In a sign that toy makers recognize the growing power of video games, the world's largest toy company Thursday announced plans to spend $25 million for a part of a major video game publisher based in Orange County.
Hasbro Inc., the maker of GI Joe and Barney dolls and board games including Monopoly and Clue, agreed to purchase a 15% stake in Irvine-based Virgin Interactive Entertainment and to jointly develop video games and other software based on Hasbro's line of children's toys and games.
"It's a good way for Hasbro to get its feet wet in interactive entertainment," said Lee Isgur, an analyst at investment bank Volpe, Welty & Co. in San Francisco. The deal would enable Hasbro to expand its reach beyond toy retailers such as Toys R Us to software and game retailers such as Babbages Inc. and Radio Shack.
Virgin Interactive is a leading developer of games for the Nintendo and Sega game systems as well as for personal computers. One upcoming title is a game based on Disney's "Aladdin" animated film.
Hasbro also owns the Parker Bros. and Milton Bradley line of board games and the Playskool brand of toys for infants and toddlers. The purchase is subject to regulatory approval.
The alliance could lead to interactive video games based on the GI Joe and Transformers characters and it would give Virgin an edge over rivals without a similar alliance, such as Irvine's Interplay Productions Inc., the No. 2 video game company in Orange County with about $60 million in annual sales.
Barry Alperin, vice chairman of Pawtucket, R.I.-based Hasbro, said the deal is the latest example of the merging of companies that want a share in the entertainment business of the future.
As this convergence gathers momentum, alliances have formed among cable TV companies, Hollywood film studios, computer makers, video game publishers, media companies and telecommunications firms. These alliances aim to marshal the technology, delivery systems and content of tomorrow's entertainment.
As an example, cable companies say technological changes such as the installation of fiber-optic cable in homes could enable them to offer 500 channels to viewers, including those that would offer a library of video games to play.
Such changes have lured Hasbro into the $7-billion video game market for the second time in recent years. In 1989, the company began distributing Nintendo games but pulled out after facing stiff competition, Alperin said.
"This time, the video game industry has the critical mass," he said.
Robert Devereux, chairman of Virgin Interactive, said his company will benefit from access to Hasbro's massive sales and distribution network. The deal would give Hasbro one seat on Virgin's board, but Devereux said it would not affect the management or work force of Virgin Interactive.
Isgur, the analyst, said the deal will enable both companies to expand their consumer base.
"This is a strong alliance in terms of distribution, but a stronger alliance would have been if Disney acquired (Virgin) and supplied them with the creative ideas and software for good games," Isgur said. "For Virgin, they will still have to worry about where to get Hollywood access."
Despite all the partnerships being made with Hollywood studios, Devereux said that Virgin opted for a link with Hasbro. Despite the hype, he said, fewer than 10% of the most popular video games are based on movies.
But Virgin's deal with Hasbro is safe because it does not alienate any particular studio, whose future hit movies might be the basis for games. It may, however, sour any future deals with El Segundo-based Mattel Inc., but analysts said there are fewer video games to be made from the properties of Mattel or its soon-to-be-acquired Fisher-Price Inc. unit.
Over the past five years, Virgin has licensed rights to make video games based on Hasbro games such as Monopoly and Risk. Video games based on those licenses have sold more than 1 million copies.
Virgin Interactive is a relatively unknown company in Orange County. It is a subsidiary of Virgin Communications--the holding company for the Virgin Group's entertainment, broadcasting, publishing and production interests. Virgin Group, owner of Virgin Atlantic Airways and a music store chain, was created by flamboyant British entrepreneur Richard Branson. Virgin founded its own game business in Europe in 1983 and acquired an Irvine company run by British transplant Martin Alper in 1988.
But despite its low-key presence, Virgin Interactive has grown into Orange County's largest video game company, with more than 250 employees worldwide and an estimated $100 million in sales for 1993. Based on Hasbro's proposed purchase price, privately held Virgin Interactive would be valued at $166 million.
The company is moving to a 25,000-square-foot headquarters across the street from its current building on Fitch in Irvine. There, the company will have 17 separate game production studios with sophisticated computer workstations to produce the three-dimensional animation for future games.
At any one time, the company has about 90 game titles on the market. One of Virgin's hits is "The Seventh Guest," an original gothic horror murder mystery published in compact disc format for a personal computer.
The game is an example of a new generation of games aimed at appealing to larger audiences--the sort of entertainment the Virgin-Hasbro team is likely to focus on. In the game, players can feel as if they are walking into an animated film in the role of a guest at a haunted mansion.
"We call this 'interactive drama' " instead of a video game, said Justin Heber, a senior vice president at Virgin.
The Future of Fun
The world's largest toy maker, Hasbro Inc., has agreed to invest $25 million for a 15% stake in Irvine-based Virgin Interactive Entertainment. The companies plan to jointly develop video games based on Hasbro's line of children's toys and games.
VIRGIN INTERACTIVE ENTERTAINMENT * Headquarters: Irvine * Employees: 250 * Products: Video and computer games such as "Robocop Vs. the Terminator," "Dune," Disney's "Aladdin" (fall release), "Cool Spot," "Monopoly," "Risk" and "Dan Marino's Touchdown Football" * Revenue: $100 million estimated for 1993 * Parent company: Virgin Communications Ltd., subsidiary of the Virgin Group in London
HASBRO INC. * Headquarters: Pawtucket, R.I. * Employees: 11,000 * Products: Parker Bros. and Milton Bradley board games such as Monopoly, Risk, Clue; Hasbro toys such as GI Joe, Transformers, Cabbage Patch dolls, Barney; Playskool toys for infants * Earnings: $179 million on $2.5 billion in 1992 revenue
Source: Individual companies