Last time, I talked about the first of four North American game companies that are in danger of failing according to Altman’s Z-Score analysis.
The first was Take Two, who bought their way into failure. The second company, THQ, licensed their way into failure.
Licensed To Fail
- Z-Score: .87
- Key Games: Warhammer 40K, Company of Heroes, PIXAR, WWE
- Key Takeaway: Beware of entertainment companies bearing licenses.
- Strategy for 2009: The courts are your friend.
Toy Headquaters (THQ) started out as Trinity Acquisition Company, basically a private investment pool, then somehow stumbled into the toy business after picking up THQ. The details about all of that are a little sketchy.
In 1999, they purchased Heavy Iron Studios, a maker of children’s video games, and they have been acquiring game studios ever since.
If you read THQ’s annual reports, they make a big show about growing IPs. That is not what they do.
They are an holding company that acquires game development studios for their IPs, or negotiates with other game developers to purchase IPs directly, and then tries to grow their business.
It is an acquisition driven strategy where each purchase is seen as an investment and an integral part of THQ’s efforts to become the largest mass market video game developer.
In order to make good on those investments, you need to generate revenue. They are not, and there are two key reasons for that:
- THQ made a point of developing for every platform, even though it was clear that they really did not have the resources or the expertise to do so. The recent closings of Helixe, Locomotive, and Mass Media studios are and indication that they finally came to the conclusion that they do not.
- THQ has made a point of chasing mass-market entertainment and sports licenses, becoming the largest developer of licensed franchise video games. Any time you license a product, you are sharing revenue with the IP holder. Whether you are paying license fees up front, or giving them a percentage of sales, you are increasing the cost to market of your video games.
Interestingly, the year they had their best revenue (2007), they had the strongest collection of internally developed titles, including:
You would think THQ would think: “Hey, developing internal IPs is great for our bottom line! Let’s focus on that!”
Instead, the financial wizards at THQ decided that the potential margins on licensed content was too good to pass up.
Developing video games is expensive enough. You do not need to go looking for additional expenses, but THQ did.
And they are suffering for it.
Unlike Take Two, I do not see a turnaround strategy for THQ.
THQ could selling off studios or IPs in the hopes of keeping the doors open a little longer, but the licensed content contracts hang out there like an approaching storm.
Those contracts need to be serviced, and it is increasingly clear that they will not be able to do so. Not without significant influx of capital.
I guess I won’t get my hopes up for Homeworld 3.
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Fascinating article but just so you are aware, S.T.A.L.K.E.R. and Supreme Commander are not internally developed IPs and are not titles produced by studios that THQ owns. The first is owned and produced by GSC Game World from Kiev and the second is owned by Gas Powered Games, who recently announced Square Enix was publishing the sequel. THQ definitely has its focus on internal studios and IPs but those two titles were their attempt to do some third-party stuff, neither of which did great for them I don’t think.
Interesting. I was digging through their 10-Ks (back to 2006), and they made mention of both titles, no mention of the third party development.. I will change that.