephone: (650) 261-3000
Fax: (650) 261-3120
Web site:http://www.3do.com

Public Company
Incorporated: 1991
Employees: 495
Sales: $122.2 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: THDO
NAIC: 42143 Computer and Computer Peripheral Equipment and Software Wholesalers; 511210 Software Publishers; 514191 On-Line Information Services

The 3DO Company develops and publishes CD-based entertainment software for personal computers (PCs) and for advanced game system consoles, such as Nintendo 64 and Game Boy Color for Nintendo of America and PlayStation and PlayStation2 for Sony Computer Entertainment. 3DO’s most popular game brands include Army Men; BattleTanx; Heroes of Might and Magic; High Heat Baseball; and Vegas Games. The company also offers the “Meridian 59” series for play over the Internet by subscription. 3DO publishes and distributes entertainment software worldwide.

A Love of Video Games Spawns New Technology

Before starting 3DO in 1991, Trip Hawkins had been involved in the design of Apple’s Macintosh computer and in the 1982 founding of Electronic Arts, creator of entertainment software for video game consoles. Hawkins’ fascination with electronic games originated with “Pong,” the first electronic game. He designed his first computer game, “AccuStat,” a football game based on the 1974 Super Bowl, as a student of Strategy and Applied Game Theory at Harvard University. As a game designer at Electronic Arts Hawkins became a leader in the new video game industry. Hawkins formed 3DO because he wanted to develop a new technology which would surpass the technical capabilities of existing Nintendo and Sega consoles, as well as bypass the stringent license requirements of those companies. Hawkins planned to license the hardware design specification to electronics manufacturers and to form cooperative links between hardware and software developers.

Originally called SMSG, Inc., 3DO began as a subsidiary of Electronic Arts and became an independent company in 1993 with several prominent investors. While Electronic Arts maintained 24.3 percent ownership in the company, other equity partners included Matsushita Electric Industrial Company, maker of the Panasonic brand of electronic appliances, and Time Warner, each with 17.6 percent ownership; venture capital firm Kleiner Perkers with 14.8 percent; Trip Hawkins with 6.2 percent ownership and AT&T with 6.1 percent. Both Matsushita and AT&T planned to produce and market the game system.

In January 1993, 3DO and Matsushita unveiled a prototype of the company’s interactive multimedia system at the Consumer Electronics Show. Hawkins hoped 3DO’s technology would set a new standard in gaming technology, with exceptional quality graphics and color, three dimensional sound, and realistic motion. A double speed CD-ROM Generaled 50 times the processing capacity of similar existing technology, including new products, such as the Philips CD-I and Tandy’s VIS. The final product was to be ready for retail introduction in fall 1993, in time for the holiday shopping season.

The product’s high price retail price of $699 contained an element of risk. The CD-ROM drives necessary for 32-bit players cost more than cartridges, but the game required a base of users to compete with established video game console manufacturers. Like VCRs and PCs, which initially sold at high prices, Hawkins expected the price of the 3DO console to drop within two years. Hawkins hoped the 3DO system would become a common household appliance as a “multiplayer” capable of playing standard audio CDs, Kodak’s CD-based electronic photo albums, and, in the future, motion pictures, referred to as Full Motion Video (FMV).

Hawkins promoted hardware manufacturing and software development with low royalty rates. The seven-year hardware license agreement required no royalty payments, though 3DO charged a fee for certification that each console met design standards. Otherwise, Hawkins required only that the 3DO logo appear on the machines. For software licenses 3DO charged a $3 fee for each CD produced, compared to $15 to $20 for Nintendo and Sega. Unlike Sega and Nintendo, the agreement allowed for unlimited title development. 3DO supplied software licensees, over 80 at the time of the January tradeshow, with a development kit with sound effects, music, video clips, and copyrighted photographs from MCA, then a subsidiary of Matsushita, and Time Warner. 3DO authorized Warner Music Group, a subsidiary of Time Warner, to replicate CDs for software licensees.

Despite the fact that 3DO did not have a finished product and had not Generaled any sales, an initial public offering of 2.9 million shares of stock in March raised $40 million. Research and development had cost $13.2 million since the company’s inception in September 1991, while assets accounted for $6.4 million. Delays in the development of 32-bit microprocessor chips for custom animation, graphics, and sound resulted in delays in completion of license agreements. Matsushita signed an agreement shortly after the stock offering and Sanyo signed in July.

In August 3DO and Matsushita announced that the Panasonic FZ-1 REAL (Realistic Entertainment Active Learning) Interactive Multiplayer would be introduced in consumer electronics and video game software stores in October. The retail price of $699 compared to Nintendo and Sega 16-bit games at $99, with dealer margins at approximately 27 percent. The final product included a control pad, and two ports for additional control pads, allowing up to eight players to participate at once. Matsushita packaged the console with a free copy of “Crash N Burn,” a game software which maximized the capabilities of the technology.

Marketing for the 3DO console targeted “early adopters,” consumers who buy the latest technology regardless of price, with joint promotions with electronics dealers. A mall tour allowed potential customers to experience the system’s performance directly. Cities on the tour included Boston; Los Angeles; Washington D.C.; Dallas; Paramus, New Jersey; and Minneapolis, at the Mall of America. Marketing strategies included in-store kiosks, commercials in 1600 movie theaters, local and national print advertising and cable and network television commercials.

Sales of the Panasonic console did not meet expectations during the 1993 holiday shopping season. While 3DO did not release information about how many units sold, industry insider estimates ranged from 22,000 to 50,000 units. 3DO predicted sales of 100,000 units, expecting stronger sales to early adopters. The company attributed the poor sales to the high price tag and the lack of software titles, with only ten available; several new titles were finally released in January. Higher priced personal computers with CD-ROMs proved to be an unexpected competitor due to the multiple uses of computers. Also, Hawkins had expected up to six licensees to have the multiplayer available for sale.

3DO Game Technology Struggles for Market Share

3DO took a variety of measures to promote the game technology as brand loyalty would determine its ability to compete with established game consoles. A software agreement between 3DO and Park Place Productions set a retail price of $8 for each game compared to Sega and Nintendo games at $18 to $28 each. A decrease in manufacturing overhead and component costs allowed Matsushita to reduce the price of the Panasonic 3DO system to $399 retail by February 1994. With new hardware license agreements with Goldstar, Samsung, and Toshiba, Matsushita also wanted to sell at a competitive price. To compensate for the lower price 3DO offered a stock incentive to licensees, paying two shares of 3DO stock for each player sold by September 30.

Panasonic’s interactive multiplayer found a ready audience in Japan when Matsushita launched the product in March 1994 at the yen equivalent of $525. By mid-February advanced orders resulted in a backorder of 40,000 units and 150,000 software items. Some dealers sold the consoles at $425 and software at 20 percent off suggested retail price. Matsushita introduced eleven new software titles and planned to launch a total of 60 titles by the end of the year. The success of 3DO in Japan led to several new software license agreements with developers in Japan: Capcom, Konami, Taito, Koei, Bandai, and Tomy. In June Matsushita released the MPEG adapter cartridge for FMV for $249.95 retail; the first movie disc released was the 1991 movie Total Recall.

Operating at a loss, 3DO needed to raise funds for working capital to continue its difficult task of building an installed customer base. For 1994 the company reported revenues of $10.3 million and a loss of $51.5 million, including a $21.4 million operating charge for the acquisition of NTG, the developer of the 3DO technology. Sale of stock to original investors included Hawkins’s investment of an additional $12.5 million. New investors included Goldstar, Creative Technology, and Sim Wong Hoo, chair of Creative Technology. Inside investment renewed public confidence in the company for a May 1994 public offering of stock at $12.35 per share. The private and public offerings raised $37 million.

Company Perspectives:

Our mission at 3DO is to get everyone in the world to play video games.

Software development presented a number of problems leading 3DO to form Studio 3DO, an in-house software development group. Few titles had been published for exclusive use with 3DO technology, with most titles as port transfers from 16-bit titles. As such, existing game software for 3DO did not make full use of the 32-bit technology’s capacities. Many developers were reluctant to expend time on producing 3DO titles given the low consumer response to the product. Also, a best-selling game title did not emerge to compel consumers to want the 3DO multiplayer. Hawkins did not want to compete with software licensees and planned only to create a few new games each year. 3DO also began to publish software for other developers. In a joint project with Creative Technology, 3DO sought to create a 3DO card which would make 3DO entertainment and education CDs compatible with PC CD-ROMs.

To raise consumer awareness of the 3DO technology, the company launched a multi-million marketing campaign. Television and print advertising targeted men aged 18 to 30 years old, incorporating game footage in advertisements on MTV, ESPN, Turner Sports Network, and the 100th episode of the animated comedy The Simpsons. Specialty magazines included Electronic Entertainment and Electronic Gaming Monthly, while general publications included TV Guide and USA Today. Radio advertisements aired in 50 major markets. Also, Matsushita included a free “Total Eclipse” space combat game with units sold before October 31.

In September 3DO announced that it was completing development of the M2 Accelerator which upgraded 3DO hardware to 64-bit capacity. The M2 used IBM’s Power PC 602 microprocessor to enhance the speed and quality of graphics. The technology performs a number of software development tasks, such as scale, detail, texture, and surface curves, thus improving the realism of the graphics. 3DO hoped an add-on cartridge would be available by fall 1995 to compete with new 64-bit game consoles from Nintendo, Sega, and Sony.

Sanyo and Goldstar launched their versions of a 3DO game console in fall 1994. Sanyo introduced the 3DO system in Japan under the name TRY for the yen equivalent of $548. Goldstar produced a sleek-looking machine, the GPA 101 M3DO Multiplayer, which the company launched in the United States for $399 through software chains Babbages, Electronics Boutique, and Software Etc., as well as Toys “R” Us, Kay-Bee Toys, and FAO Schwarz. Goldstar planned to introduce the system through regional and national mass merchants in 1995 and 1996, respectively. Marketing involved flexible in-store displays and a special software package which included “Shock Wave,” a science fiction game, children’s “Putt-Putt,” and a Photo CD processing coupon from Eastman Kodak, a $150 retail value.

As the 1994 holiday season approached, Hawkins recognized that slow sales determined the future feasibility of the 3DO multiplayer. Because the game makers planned to introduce new game technology in 1995, holiday sales declined dramatically for Nintendo and Sega, as well as 3DO. Sales in Japan, however, were double that of those in the United States, as the Panasonic REAL multiplayer sold well in Matsushita-owned stores. Goldstar sought to improve sales by repackaging its 3DO multiplayer console with “FIFA International Soccer” and “Shockwave.” It bundled the FMV attachment, called the Digital Video Module (DVM), with a “Total Recall” CD for a retail price of $200. The DVM module also enabled full motion video games and Goldstar planned to open a software development studio to create titles for DVM use.

The 3DO hardware began to gain more acceptance in the retail marketplace. Wal-Mart agreed to carry the Panasonic REAL multiplayer in 2,300 stores in spring 1995. Other new distribution included toy stores, mass merchant retailers, and department stores. Available in 2,000 stores at the beginning of 1995, 3DO set a goal to be in 12,000 stores and to have 300 software titles available by the Christmas season. The 3DO technology was available in 10,000 stores by July.

In anticipation of competition from new game technology by Sega, Nintendo, and Sony, Goldstar and Matsushita cut the retail price of their 3DO systems $100 to $299, resulting in a sudden increase in sales. In April 1995 Sega launched a 64-bit technology at $399 with one software title and sold 120,000 copies in the first six months. The following October the Sony PlayStation, at $299 per unit, sold 100,000 machines its first month in the stores. After two years on the market, 3DO had sold 300,000 units in the United States, an indication that 3DO would not attain a critical mass of users to merit continued upgrading of the technology and supplemental equipment and software. Goldstar and Matsushita responded by reducing the price of 3DO multiplayer to $199. The Panasonic REAL console continued to sell well in Japan, with almost a half million units sold.

3DO Makes Transition to Software Development

Taking a dramatic step to reduce losses—$46 million on revenues of $30.4 million in fiscal 1995—3DO signed an $100 million licensing agreement with Matsushita. Under the agreement Matsushita paid a $100 million licensing fee plus royalties to 3DO for its exclusive use of the M2 Acceleration technology. 3DO retained a nonexclusive license to use the technology for personal computing applications, as a tool in software development, and for coin-operated arcade games. Matsushita planned to sublease the technology and to use the technology in DVD players, car navigation hardware, kiosk hardware, interactive television set-top boxes, as well as video games. As a result of the deal, LG Electronics, (formerly Goldstar) decided to discontinue production of the 3DO console.

Key Dates:

1993:: Matsushita introduces Panasonic FZ1 REAL Interactive Multiplayer with 3DO-designed hardware.
1994:: 3DO forms in-house game software studio.
1995:: Poor sales of game console indicate failure to attain an installed base of users.
1997:: 3DO halts hardware development; sells rights to M2 technology to Matsushita.
1998:: Company launches Internet multiplayer game, “Meridian 59.” 2000: 3DO makes first profit, $205,000.

3DO continued to focus on software and hardware development. In December 1995 3DO acquired the 15-employee Cyclone Studios which produced arcade-style video games, with plans to apply the M2 technology to improve arcade games. In July the company acquired New World Computing for $18 million in stock and the assumption of debt. New World Computing was known for the popular video games series, “Heroes of Might and Magic” and “Wages of War.” In hardware 3DO launched MPEG Express 1000, a digital encoding and decoding product for television and computer monitors, for license in March 1996. The MPEG Express 1250 provided high-speed data transfer.

By September 1996 3DO decided to discontinue the hardware development and licensing operations, making a definitive switch to game software design. Hawkins gave control of the company to Hugh Martin, president of 3DO. While retaining his position as Chair and CEO, Hawkins became the creative director of Studio 3DO. The company’s first games included “Meridian 59,” a multiuser, role-playing fantasy game, the first important multiplayer Internet game. While consumers purchased the disc in retail stores, actual play occurred on the Internet by subscription only. For the PC platform 3DO released “3DO Games: Decathlon,” “Captain Quasar,” and “Star Fighter.” The top selling game for PCs, “Magic,” sold over 500,000 units, becoming one of the all-time best-selling video games.

3DO settled its business arrangements by selling hardware-related assets. Samsung bought the company’s hardware business for $20 million in June 1997. In negotiations with Matsushita, 3DO exchanged future claims to royalties from M2 technology for 3.2 million shares of 3DO stock. 3DO relinquished the right to develop software and peripherals related to M2 technology and Matsushita obtained the right to further develop the M2 technology.

The agreement solidified 3DO’s shift to game development, with special interest in the Internet game industry. The company promoted online gaming with reduced rates, to $2.49 per 24-hour day, with maximum charge of $7.47 per week. 3DO eliminated the $14.95 activation fee and reduced the minimum monthly rate to under $5.00. “M59 Revelation” debuted in October and “M59 Renaissance” launched in early 1998. Aries Online Games and Game Storm distributed 3DO Internet games. 3DO sold its first server license to Computec, a publisher of magazines and a game site owner based in Germany.

The company continued to create games for PCs and began software development for other game platforms. In fiscal 1998 3DO launched three new PC games, “High Heat Baseball,” “Army Men,” and “Heroes of Might and Magic IV.” By fiscal 1999 that number increased to 14 titles, ten for PCs, three for PlayStation, and one for Nintendo. “BattleTanx,” released in early 1999, sold 65,000 copies during the first three weeks available. Other best-sellers included the “Army Men” series, “Heroes Might and Magic VII,” and “Uprising.” 3DO also introduced “M59 Liberation” for Internet play by subscription in July 1999. The company launched “Sammy Sosa High Heat Baseball” after obtaining an endorsement from the record hitting baseball player in January 2000. In fiscal 2000 3DO had increased its rate of new game releases to 31 new titles, 16 for PCS, ten for PlayStation, three for Game Boy Color, and two for Nintendo 64.

By returning to his love of games, Hawkins turned 3DO into a viable company. Fiscal 1999 revenues of $48 million resulted in low losses, relative to the past, at $13 million. With the turnaround in process, 3DO initiated a August public offering of stock and raised $43 million for continuing operations. In December 1999 the company received a patent for ideas related to a new network entertainment system. In anticipation of continued success, 3DO hired several video game industry veterans for crucial executive positions. Operations opened in the United Kingdom to begin distribution throughout Europe. 3DO realized its first profit in fiscal year ending March 31,2000. With revenues of $122.2 million, 3DO garnered a net income of $205,000. The company expected revenues to continue to grow in the future, but research and development would curtail profits.

Future game releases involved multiple game platforms and leading edge technology. While some titles were being adapted to alternate platforms, new titles included sequels to “Army Men” and new game brands included “Warriors of Might and Magic” and “World Destruction League.” The company expected to produce several games for Sony’s PlayStation2, launched in fall 2000. The company also planned to launch a new Internet game, “Legends of Might and Magic.” 3DO expected the network capabilities of the Internet as a game platform to be a major factor in software development and company growth.

Principal Subsidiaries

Studio 3DO K.K. (Japan); 3DO Europe Ltd. (United Kingdom).

Principal Competitors

Activision, Inc.; CUC International; Disney Interactive; Electronic Arts Inc.; GT Interactive Software Corp.; LucasArts Entertainment Company; Mattel, Inc.; Microsoft Corp.; Sierra On-Line, Inc.