Consolidation Seen Among Game Firms


For video game companies, these are feast years. With hundreds of new titles this holiday, the industry is expecting record sales.

But not everyone is benefiting from the boom. A number of firms--including Infogrames, 3DO Co., Acclaim Entertainment Inc., Irvine-based Interplay Entertainment Corp. and Midway Games Inc.--are pressured by debt, declining sales and mounting costs.

Their predicament illustrates the increasingly volatile nature of a games business that’s driven by blockbuster hits, multimillion-dollar development costs and Hollywood-style marketing budgets. Analysts predict a round of consolidation over the next year as some companies sell their assets or simply go out of business.

“You are seeing the cream rise to the top,” said Edward Williams, an analyst with investment banking firm Gerard Klauer Mattison in New York. “Over the next 12 months, there’s an inevitable thinning of the ranks.”


Most of the companies now at the bottom of the heap were once at the top, and many of them hold out hope that they may again dominate. After all, the history of video games is rife with stories of success, failure and redemption.

Santa Monica-based Activision Inc., which was in bankruptcy in the early 1990s, today is the nation’s second-largest game publisher after plodding its way back to the top, one hit at a time. And Atari, once the undisputed leader of the video game industry, withered in the 1980s and now is part of Infogrames.

“These guys all think they’re one holiday season away from a hit,” Williams said, citing Take-Two Interactive Software Inc., which pulled out of a nose dive last year with “Grand Theft Auto 3,” a sleeper title that became the best-selling console game of 2001.

Companies such as Redwood City, Calif.-based Electronic Arts Inc., and Calabasas-based THQ Inc. have managed to weather the ups and downs of the industry by cultivating proven franchises. For EA, perennial hits such as “Madden Football,” “Fifa Soccer” and “The Sims” have provided a fund to experiment with newer titles. Instead of trying to cover every genre, however, EA has stayed on top by sticking with tried and true formulas and wandering off only occasionally.


For Infogrames, its current hard times are particularly painful because the French game publisher benefited three years ago from an earlier round of consolidation by amassing a portfolio of game companies. The company declined to comment for this story.

Led by Bruno Bonnell, its charismatic French chief executive and founder, Infogrames spent more than $300 million in three years acquiring companies such as Hasbro Interactive, Shiny Entertainment, GT Interactive Software, Accolade Inc. and Paradigm Entertainment.

Infogrames didn’t stop there. It also bid top dollar for licenses to movies and television shows, including the “Survivor” television show, “Men in Black II” and the upcoming sequels to “The Matrix.”

The shopping spree turned Infogrames into Europe’s largest game company and one of the top five game publishers in the United States. But the properties had little in common, and many of them bled money. The most troubled property was GT Interactive, responsible for the bulk of a $322.6-million net loss at Infogrames’ U.S. subsidiary in 2000. Some of the studios it purchased lost talent as owners cashed out or left to start other companies.

Its licenses have yet to pay off. The company released its “Survivor” game just as the show’s popularity fizzled. And its “Men in Black” game failed to wow either critics or consumers. Its “Matrix” games will not be released until next year, but analysts question whether the games will perform well enough to justify the $47 million Infogrames paid to license and develop the titles.

So far, Infogrames has not been able to consolidate its disparate empire and generate a profit. Its U.S. business has recovered and eked out a $1-million operating profit and a $700,000 net loss for the fiscal year that ended in June. The subsidiary completed the year with just $6 million in cash. Its French parent did worse, posting a net loss of about $78 million on revenue of about $750 million, $419 million from its U.S. arm.

The upshot is that the onetime acquirer may find itself being acquired if it can’t turn a profit this fiscal year to satisfy creditors holding convertible bonds worth $122.4 million and $302.5 million due in 2004 and 2005, respectively.

“This is a company with all the signs of being up for sale,” said Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles.


Infogrames’ Bonnell recently denied to European journalists that the firm is shopping itself around.

Of course, if Bonnell were to change his mind, Infogrames has a number of valuable assets it could sell, including its “Backyard Sports” and “Test Drive” franchises, its Hasbro licenses to produce games based on Monopoly and Scrabble, and its publishing contracts with independent game studios for such titles as “Unreal 2003,” “Neverwinter Nights” and “Sid Meier’s Civilization III.”

Likewise, many other companies on the consolidation watch have desirable assets. Midway has the “Mortal Kombat” franchise, 3DO owns the “Army Men” series and Acclaim has had steady success with its BMX titles and “Burnout” driving games. Interplay, which appeared to be at death’s door after ousting its founder and selling Shiny Entertainment to Infogrames in April, has Black Isle Studios and the license to the “Baldur’s Gate” franchise.

But Wall Street has been unimpressed, pushing several stocks to new lows. Infogrames’ U.S. subsidiary touched a 52-week low of $1.40 on Nasdaq on Friday before closing at $1.69, down 26 cents. For the year, its stock is down more than 76%. Interplay closed at just 11 cents, also down 76% for the year. Acclaim is at $1.27, down from $5.18 on Jan. 2. Midway’s shares are off by 63% for the year at $5.51 on Friday. After a one-for-eight reverse stock split last month, 3DO’s shares lost nearly 92% of their value this year and are trading at $1.34.

Acclaim declined to comment. Midway and Interplay could not be reached for comment. Trip Hawkins, chief executive of 3DO, with a market value of little more than $10 million, said his firm would sit out this holiday season to retrench and focus on releasing a few key titles it hopes will help it revive.

“Theoretically, anybody can stage a comeback,” said John Riccitiello, president of Electronic Arts, the nation’s largest game company. “But each time the industry goes through one of these cycles, it gets harder to make a comeback. The market gets bigger. Consumer expectations rise. Development budgets, marketing budgets rise. And when the stakes go up, there will be winners and there will be losers.”