Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: This is Wall Street Week. I'm David Weston, bringing you
Speaker 2: stories of capitalism, putting new wine into old bottles. We
Speaker 2: take a look at one company that has remade itself
Speaker 2: successfully more than once, New Balance, and one that doesn't
Speaker 2: seem to be able to make the turn Hurts, and
Speaker 2: the whole world of gaming is waiting for the sixth
Speaker 2: edition of Grand Theft. Auto straus Zelnik of Take two
Speaker 2: explains why he left a successful career as a movie
Speaker 2: mogul to get on the ground floor of video game creators.
Speaker 2: But we start with the story about shock and awe,
Speaker 2: something we hear about as a tactic in warfare, but
Speaker 2: that usually doesn't come up in public exchanges. Among those
Speaker 2: who have been allies for eighty years.
Speaker 3: The EU treat us very very unfairly, very badly.
Speaker 4: We have to rely on our own defense industrial base.
Speaker 4: We cannot buy American products when it goes to defense,
Speaker 4: because you know, there is a string attached. There is
Speaker 4: a double key.
Speaker 2: Zenny mitten Bedows is editor in chief of the Economist
Speaker 2: and has a front row seat for the increasingly strained
Speaker 2: relations between Western Europe and the United States and how
Speaker 2: the Europeans are taking it.
Speaker 5: This is the first time I've been in New York
Speaker 5: since the President Trump took over, since the inauguration, and
Speaker 5: I'm struck at how relatively little I think people here
Speaker 5: are focused on, just how dramatically the perception of the
Speaker 5: US actually around the world, but particularly.
Speaker 6: In Europe, has changed.
Speaker 5: But what's happened in the last few weeks has really
Speaker 5: shocked Europeans because they have realized that a significant element
Speaker 5: of this administration is outright hostile to Europe, doesn't like Europe,
Speaker 5: particularly the European Union as a concept. One shouldn't exaggerate
Speaker 5: too much from sort of individual moments of theater, because
Speaker 5: this is an administration that loves moments of theater. But nonetheless,
Speaker 5: that dressing down of President Zelenski in the Oval Office
Speaker 5: had a visceral reaction in Europe because it was watched
Speaker 5: by everyone I met had watched it, even people who
Speaker 5: aren't usually interested in current affairs, and everyone had been
Speaker 5: shocked at the treatment of this man, this brave man
Speaker 5: speaking in his third language, by the President of the
Speaker 5: United States. And those two some powerful examples of I
Speaker 5: think a recognition in Europe that actually maybe the United
Speaker 5: States is not a country that Europe can rely on.
Speaker 5: And the country that created the North Atlantic, the NATO Agreement,
Speaker 5: the country that built the post war order, the country
Speaker 5: of the United States, there's always been the backbone of
Speaker 5: this post war system.
Speaker 6: I think Europeans have just been really shocked.
Speaker 5: And of course things can change, and of course there
Speaker 5: can be a change in the relationship with Ukraine and
Speaker 5: all of those things, but even if things now go
Speaker 5: to a more conventional place, Europe has been shocked and
Speaker 5: shocked such that I think every single politician in Europe
Speaker 5: is having to think about can we rely on the
Speaker 5: United States? Can we really only think about a world
Speaker 5: where we spend more and we have a NATO which
Speaker 5: is the same except that we spend more, or do
Speaker 5: we need to think about having a plan B in
Speaker 5: case this really is a country that is hostile to
Speaker 5: us and it is outright bent or not having our
Speaker 5: interests at heart. And that's a really big shift for Europe,
Speaker 5: and I think that it's something that is going to
Speaker 5: the upside. I hope is that it will be one
Speaker 5: of those moments that galvanizes Europe.
Speaker 2: When you say Europe is shocked, I guess My question
Speaker 2: is shocked into action. If you're Europe, what do you
Speaker 2: do well?
Speaker 5: That's always the question with Europe, that you can, you know,
Speaker 5: you can have a lot of pearl clutching and then
Speaker 5: nothing actually happens. But I think you've seen enough already
Speaker 5: to take a view that this is different. If you
Speaker 5: look at what's happened in Germany, and you know Friedrich Meltz,
Speaker 5: the soon to be Chancellor of Germany, very clearly saying
Speaker 5: it's five minutes to midnight.
Speaker 6: We will do everything it takes.
Speaker 5: And that's the phrase remember that as associated with Mario Dragi,
Speaker 5: who was during the euro crisis president of the European
Speaker 5: Central Bank, and he said they would do everything that
Speaker 5: it takes to hold the euro together. The same language
Speaker 5: Finich Melts very clearly signaling the Germany, which is of
Speaker 5: course the biggest economy in Europe and the one that
Speaker 5: has been obsessed with its you know, fiscal prudence and
Speaker 5: its debt break, would do everything that was necessary to
Speaker 5: increase defense spending. And you've seen other countries in Europe,
Speaker 5: you know Poland talking about nuclear weapons. You've seen big changes,
Speaker 5: and I think this could be one of those moments
Speaker 5: where the European commissioners galvanized.
Speaker 6: They're making it easier to you.
Speaker 5: Know, find resources to pay for a very signficant increase
Speaker 5: in defense spending.
Speaker 6: And to give you a scale.
Speaker 5: Of it, the European Union countries spend about one point
Speaker 5: eight percent of GDP on defense, which is well below,
Speaker 5: as President Trump would tell you, the two percent that
Speaker 5: they're supposed to, and certainly nowhere near enough if they
Speaker 5: can't rely on the United States. How much Europe needs
Speaker 5: to spend depends on how you know, darker scenario you
Speaker 5: want to paint in terms of the US turning its
Speaker 5: back on Europe and the threat posed by Vladimir Putin.
Speaker 5: But at the very least, it's the doubling of defense
Speaker 5: spending three point five three point six percent of GDP.
Speaker 6: That's a huge.
Speaker 5: Increase in defense spending. And so one question is will
Speaker 5: the Europeans actually do it? Because they're slow growing, they're indebted,
Speaker 5: they're high tax economies. I think this German shift is
Speaker 5: a very very big moment because I think it signals
Speaker 5: that the one country that has the capacity to borrow
Speaker 5: a lot more is intending to do so.
Speaker 6: The European Union.
Speaker 5: Can as it did during COVID actually issue joint bonds to.
Speaker 6: Pay for this.
Speaker 5: I think you will have more what you call safe
Speaker 5: assets in Europe, more commonly issued debt, which investors actually
Speaker 5: may well lap up because people will be looking for
Speaker 5: a non dollar.
Speaker 6: Asset that is a safe asset.
Speaker 5: So I think you could see a big shift in
Speaker 5: European financial markets.
Speaker 6: If this money on defense is spent well and spent.
Speaker 5: Effectively, you could see a kick starting to technological innovation.
Speaker 5: Look at drone capability that's being developed in Ukraine. If
Speaker 5: the Europeans work with the Ukrainians provide the financial wherewithal
Speaker 5: to really kind of develop and scale up that capability,
Speaker 5: That's an area where Europe is now at the cutting
Speaker 5: edge of military infrastructure. That's one of the reasons why
Speaker 5: European defense docks have been soaring, because there is the
Speaker 5: potential in Europe.
Speaker 6: To do that. Now, there's a lot there's a ton
Speaker 6: of things that could go wrong.
Speaker 5: Never you know, overest never underestimate European country's ability to
Speaker 5: think about their parochial interests rather than.
Speaker 6: What makes sense for Europe as a whole.
Speaker 5: One of the consequences of what Donald Trump has done
Speaker 5: may well be to unify Europe, to increase its defense
Speaker 5: spending substantially, which is of course what he wants, but
Speaker 5: actually also to kickstart Europe's economies and to kickstart its
Speaker 5: capability of having a financial asset that would over time
Speaker 5: be something which might be eventually become an alternative.
Speaker 6: To the dollar.
Speaker 2: Countries in Europe are under pressure to figure out how
Speaker 2: to serve their individual interests while addressing a priority for
Speaker 2: the whole union. We may, as you say, be seeing
Speaker 2: the political will in much of Europe to move forward.
Speaker 2: Is there the capacity, and particularly is the capacity in leadership.
Speaker 2: You've got to make some tough decisions about where to
Speaker 2: get the money and how to spend it you have.
Speaker 5: And I think the easy answer to your question would
Speaker 5: be to say, look around Europe and there are only
Speaker 5: kind of political pigmies. But actually I think that's and
Speaker 5: I've made that argument myself, but that's slightly unfair if
Speaker 5: you look at, for.
Speaker 6: Example, Meltz, who.
Speaker 5: I interviewed before the German election, and I asked him
Speaker 5: about some of these questions, what did Europe Germany need
Speaker 5: to do on defense and so forth? And he was
Speaker 5: unwilling to really sort of put his neck out he was.
Speaker 5: He was quite cautious, and he's a man who's been
Speaker 5: a staunch Atlanticist all his life. And you know, you
Speaker 5: could forgive that, I suppose because it was just before
Speaker 5: an election and he doesn't want to say anything terribly controversial.
Speaker 5: But it made me think, made me worry exactly as
Speaker 5: you suggest that is this man someone who can really,
Speaker 5: you know, step up if needed. And frankly, what we've
Speaker 5: seen since the election, in light of what the President
Speaker 5: Trump has done, has actually been.
Speaker 6: I think pretty remarkable.
Speaker 5: Others have real constraints. Emmanuel Markran President of France, I
Speaker 5: think loves grand, grandiloquent language and grand gestures and I'm.
Speaker 6: Sure he wants did all of this.
Speaker 5: In fact, to his credit, he was the man who,
Speaker 5: you know, a few years ago said to us that
Speaker 5: NATO was brain dead and that Europe needed more strictic autonomy.
Speaker 6: He's worried about this for a long time.
Speaker 5: His problem is that he's actually very weak domestically, and
Speaker 5: he's the domestic politics within France make it harder for him.
Speaker 5: Kiir Istama, Prime Minister of Britain, I think has come
Speaker 5: out so far very well. He also is he's trying
Speaker 5: to hwe a very difficult line because on the one hand,
Speaker 5: Britain traditionally the special relationship with the United States. Our
Speaker 5: military is particularly entwined with the United States, are intelligence
Speaker 5: so forth, members of the Five Eyes, all of that stuff.
Speaker 5: The Brits are very very keen to hug the US close.
Speaker 5: But at the same time he has worked very effectively
Speaker 5: with Immanuel Marquant in particular on Ukraine. He's very clearly
Speaker 5: trying to shape a European response, and I think he's.
Speaker 6: Risen to the occasion.
Speaker 5: Again in the UK's case, in order to fund the
Speaker 5: kind of defense expending that we need to do, he
Speaker 5: actually needs to do the radical pro growth reforms which
Speaker 5: he talked about, but again we worried that the Starma
Speaker 5: government would not be sufficiently bold to do. If he
Speaker 5: does that, he will also be deserving in the president
Speaker 5: with him, we I think more in hope more than expectation.
Speaker 5: We put on the cover just a couple of weeks
Speaker 5: ago Winston Starmer and had him, you know, dressed in
Speaker 5: dress like Winston Churchill its early days. Ask me again
Speaker 5: in a few months whether.
Speaker 6: They live up to it. But I think those would
Speaker 6: be the three people I would look out for.
Speaker 2: Defense spending is just one part of the bigger European
Speaker 2: issue of remaining barriers among member states, including in financial
Speaker 2: regulation and capital markets. I'm mindful of the name of
Speaker 2: your publication the economists. Can Europe get to where it
Speaker 2: needs to go without fundamental reform of the capital markets.
Speaker 6: The simple answer is no in the medium term.
Speaker 1: No.
Speaker 5: Capital markets Union is a kind of you know, aspiration
Speaker 5: that the European Union has had for a long time
Speaker 5: and has made very little progress on. I think it's essential.
Speaker 5: I think the creation of a safe asset that can
Speaker 5: be a common asset for investors to hold in Europe
Speaker 5: is essential. I think this stuff can come and will
Speaker 5: come actually eventually, but you will not have a dynamic
Speaker 5: European continent without that.
Speaker 6: I think it's completely essential, but it's not the only thing.
Speaker 5: You know, there's all kinds of other You need a
Speaker 5: much more pro growth regulatory environment. You need to have
Speaker 5: a European Commission which is much more focused on creating
Speaker 5: the conditions for brisk taking, for innovation, for growth that
Speaker 5: doesn't think that things needed to be regulated first. I
Speaker 5: mean that the attitude towards tech has been very telling.
Speaker 5: Right in Europe, where you know, the European Union has
Speaker 5: probably got the most aggressive and encompassing tech regulation, but actually,
Speaker 5: you know, no major tech company to speak of. That
Speaker 5: kind of thing has to be changed, and I don't
Speaker 5: want to appear of Panglossian.
Speaker 6: I think it's perfectly.
Speaker 5: Possible that Europe could fail to do what we've been
Speaker 5: talking about. But I do think this moment, these last
Speaker 5: few weeks have given Europe a sort of a shock
Speaker 5: that has had a kind of consequence in Europe that
Speaker 5: I wasn't anticipating. There is now a sense of urgency,
Speaker 5: there's a sense of what's at stake, which could just
Speaker 5: be the galvanizing moment that is needed for this to
Speaker 5: really happen.
Speaker 2: Coming up, we look at two companies that have been
Speaker 2: around a while and decided they needed a reset, New
Speaker 2: Balance which got the reset right, and Hurts, which didn't.
Speaker 2: This is a story about renewal companies that have known
Speaker 2: great success but face changing tastes and changing markets, companies
Speaker 2: that have to rethink what they're doing to success.
Speaker 1: Some do it well in Carol Company, New Balance really
Speaker 1: continuing to expand the US manufacturing presence.
Speaker 2: And some get it wrong.
Speaker 3: A pair of finance veterans bought the bankrupt car rental
Speaker 3: company Hurts in twenty twenty one and went all in
Speaker 3: on electric and it turned out to be a bad bet.
Speaker 2: It was not long ago that New Balance was known
Speaker 2: for the ultimate dad sneaker.
Speaker 7: What happened to your feet?
Speaker 2: What do you mean?
Speaker 8: These are my four oh sevens?
Speaker 9: Oh?
Speaker 7: The four oh sevens? Can I see them?
Speaker 10: Yeah?
Speaker 8: He's offered a lot of support, right.
Speaker 2: Well, come on, and now it's a shoe worn by
Speaker 2: celebrities and runway models. Joe Preston is the CEO who's
Speaker 2: overseen the latest transformation of a company. Dating back to
Speaker 2: nineteen oh.
Speaker 11: Six, New Balance was the first athletic brand to have
Speaker 11: an NBA player with a million dollar contract. By the
Speaker 11: time the late eighties came along, New Balance was struggling.
Speaker 11: All of our competitors had moved all of their production
Speaker 11: from the US over to Asia, and that in part
Speaker 11: put us at a little bit of a competitive disadvantage.
Speaker 11: And then in the early nineties we retracted and just
Speaker 11: focused on running. We wanted to make sure that we
Speaker 11: could carve out a positioning with that new strategy. But
Speaker 11: then around two thousand and eight, two thousand and nine.
Speaker 11: We knew we needed to get younger, We knew we
Speaker 11: needed to get back into sport, and we made an
Speaker 11: entry into baseball, and we set this lofty goal of
Speaker 11: being number one in baseball within five years. And in
Speaker 11: the beginning there was a lot of doubt internally as
Speaker 11: to whether whether or not we could do that.
Speaker 2: It wasn't a straight ride up. As New Balance went
Speaker 2: through its transition, its global sales fell from an estimated
Speaker 2: four point five billion dollars in twenty eighteen, that's the
Speaker 2: year Preston took over, down to some three point four
Speaker 2: billion dollars in twenty twenty. But then they took off,
Speaker 2: hitting seven point eight billion dollars last year, an approximate
Speaker 2: seventy three percent increase under Preston's leadership. What caused you
Speaker 2: to have a couple of years that were challenged.
Speaker 11: I wouldn't say we were going south, We would going sideways.
Speaker 11: We had a rapid growth that was happening internationally, specifically
Speaker 11: in North Asia and in Europe and in that head flatline,
Speaker 11: and we were not able to take truly advantage of
Speaker 11: the brand here in North America, and so we reset
Speaker 11: in twenty nineteen to try to put the company in
Speaker 11: position for growth, and then obviously COVID hit, which kind
Speaker 11: of stalled things a little bit, but we could see
Speaker 11: in the back half of twenty twenty that the brand
Speaker 11: was beginning to resonate and we've been able to grow
Speaker 11: twenty plus percent for four consecutive years.
Speaker 3: There's three key traps that I think are key to
Speaker 3: understanding why some firms are better situated to reinvent themselves.
Speaker 2: Ryan Raphaeli is a Harvard Business School professor who teaches
Speaker 2: corporate reinvention.
Speaker 3: The first trap is the trap that I call the
Speaker 3: identity trap, and this is too tightly coupling the questions
Speaker 3: around who we are with a very specific product or surface,
Speaker 3: and get so tied to one product or service that
Speaker 3: we sort of lose sight of everything else around us.
Speaker 3: The second trap is one that I call the architecture trap,
Speaker 3: and this is where we think about you have different
Speaker 3: products and services on an S curve sort of at
Speaker 3: different phases of maturity. And what often happens is in
Speaker 3: organizations is they're designed where all the same systems and
Speaker 3: structures and incentives are applied to early stage innovations versus
Speaker 3: processes of innovation that may be needed for a later stage,
Speaker 3: more mature products, and this can often kill out the
Speaker 3: early stage. There's a third trap, the collaboration trap.
Speaker 6: And this is a.
Speaker 3: Trap or what you see is that individuals tasked with
Speaker 3: innovation at different phases of an s curve often begin
Speaker 3: to either not trust each other and you get this
Speaker 3: internal resentment that can often kill off innovation for reinvention
Speaker 3: that has to happen for the future.
Speaker 2: New Balance successfully skirted those three traps, leading to a
Speaker 2: revamp that's allowed the company to expand its footprint, sponsoring
Speaker 2: both the New York City and London Marathons and hosting
Speaker 2: athletic events at their own Boston track.
Speaker 11: Today will mark the opening of the New Balance Nationals.
Speaker 11: We'll have six thousand of the best track and field
Speaker 11: high school athletes in the country that come to campus
Speaker 11: here and come to this brand new facility.
Speaker 7: But this is a revenue raiser for you.
Speaker 2: Does is work?
Speaker 9: Not really?
Speaker 1: Now?
Speaker 11: This is you know, this is an opportunity for us
Speaker 11: to engage with these young athletes.
Speaker 2: And the athletes are engaging back. Coco Goff Kawhi, Leonard
Speaker 2: Bocayosaka and perhaps the biggest of them all Shohei Otani
Speaker 2: all New Balance athletes.
Speaker 10: This is all of show Hayes's collection. You can also
Speaker 10: see those are his signature cleats.
Speaker 2: Samantha Siciliano is the lead athlete insights researcher at New Balance.
Speaker 10: The collaboration with the athletes is key for us. We
Speaker 10: learn so much from them and it's stuff that we
Speaker 10: can use for all of our pros, but it's all
Speaker 10: the things that we can use for our community athletes
Speaker 10: and make sure that those athletes are getting the best
Speaker 10: product possible.
Speaker 11: The reason why that we can enter into these sports
Speaker 11: is twofold. One of them is that our product engine
Speaker 11: is just so strong, the investment that we may continually
Speaker 11: into product and innovation, and through our Sports research center,
Speaker 11: we can go in and test any different type of
Speaker 11: product for any of those sports. And the other element
Speaker 11: is as the brand is becoming more widely known, we
Speaker 11: have athletes coming to us from these various sports looking
Speaker 11: to be part of the brand.
Speaker 2: As you evolve the company, how do you retain some
Speaker 2: of the basics and at the same time innovating go
Speaker 2: into new places. How do you get that balance right?
Speaker 11: It is seventy thirty seventy meaning making sure we are
Speaker 11: retaining the culture that we have here because we believe
Speaker 11: it to be a differentiator. Now we're a family owned company,
Speaker 11: we're privately held, and how we operate is as important
Speaker 11: as the result. And I think we have strengthened our
Speaker 11: culture as we have grown.
Speaker 8: But it's a challenge.
Speaker 11: You continue to add people as you get larger, and
Speaker 11: you just want to make sure that people are assimilating
Speaker 11: and are also contributing to a strong culture that you have.
Speaker 2: New balances sports and Innovation lab is a key part
Speaker 2: of the company's architecture, giving it a recipe for some
Speaker 2: of its greatest hits.
Speaker 3: So when we think about technological changes most firms, we
Speaker 3: can go back to these classic theories of like the
Speaker 3: S curve, right, the idea that you have a technology
Speaker 3: or a product associated with that it sort of starts
Speaker 3: in its infancy, it then starts to move through a
Speaker 3: period of growth, and then it eventually matures. And so
Speaker 3: for many firms, they're managing these S curves within and
Speaker 3: what often happens in processes of reinvention is what you
Speaker 3: tend to see is that for established firms, they don't
Speaker 3: have the luxury of just managing one of these curves
Speaker 3: at a time, and so the challenge for them is
Speaker 3: to try to figure out, well, how do you manage
Speaker 3: multiple curves with product and services that sit at different
Speaker 3: phases of those s curves simultaneously and keep the whole
Speaker 3: thing running. It's one of the core components, right because
Speaker 3: you're having to think about not only what do you
Speaker 3: need to do to make yourself successful today and appease
Speaker 3: your current customer base, but also what's the next thing
Speaker 3: that will potentially drive growth and revenue in the years ahead.
Speaker 2: If New Balance was a company that successfully appealed to
Speaker 2: both its former and new customer bases, Hurts is far
Speaker 2: from it.
Speaker 9: Hurts has the largest ev rental fleet in North America,
Speaker 9: charged and ready to go, Let's go.
Speaker 2: The car rental company has gone through countless failed reinventions,
Speaker 2: most recently making a bold move to replace much of
Speaker 2: its fleet with Tesla electric vehicles.
Speaker 8: We know our corporate travelers want electric vehicles to go
Speaker 8: visit their clients and do business in We know our
Speaker 8: leisure travelers want electric vehicles. It's a great way for
Speaker 8: them to try a lot vehicle without committing.
Speaker 7: As tonal attention to hers.
Speaker 2: The rental call company misses its estimates as it sells
Speaker 2: its fleet of Tesla EV's. The company lost two point
Speaker 2: nine billion dollars in twenty twenty four on its failed
Speaker 2: bet offloading thirty thousand evs. It's market caps slumping from
Speaker 2: a peak of sixteen billion dollars in twenty twenty one
Speaker 2: to sit at just over one billion dollars today.
Speaker 12: The EV strategy actually was suggested by one of the
Speaker 12: private equity partners who bought Hurts out of bankruptcy, and
Speaker 12: at the time it seemed like a great idea.
Speaker 2: Yale professor Jacob Thomas studied Hurt's failure to reinvent itself
Speaker 2: time and time again. Some of the.
Speaker 12: Reasons that worked against them, I think one of it
Speaker 12: was just people didn't know how to drive the cars.
Speaker 12: They've treated them badly. The repair, you know, was much
Speaker 12: higher than expected. People complained about having not finding charging
Speaker 12: stations and then having to pay Hurts for the cars
Speaker 12: that were uncharged. The completely unexpected thing that happened is
Speaker 12: that Tesla facing demand issues and they're worried about the
Speaker 12: federal tax credit. They lowered the prices of their cars,
Speaker 12: and so the new car prices fall. They used car
Speaker 12: prices fall. It hurts is you know, is in trouble
Speaker 12: because it has to make up the difference. So I
Speaker 12: think it was just a combination of unexpected things. I
Speaker 12: think it was worth I think it was worth trying,
Speaker 12: but in hindsight, it was probably something that's going to
Speaker 12: cost them a lot.
Speaker 2: Ultimately. Thomas believes luck can contribute to a company's reinvention.
Speaker 12: I think Hurts has had their share of bad luck.
Speaker 12: They were doing really well until the pandemic hit. One
Speaker 12: could argue that the ev strategy was a good one,
Speaker 12: but it didn't work out.
Speaker 3: Luck is about when opportunity meets preparation, and that is
Speaker 3: the core to reinvention.
Speaker 2: Pannels of business history are littered with bad luck stories
Speaker 2: of corporate reinvention, but for the successful few, like New Balance,
Speaker 2: the ability to strategize, innovate, and execute goes beyond just
Speaker 2: good luck. As you look out, what do you examine
Speaker 2: to figure out this will keep us going as opposed
Speaker 2: to that one. I'm not sure that's going to get
Speaker 2: us there.
Speaker 11: But we're trying to make sure that the brand is
Speaker 11: positioned from a premium standpoint, and when you do that,
Speaker 11: you've got to be cognizant that you can grow, but
Speaker 11: you've got to have controlled growth. So as we look
Speaker 11: out into the future, you know, trying to maintain a
Speaker 11: growth rate that we've had in the past few years
Speaker 11: is not the first thing that we're looking at.
Speaker 6: It's the quality of growth.
Speaker 11: And so as we look forward, we know that sport
Speaker 11: continues to be an area that we can develop. A
Speaker 11: parel is a big opportunity, but all of it's under
Speaker 11: this guise of making sure that we are following a
Speaker 11: distribution strategy.
Speaker 7: And today when you win.
Speaker 2: That coming up, the two hundred billion dollar market of
Speaker 2: video gaming is about to get a new version of
Speaker 2: its most popular game ever, Grand Theft Auto six. We
Speaker 2: talked to the man bringing it to you, Strauszelnik of
Speaker 2: Take two. That's next on Wall Street reading. This is
Speaker 2: a story about the power of play, how video games
Speaker 2: can entertain us, connect us, and bring out our competitive side.
Speaker 7: It's highly social, it's highly engaging.
Speaker 6: I love video games.
Speaker 12: Last of Us Part one and two, The Witcher, God
Speaker 12: of War.
Speaker 2: The video game industry has grown into a nearly two
Speaker 2: hundred billion dollar global market, larger than film, television, and
Speaker 2: music combined, and is projected to grow around six percent annually.
Speaker 1: The really big hits of today, the Call of Duties,
Speaker 1: the Fortnites, the esports football clubs, the Grand Theft Autos
Speaker 1: like they just keep becoming more and more dominant.
Speaker 2: In addition to being an avid gamer himself, Doug Krutz
Speaker 2: is the senior Media, Entertainment and Gaming Analyst at t
Speaker 2: D Cowen. He's been following the industry trends for decades
Speaker 2: and has witnessed one game in particular, outshine the Rest.
Speaker 1: GTA five has sold over two hundred million units life
Speaker 1: to date, which is far and away the most at
Speaker 1: any video game has ever sold.
Speaker 7: It's not even close.
Speaker 1: Has probably generated ten billion dollars in revenue Life to
Speaker 1: date lines alone, but it's.
Speaker 2: Pretty as Rockstar Games, a subsidiary of video game holding
Speaker 2: company Take two Interactive, released Grand Theft Auto five back
Speaker 2: in twenty thirteen.
Speaker 7: Today, it's still the standard bearer for the industry even
Speaker 7: though it was launched so many years ago, and that
Speaker 7: it's kind of astonishing in a business where the technology
Speaker 7: is continuing to change at a pretty steep rate.
Speaker 2: Straus Zelnik is the chairman and CEO of Take two,
Speaker 2: which is also behind successes like NBA two K, Borderlands
Speaker 2: and Red Dead Redemption. But all eyes are on its
Speaker 2: next installment of the Grand Theft Auto series, GTA six,
Speaker 2: set to be released this fall.
Speaker 7: The anticipation for that title may be the greatest anticipation
Speaker 7: I've ever seen for an entertainment property. And I've been
Speaker 7: around the block a few times.
Speaker 2: It's been twelve years, now, why does it take that
Speaker 2: long to come up with six?
Speaker 7: We set an intention actually to rest our intellectual property.
Speaker 7: So some of our competitors come to market very regularly,
Speaker 7: maybe even annually. We think you need to create enormous
Speaker 7: anticipation on the one hand, On the other hand, it
Speaker 7: takes a long time to develop these big, robust experiences.
Speaker 7: Rockstar Game Seeks perfection.
Speaker 2: Take two is a major publisher and developer of Triple
Speaker 2: A title, a classification used within the industry for high
Speaker 2: profile games with high budgets.
Speaker 7: Luckily we have the balance sheet for it. It's one
Speaker 7: of the reasons that's standing up a company in a
Speaker 7: garage today will be awfully difficult. So in a way,
Speaker 7: the incremental costs have enhanced the barriers to entry to
Speaker 7: benefit companies like ours, we have team sizes that are
Speaker 7: as small as twenty people in the mobile space and
Speaker 7: as large as thousands of people in the console space.
Speaker 2: Even after spending all that money and time developing a game,
Speaker 2: how does a company know if it will be a
Speaker 2: hit or a miss.
Speaker 7: You would look at the sales of the last iteration,
Speaker 7: or in the case of new intellectual property, you sort
Speaker 7: of get a sense of what you think that thing
Speaker 7: looks like and compare it to other similar releases. We
Speaker 7: have consumers come in and play the games along the
Speaker 7: way and give us feedback. In the movie business, there
Speaker 7: is testing, but what do you test. You can't really
Speaker 7: test before you have a rough cut. To have a
Speaker 7: rough cut, you've shot the entire thing.
Speaker 6: I only wait then you get through.
Speaker 7: This is by sticking together, being a team.
Speaker 2: Like movie studios, gaming companies also market their product by
Speaker 2: releasing trailers before game debuts. To date, the trailer for
Speaker 2: Grand Theft Auto six has racked up more than two
Speaker 2: hundred and forty five million views on YouTube. What's the
Speaker 2: revenue stream look like? How do you get your money?
Speaker 7: In the case of console and PC, there's a free
Speaker 7: to play business, but that is largely a business where
Speaker 7: you purchase a unit and then you often have the
Speaker 7: opportunity to engage in an ongoing basis after the original
Speaker 7: purchase through a multiplayer, for example, experience, and that would
Speaker 7: be also monetized in game.
Speaker 1: The question is how much in game revenue can it generate.
Speaker 1: GTA five currently probably generates around half a billion dollars
Speaker 1: a year in game revenue. Now that's a lot of money,
Speaker 1: but it's less than half of what Call of Duty generates.
Speaker 1: It's probably less than what EA Sports Football Club generates,
Speaker 1: and it's maybe fifteen percent of what Fortnite generates. I
Speaker 1: do think that GTA six online will be bigger and
Speaker 1: better than GTA five, and it will probably be more successful.
Speaker 1: And the only question is you know how much more successful.
Speaker 2: But Strauss isn't putting all his eggs in one basket.
Speaker 2: In twenty twenty two, Take two acquired mobile gaming giant
Speaker 2: Zinga in an eleven billion dollar deal.
Speaker 7: What was the most expensive acquisition that had been done
Speaker 7: in the interactive entertainment businesses, eclipsed quickly by the Microsoft
Speaker 7: Activision deal, but at the time it was a big deal,
Speaker 7: and certainly a big deal for US. Mobile represents fifty
Speaker 7: percent of our netbookings. It's a very successful business and
Speaker 7: we have new hits. Our goal on the mobile side
Speaker 7: is to have the number one market share mobile. We're
Speaker 7: not there yet, we're heading in that direction.
Speaker 2: About one hundred and ninety million people between the ages
Speaker 2: of five and all the way up to ninety play
Speaker 2: video games in the United States. Approximately three billion people
Speaker 2: play worldwide. So how did the video game industry become
Speaker 2: the behemoth in the entertainment sector that it is today.
Speaker 1: It goes back in some ways to the nineteen sixties
Speaker 1: when some people were fiddling around with electronic equipment and
Speaker 1: seeing what they could do with it. From a commercial
Speaker 1: point of view, it really started in sort of the
Speaker 1: mid to late seventies with the Magnavox. The Atari twenty
Speaker 1: six hundred was one of the first kind of mainstream consoles.
Speaker 1: The next big thing was the launch of the Nintendo,
Speaker 1: the original Nintendo entertainment system back in the mid eighties,
Speaker 1: which really took off and made video games sort of
Speaker 1: a permanent feature of the entertainment landscape. It's gone from
Speaker 1: being sort of PC focused and then console focused, and now,
Speaker 1: of course we've got the mobile game industry, which is
Speaker 1: actually a majority of the industry now, in part because
Speaker 1: everybody owns a mobile device.
Speaker 2: In twenty twenty, the pandemic shut down the world, which
Speaker 2: further fueled the market. And while lockdowns hurt businesses like
Speaker 2: restaurants and tourist attractions, the video game industry got a
Speaker 2: major boost, even for a short while.
Speaker 1: The industry grew well over thirty percent in twenty twenty,
Speaker 1: and there was some sort of residual growth in twenty one,
Speaker 1: and then people came back out of their houses again.
Speaker 1: It a lot of firms sort of saw the increased
Speaker 1: demand and chased it. Maybe unwisely, people were chasing talent,
Speaker 1: and again I think that that led to overinvestment, and
Speaker 1: then when things moderated, you know, a lot of people
Speaker 1: got caught off base.
Speaker 2: It is estimated that globally more than fourteen thousand video
Speaker 2: game workers were laid off in twenty twenty four, up
Speaker 2: from roughly ten thousand the year before.
Speaker 7: One of the things I'm probably most proud of in
Speaker 7: my career, given I don't really have any creative talent
Speaker 7: at all myself, is that I seem to have some
Speaker 7: ability to figure out who's really talented and somehow convince
Speaker 7: them to work within our system, and then most importantly,
Speaker 7: then to pursue their passions. They're genuine creative passions. One
Speaker 7: of the questions I'm often asked is does generative AI
Speaker 7: mean that you know, someone sitting at home can ask
Speaker 7: chat GPT fourteen to you know, make a GTA competitor
Speaker 7: code at giving the marketing materials, you know, and more
Speaker 7: off to the races. I don't believe for a minute
Speaker 7: that that's going to happen. There's no evidence that tool
Speaker 7: sets allow people to win creatively. To the contrary, I think,
Speaker 7: you know, these are phenomenal digital tools and the more
Speaker 7: mundane tasks will be done more automatically.
Speaker 2: Still, thirty percent of game developers believe generative AI is
Speaker 2: having a negative effect on the industry, according to a
Speaker 2: recent report. But the Game Developers Conference. In contrast to
Speaker 2: the Triple A gaming companies like Take two, independent developers
Speaker 2: create their own games with significantly less funding. They flock
Speaker 2: to the annual GDC in San Francisco to show off
Speaker 2: their latest projects and maybe even attract some investors.
Speaker 9: Feeling inspired by other developers is a big part of GDC.
Speaker 9: For me, I think it is possible to take more
Speaker 9: risks and smaller studios. The budget is smaller, so there's
Speaker 9: less of a monetary risk. The folks that start these
Speaker 9: smaller studios are usually looking to tell a story that's
Speaker 9: unique and different.
Speaker 2: Sharon Kahn is the lead producer at Visai Games, a
Speaker 2: small independent studio that swept up awards last year for
Speaker 2: its game Venba.
Speaker 9: The winner is Venba Nba Vega, and the beftter goes to.
Speaker 7: Venba.
Speaker 9: I remember when we first started working on it, there
Speaker 9: was a bit of a joke that, oh, maybe we'll
Speaker 9: win the grand prize of the IGFs, but I don't
Speaker 9: think anyone really expected it. You're essentially playing in the
Speaker 9: role of an Indian immigrant mother. Her and her husband
Speaker 9: come to Toronto and they start a new life. They
Speaker 9: end up getting pregnant and having a kid right as
Speaker 9: they're like about to think about going back because they're
Speaker 9: struggling financially in Canada. And the story just goes through
Speaker 9: the relationship Venba has with her son, and it's told
Speaker 9: through food and cooking. It's probably going to get people
Speaker 9: to call their mom.
Speaker 2: The game has been quite successful, making over two times
Speaker 2: its budget back in sales and exceeding one million dollars
Speaker 2: in revenue. But before a game can thrive, independent developers
Speaker 2: often need funding to bring their vision to life.
Speaker 9: It was really difficult to get support at that time
Speaker 9: because Venbo was considered too risky and too weird. We
Speaker 9: made a trailer for this event called Wholesome Games Direct,
Speaker 9: and the trailer ended up blowing up, and that's when
Speaker 9: we started getting contacted by various publishers and funding sources.
Speaker 9: We managed to get funding directly from platforms such as Microsoft, Xbox,
Speaker 9: and Sony, and so we decided not to go with
Speaker 9: a publisher, and that, along with an Ontario Creates Fund,
Speaker 9: which is like a government brant in Canada, we were
Speaker 9: good to go for the rest of production, whether it's.
Speaker 2: A small independent release or a big studio one. Video
Speaker 2: games do more than just entertain players. They help connect
Speaker 2: users to other people, cultures, and even imaginary lens.
Speaker 7: Our focus around here is to be of service to
Speaker 7: our consumers, to engage them and captivate them and delight them.
Speaker 7: If we get that right, then the numbers will take
Speaker 7: care of themselves.
Speaker 2: That does it for us here at Wall Street Week,
Speaker 2: I'm David Weston. This is Bloomberg. See you next week.
Speaker 2: For more stories of capitalism,