Fast Company

Hollywood's New Game

Technology and entertainment can mix -- if you combine the right strategy with the right kind of organization. That's the lesson behind the rise of Sega GameWorks. Although the company is based in Hollywood, the model is pure Silicon Valley.

Skip Paul pulls his golf cart up to the classic Hollywood vaulted roof and palm trees of Soundstage 35. He usually tools through the back lot of Universal Studios with utter nonchalance, skirting Styrofoam dinosaur eggs and buzzing past, say, Jerry Seinfeld. But it's June 1993, and Soundstage 35 now houses Paul's new company -- so his superhuman cool is warming to excitement.

He says hello to a guy coming out of the building and asks, "Steve around?" The answer comes back: Steve's not there; he came by earlier. "Okay, fine," says Paul, 51. That's Steve as in Spielberg, Paul's friend and one of the other two cofounders of Paul's company. "And," the guy reminds Paul, "you need to call Snoddy." That's Snoddy as in Jon Snoddy, 46, in all likelihood the reigning entertainment-technology wizard this side of the San Fernando Valley and, as it happens, the third man in the company's original troika, with Paul and Spielberg, 52. Paul nods and then opens the door. "Now," he says, "you'll understand what this company is all about."

The atmosphere inside is fantastical. Everything comes at you: huge soaring arcs of metal, giant splashes of color, lights, cameras, overhead monitors, and, although it takes a moment to notice them, games. Everywhere there are games. They are video games -- racing games, skiing games, sports games -- but they seem different somehow. Looking around, you realize that the reason you don't see the games at first is that they are not just in the environment -- they are part of this amazing environment. The environment is the games. Everything looks different. And there's a . . . bar? The question almost forms itself: What is this company selling exactly?

Paul smiles.

The company is Sega GameWorks LLC, and in its shiny multilayered surfaces, you can see the vision of its three creators. Paul, Snoddy, and Spielberg have seen the future of movies and games. And guess what? The future is not exactly movies, and it's not exactly games. And there's more. The three men created this company on a production-studio lot, among movie sets. But strictly speaking, it's not a production studio or a movie set. These guys have taken the next sports bar and future rock show, and have created not a sports bar or a rock show but some kind of a fusion -- something different, something that starts with old and familiar elements and then makes something new and fresh and fundamentally other. And although they've created it in Hollywood, their model is pure Silicon Valley. It's all hybrid, fusion, transformation -- the morphing of the future of entertainment.

You have never heard of Paul, and he prefers it that way. With his cool, Californian air and athlete's haircut, Paul looks like a pro tennis player who wandered into a boardroom. He cannot be intimidated, and he is utterly independent. He has been openly gay for years and has managed to make a fortune, getting to know everyone in the top echelons of the movie business with barely any press exposure. He rarely gives interviews. He and his life partner, a doctor, live quietly in San Francisco.

One other thing about Paul: He is a video-game fanatic. He used to be, after all, a top executive at Atari Games Corp. It just might be the art of the video game that gave Paul his commercial edge. It turns out that in the constantly morphing technology economy, video games are the best corporate metaphor: They are all about negotiating fast-moving obstacles and surviving one level to get to the next. Get a good idea, survive all attempts to kill it, and you get to the next level.

The topology morphs suddenly into another time-space dimension? Go with it. Paul knows that you can't be either a bricks and mortar or a dotcom. Nor can you be either a startup or an established company. You have to be both. It's not either-or; it's both-and. GameWorks seeks to play in another dimension entirely. The company's corporate structure -- it is a joint venture among DreamWorks SKG, Sega Enterprises Ltd., and Universal Studios Inc. -- suggests the operating synthesis that its founders hope to achieve in their 13 domestic and 2 international locations. The company's DNA begs the question "Is there a model for creating a whole new industry?" Here's how these guys are doing it.

Level One: Start Game

Ready to play? The point of this game is this: Take an existing product and zap it with so many elements that it transforms into something else entirely. Technology collides with movies, which collide with video games, nightclubs, architecture, design, restaurants, sexual politics, amusement parks. And as these collisions occur in front of you, and as you watch each collision produce the next fantastic fusion, you think, Yes, of course! These different forms and factors, separate for so long, had to converge sooner or later -- didn't they?

"Everything good, all at once." That's an old GameWorks motto, a corporate philosophy that also happens to describe the core of a nuclear reactor: If you carefully put together the already-existing right elements and then ignite them in the right way, you get a hell of a lot of power. And you can probably make a lot of money doing it. Which is exactly what GameWorks is all about: daring. If there is a model for creating a whole new industry, this might be it. Set up the reactive elements, and then watch as technology and entertainment super-accelerate, super-collide.

It started like this: In the early 1980s, Paul was in Chicago attending a consumer-electronics show when Warner Communications's legendary chairman Steven Ross told him to grab a ride back in the company Gulfstream. "There's a young director we want you to meet," said Ross. Paul and the "young director," Steven Spielberg, hit it off. Spielberg began stopping by Paul's office, where they played games, talked games, thought games. Why, Paul and Spielberg asked, do we think of video games as distinct things, as units of and by themselves? Why do we segregate them into arcades, separate them? If video games use pictures and motion and sound and atmosphere and set design and plot and character, why was there such a sharp line between them and movies, or theme-park rides, or the music industry?

The answers to those questions were, in large part, embedded in Paul's career trajectory. Even if he'd planned it, he couldn't have had a better education in how to negotiate this level of the game, the part where you grow the concept. After Atari, one of the earliest video-game companies, skyrocketed and then imploded back in 1984 ("Bad business," says Paul simply), Sid Sheinberg and Lew Wasserman, the heads of MCA, asked Paul to join their company. As a lawyer in Silicon Valley, Paul had already been exposed to venture capital and computer technology, and so now he began his schooling in theme parks and their marketing. He put together Universal Interactive Studios, which created Sony PlayStation mascot Crash Bandicoot and made Universal lots of money.

He also started to work with a guy named Ron Bension, and in 1992, the two of them were part of a group that bought some land for Universal Studios Florida. Working for Wasserman, Bension, 46, and Paul found themselves studying with the quintessential entertainment master. "When we opened the 'Back to the Future' ride at Universal Studios Florida," recalls Paul, "Ron and I sat with Lew Wasserman and watched people coming off the ride. Lew said, 'It's a hit.' I said, 'How do you know?' He said, 'Just look at their faces.' " Near the end of 1995, Sheinberg and Spielberg (who had been tracking his friend's progress) decided that it was time to get serious about creating a new company. So Paul started searching for a chief architect who could realize Spielberg's vision.

Over at Disney, Jon Snoddy happened to be looking for something new to do. "You see Snoddy walking around," Paul says, observing Snoddy's long, silver ponytail and utterly mellow manner, "and you think he's putting together the reunion tour for the Dead." Snoddy had started at Lucasfilm and then jumped to Disney, where he created the "Indiana Jones" ride. " 'Jones' was a modified roller coaster," says Snoddy, "and I learned a lot from it: how to mock up a system, how to deal with motion problems, and how to use hydraulics to make bumps feel bumpier." Now Snoddy wanted to set up his own shop, a super-environment post-production company that animated something he loved: video games. So he went to see former Disney honcho Jeffrey Katzenberg. "Funny," Katzenberg said, "I've been looking for you. Have you ever met Skip Paul?"

Snoddy said that he had not met Paul and asked who he was. Katzenberg explained that GameWorks was just being formed and asked Snoddy if he could come back once the company was established. Snoddy, struck by the secretiveness, agreed.

A short time later, when Paul and Snoddy finally met, "I knew that I wanted to do business with him," says Paul, who immediately arranged a meeting in Spielberg's office. The three men pulled up chairs, and Spielberg talked about his gaming vision.

"I was amazed at the depth of Steve's passion," Snoddy recalls. The three men shared a reverence for games and, says Snoddy, a hatred of the backwaters called "arcades" in which games had been stuck: "Skip, Steve, and I agreed that we're not ashamed of video games. Somehow, traditional entertainment people viewed video games as 'unserious.' As it was hard for my parents to think of rock and roll as serious music and to understand that it was part of my culture, it's hard for traditional movie-industry and theme-park executives to take video games seriously."

It was a manifesto that constituted an initial business plan. The founders envisioned a company that would reach a new kind of human-leisure animal. "There was a generation of people out there who had started to run the world," Snoddy says. "They had lived their entire lives with a game plugged into their TVs. We thought, That has to change the way that adults view entertainment. When you're playing a video game, you're in control. I think that has to affect people. It makes them demand a role in their own entertainment."

So they said, "Let's build a place that we would want to go -- adult, sophisticated, a peek behind big companies, a look at technology, injected with the best parts of movies."

Go to level 2.

Level Two: Choose Your Battlefield

In the business of games and in the game of business, every decision has the potential to be the one that will kill you -- or propel you to the next level of success. Take the decision that Paul says was one of the toughest calls that his team had to make: where to put GameWorks's headquarters. It was less about geography than about how the company should be run.

Says Paul: "Snoddy and I sat in a room and said, 'Are we going to do this in San Francisco or at Universal Studios in LA?' It was originally supposed to be in Silicon Valley."

It wasn't the location that was important but what the location said about the kind of company that GameWorks would be. Paul wanted a Silicon Valley - type company. "At the most fundamental level, GameWorks is put together out of a belief in and a reverence for what has made those companies successful," Paul says. "Low salaries, basic and functional surroundings, and group ownership. Most important is ownership, the sense that you are part of building something. If you arrive at a Silicon Valley company at 9 at night, you see men and women working, because they are owners. That's totally different from the Hollywood business model, which is a subsidy of lavish lifestyles and surroundings, big expense accounts, inflated egos, and focus-group thinking. In Hollywood, hierarchies of power are important. At GameWorks, the receptionist has stock options."

It sounds odd: Paul has managed to thrive within the Hollywood business model while having no respect for it? "No," says Paul, "I don't respect it. Why? Because too few people make too much money. It's not open, it's not accessible, and the distribution of wealth bears little relationship to the distribution of talent. In the technology world, exclusion never has a chance. Hollywood has some incredibly hardworking people like Lew and Sid, but it's also full of people who glide by on cell-phones. Silicon Valley is about creating things."

But one compelling factor brought GameWorks to the Universal lot in LA: Paul wanted to be near Spielberg while the director was shooting The Lost World: Jurassic Park. The goal, Paul says, was to make it possible for Spielberg to "come around, to feel as though he had a proprietary interest, to give his input." But at company meetings, Paul made it clear what kind of business he was interested in starting: "We did not inherit a culture. I don't want MCA Universal. I don't want Disney. This is Silicon Valley. This is a startup. You carry your own bag at this company."

Level Three: Team Players

When you're playing a video game that's based on a team sport, Madden NFL 2000 or NBA 2K, for example, there's one important rule: The guy with the best team wins. The same rule holds when you're starting a company to produce games -- and Paul, Snoddy, and Spielberg started by assembling the best creative team around. Snoddy picked the biggest names in the theme-park and movie-magic business: Disney designer Bill Stout; media and technology guru Tim Onosko; and Jim Schelter, tech director for some of Universal's biggest attractions. Whenever someone needed special persuading, Spielberg made the phone call. Paul had done a little negotiating with Universal Studios, and he delivered Soundstage 35 to the hotshots. (Most studio newcomers are lucky to get a small bungalow.) In March 1996, GameWorks was officially born.

The creative team was allowed total freedom to ... play. "We started thinking up ideas and drawing pictures," says Snoddy. "We filled a conference room with sketches, we took trips, we looked at things." Word started to get around about Soundstage 35. Walter Parkes, head of DreamWorks's movie division, found time to drop by, as did America Online president and COO Bob Pittman, and high-powered movie executives Tom Pollock and Casey Silver. And the team "met with Steven" -- which really meant letting Spielberg play, think, and effuse about games. Remembers Snoddy: "Skip, Steve, Jeffrey, and I were on a bus once in Japan, and Steve was talking about which games he was playing during the making of which of his movies. He would have a game console of Missile Command or Tank shipped to his movie set, and between takes he would sit there playing these things. He's amazing at Asteroids." Adds Paul: "Steven loves games, and he knows them intimately -- why they succeed and why they don't -- better than anyone I know in Hollywood knows games. Walk into a games place, and most Hollywood execs stand there with their arms folded. Steven plays them online when he gets home at night."

Meanwhile, Paul brought in Michael Montgomery as president and COO. Montgomery had turned Euro Disney around before going to work for Katzenberg to raise equity for DreamWorks. He went to a presentation that Paul was giving and was hooked. Montgomery would go on to raise $76 million. Paul and Spielberg also put in a huge sum. Edgar Bronfman Jr. put in Universal's money to buy 25% of the company, and, of course, Sega chipped in as well. In total, the investment amount was so large that today the company still has zero debt and a huge war chest of cash.

Go to the next level.

Level Four: Strategy

In video games, "strategy" is a fancy word for the quick, intuitive decisions that you make as unexpected events unfold in front of you on-screen. That's also GameWorks's definition of strategy. Take the issue of pace. "Originally," says Snoddy, "we were going to do 100 GameWorks in two years. But the limiting factor was real estate. You just can't get that many really good locations." Adds Paul: "We would have had a cash flow of around $50 million a year, as opposed to $15 or $20 million, and more than 30 GameWorks locations, but we erred on the side of slower expansion to make sure that we would correctly implement the concept and the brand."

Then there was Paul's concept that each GameWorks site be designed differently, by sequential evolution: As each site opens, the design team immediately begins mentally tearing it apart and rethinking the whole thing. After each GameWorks opens, "we start from zero," says Paul. "Seattle was our genius creation -- until the second we built it. Then it was just a prototype. You need to trust your initial vision. But you also need to learn from it."

And then there was the product itself. And this was where GameWorks got really weird.

It is not immediately apparent what GameWorks sells. Sure, it sells the opportunity to play games. There are games from Namco and Sega at each GameWorks, and each game costs around $11,000 (some go for as much as $30,000). Every GameWorks facility holds at least 150 games and 3 or 4 "attractions," such as "Vertical Reality" (a Spielberg creation), "Indy Player," "Max Flight," and "The Lost World: Jurassic Park." Each attraction costs around $200,000 -- a total of between $3 and 4 million in games per site.

But these are not -- and everyone at GameWorks repeats this emphatically as the company's mantra -- just video games. Or more precisely, GameWorks isn't "about" games. Snoddy puts it this way: "GameWorks is not about the game that you are playing. It's about linking experiences, linking my experience to everyone else's experiences. Playing a video game at home, you play by yourself. Nobody knows, nobody cares. You play, and then you turn it off."

Now compare that limited experience to the options that are available in GameWorks's go-cart ride. A simple video game would be about you and the go-carts. At GameWorks, Snoddy explains, the go-carts "are about you and the people around you. You're onstage. You're being watched, evaluated. Other people are wondering if they can drive as well as you can. The best score of all time is up there, and you judge your performance based on it. When a race ends and a record time goes up, you hear cheering and shouting, and the winner is seen and known. Steven talked a lot in the early days about his conception of how this could work. He felt that a kid sitting alone staring at a screen is not a great thing. People interacting with one another and having fun is."

And then there is the element of the movie, the set, the design. GameWorks's genius is in the way that the idea of a movie is synthesized into the product. Paul explains: "We want the environment to be jarringly different. You're experiencing environment, moods, angles, sight lines rendered in computer modeling designed to seduce you, lights placed in such a way to make you follow them with your eyes. It is selling the art of motion pictures, as opposed to the stuff of motion pictures."

Ultimately, the company is defined by the verb that you use. First there were movies. If Universal Studios theme parks "spin off" movies -- "Jurassic Park, the Ride" -- and if the Disney Store "merchandises" movies -- "Aladdin, the T-shirt" -- then GameWorks "distills" movies. The value added by a simple video game is in part the physical totality of the experience: No ordinary game can drop you and three screaming competitors 26 vertical feet -- but the $400,000 "Vertical Reality" attraction can. Strip away the story (this is not two hours but two minutes), turn the director into the production designer, package your product in the atmosphere of a Hollywood film premier while omitting the actual film, and you get a bite-sized, new kind of movie. You get GameWorks.

What Paul, Snoddy, and Spielberg have tapped into is the fact that, along with plot and character, movies are and always have been pure atmosphere. Think Casablanca, and the first thing that your mind retrieves isn't the script but the raw feel -- the gritty texture of Rick's Café Américain. The GameWorks team knows that when you say "movie," you're talking not just about the picture that you go to see but also, consciously or unconsciously, about the whole exciting concept of celebrities and Hollywood studios, red carpets and velvet ropes. In reproducing sensations -- in its avid sensory promiscuity ("Everything good, all at once"); in its cool, headset-wearing crews; in the way that it voraciously, overwhelmingly surrounds you like an electronic womb -- GameWorks is a new means of selling movies. It offers, simply and efficiently, the essence of movies. Whereas companies like Paramount, TriStar, and Warner Bros. feed your cerebellum, GameWorks jams a catheter into your brain stem.

Level Five: Hit Reset

The most financially original idea behind GameWorks is the market that its founders set out to create. Paul, Snoddy, and Spielberg envisioned excellent dining, and young professionals holding expensive vodka tonics with clinking ice cubes in one hand and joysticks in the other -- plus a social-sexual dimension appropriate for young adults. They envisioned a Monaco with video games. Instead, they found that their average guest was 22. There were lots of guys sporting T-shirts, baseball caps worn backward, and goatees.

So they changed everything. All facilities are now run according to a principle that GameWorks calls "day parting," which means that they're not only morphing the elements of the industry -- they're also offering a product that mutates during the day. Says one GameWorks employee: "We're developing a product that is safe, secure, and comfortable for the family during the day and early evening, and that morphs at night into something sexier for the older clientele." And it's working, he says. "Do an exit survey at 3 PM on Thursday, and it will be all families, parents with 12- to 18-year-olds. But at 8 PM, the core age is 25." There are age restrictions now, comparable to, say, the way that the movie industry rates its films. "There's no actual difference in the games," says the employee, "but the music, lighting, and atmosphere change dramatically."

Paul wasn't kidding when he said that Seattle was "just a prototype." The Seattle model had a snack bar that sold fancy bar food. The restaurant, unfortunately, had not lived up to the original plan. "When we started this," says Paul, "we underestimated the restaurant's importance in getting people to think of GameWorks as an adult place. We didn't recognize the customer." By the time they were ready to open the Miami GameWorks, they were confident enough to place the restaurant, which can seat 240 people, front and center.

There are more signs of total reinvention. For example, in the latest GameWorks clubs ("club" is really the only appropriate way to describe them) in Chicago, Columbus, Detroit, Miami, and Tampa Bay, evening guests order gin and tonics from cocktail waitresses. Chicago and Miami GameWorks stay open until 2 AM on the weekends. Members of the crew, who used to wear polo shirts and jeans, now dress up more. The bartenders and waitstaff all wear ties, and the average age of employees has risen from 16 to 21. GameWorks used to generate less than 15% of its revenues from food and beverage sales, and now that number has increased to 40%. In fact, it looks as if the food and beverage part of GameWorks could very well overtake the games.

Level Six: Change Players

When changing strategies, don't forget to get new blood. The concept for GameWorks morphed, and the team morphed with it. When Michael Montgomery left the company to become a venture capitalist, Paul replaced him with his old Universal friend, Ron Bension -- not a surprising move, given the fact that Bension had been preparing for exactly this job his entire career. After rising to chairman and CEO of Universal Studios Recreation Group, Bension put into place a $2.8 billion expansion plan at Universal Studios Florida. At GameWorks's headquarters in Glendale, California, he is focusing his attention on international expansion and is aggressively looking at Asia and Latin America. GameWorks Rio opened in November 1999; São Paulo is scheduled for 2001.

Bension is also modifying the use of movie magic. "I don't think that we've done a good job so far of using specific movies -- movie-themed games -- and I'm going to focus on developing proprietary entertainment assets," he says. "I intend to develop those assets -- 'rides,' if you will -- based on a film. It will have a branded aspect to it. 'Vertical Reality' is a big idea, but I just hate the name. What does that say to people in Columbus, Ohio? You can say to them, 'We have "Vertical Reality." ' And? The experience is terrific, but how do you get people to experience it? If that were the 'Men In Black' attraction, it would be more successful."

Second, and rather astounding, the creative dream team that Snoddy and Spielberg painstakingly assembled is gone. "We just found that we didn't need them," says Snoddy. At this level, and at this point in its own evolution, GameWorks has decided that the best team can be a surprisingly small and inexpensive one (it comprises just seven other people).

Level Seven: Keep an Eye on the Future

It's another video-game operating rule: Try to know where you're going. That's why Snoddy is developing more games: a parachute jump and "another game that I can't go into detail about." And of course, he's working on more pure-video games, which users will soon be able to download from the GameWorks Web site. "Ultimately," says Snoddy, "any game that people play should be a GameWorks game. We want to be part of the definition of playing games with your friends. Our company will grow outside of its walls onto the Internet. It's always about people playing together."

As for Paul, the entire process is a vindication. "Now that I'm 51," he says, "the most fun thing has been watching technology and entertainment collide." He is one of the few executives who looked at Pong -- remember Pong? -- 30 years ago and saw what its great, great-grandson could be. "I feel," he says, with satisfaction, "like one of those animals that crawled up on the beach and grew legs." Game definitely not over.

Chandler Burr (cburr@fastcompany.com) is a freelance writer based in London. His second book, Heretic of the Senses, is due out in late 2001. contact Ron Bension(ron@gameworks.com), Skip Paul (skip@ifilm.com), or Jon Snoddy (jon@snoddy.net) by email. Visit Sega GameWorks on the Web (www.gameworks.com).

Sidebar: How GameWorks Works

Jon Snoddy, creative consultant at Sega GameWorks LLC, is in the process of decorating his office. He's creating a techno-explosion. There's a huge blood-colored spider Web hanging over the window (it's actually a red parachute), along with snapshots of Snoddy having beers at a GameWorks opening with Carmen Electra, Bill Gates, Will Smith, and Vince Vaughn hanging on the walls. GameWorks is heavily dependent on engineering and technology -- the latest game engine, the hottest motion base -- and almost immediately, Paul and Snoddy made a strategic decision not to be an engineering company or a technology company.

"We didn't want a big in-house engineering department," says Snoddy. " 'Vertical Reality' required a company with a lot of electrical-engineering knowledge and game development and computer animation and character and personality creation. To do all of that, we'd need a huge engineering firm. We just wanted to start with a notion and wind up with a game."

The process of developing the attractions starts with the perfect game idea. And GameWorks is actually under a constant bombardment of external ideas. "GameWorks is a magnet," says Snoddy. "People call up all the time and say, 'I've got this idea. Would you be interested?' Unfortunately, often when you ask, 'But what do people do with this?' they say, 'Well, anything!' And anything is a lot like nothing. Until you can be more specific, you really aren't there."

The game ideas then get a "script," which in GameWorks's case is mostly direction, a narrative of what the guest sees, not dialogue. The script must also allow space for each person to interpret the story subjectively.

Once the script is done and the art is finished, GameWorks president and CEO Ron Bension asks, "Is it technically possible?" and "Does the engineering exist?" He also has to ask, "Is it financially viable?" At any given moment, GameWorks has eight projects at the idea stage, three at the "actively talking with potential vendors" stage, and one near production. It is precisely at this near-production stage that the company must walk a line: It has to be careful not to reinvent the wheel -- but it can't afford not to invent wheels that need inventing.

Snoddy says that the company tries "to use off-the-shelf stuff whenever we can, but this industry is pretty small, and we're one of the biggest players in the industry, so we tend to drive this innovation. We're the prototype creators. And that's what we sell: an experience that you can't have elsewhere."

GameWorks has another advantage: speed. Says one former employee, who used to work at Disney: "GameWorks, as a new company, is a little disorganized, but there's tons of individuality and possibility there. At Disney, everything is hyper-organized, but you'd wait three, four years for an attraction to be ready. At GameWorks, six to nine months, and you're up and running."

The "Indiana Jones" ride that Snoddy did for Disney may have cost $90 million, but Snoddy finds the attractions at GameWorks much more interesting. "When people come to GameWorks, they want to see new stuff," he says. "So we have to work very quickly to stay ahead, and I love that. I love the fact that by the time something is in GameWorks, we already have to be thinking about its replacement."

What is remarkable -- and clearly visible -- about GameWorks is its openness to ideas. Says Snoddy: "We're open to everything. I'm not an engineer. I have a degree in journalism, and I studied some engineering. My job is not to build the machine -- it is to define the experience and then get it created." Snoddy has carved out an area in the GameWorks offices for ideas, posters, designs, sketches, and words that people throw up so that others can critique them. "I like to have an open office where everything is out." He points at one sketch: "This is four hours old, and already it's out here. We have no 'idea department.' This company rewards creative ideas, so they come from everywhere and from everyone."

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