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The Rise and Fall, and hopeful rebirth of THQ

Although 2012 is still just weeks old, at least one company is probably not going to think back fondly on this year. In just a few short weeks, the once giant video game developer and publisher THQ has reported loses during the holiday season alone of $55.9 million, causing a massive restructuring. Sales in general were down 3-percent as well.

Sadly, but not surprisingly, that news was followed by reports of layoffs. At first it was estimated that 30 people would be losing their jobs, then that number jumped to 170. The actual number is closer to 240 as part of a proposed restructuring, and although things seem stable at the moment, more could be laid off in the near future. THQ’s CEO, Brian Farrell, is also expected to face a 50-percent pay decrease for one year, dropping his salary from $718,500 to $359,250. The board has also agreed to take voluntary pay cuts.

Nasdaq has even gone so far as to issue THQ a delisting notice, warning the publisher that if its stock per-share does not increase to at least $1 and remain there for 10 consecutive days by July 23, THQ will be removed from the market. Beyond the potentially disastrous financial consequences of being delisted, the low stock reaffirms the lack of faith the shareholders have in THQ as a company, which further complicates any new projects in the making.

THQ has been a staple in the video game industry as a publisher and developer since 1989. It has been there for the rise of the industry, and has released some massive and memorable hits on all almost every platform for over 20 years. So what went wrong?

The curse of the creeping uDraw

The reasons for THQ’s current predicament are many, and this has been building for at least a few quarters now. But even factoring in disappointing sales on a handful of recent big budget games like MX vs. ATV: Alive and Red Faction: Armageddon, as well as poor sales for games geared for children, the real trouble began courtesy of the uDraw tablet peripheral, an accessory geared for a specific line of uDraw games. The device was released in 2010 for the Wii, and did decently (but not spectacularly). The version for the Xbox 360 and PS3, however, did horrifically. On the Xbox 360 and PS3, it didn’t even manage to crack the top 100 best-selling gaming products until it was given a massive price cut—from around $60 to under $20.

“Sales of the uDraw GameTablet and related software, and other titles in the kids, family and casual category were far weaker than anticipated, substantially reducing our financial results for the quarter,” Farrell stated in a press release.

It is an understatement to say that the uDraw tablet and game failed to capture the attention of the public. According to a report from Kotaku, as many as 1.4 million units remain unsold, and that doesn’t count the uDraw games. The device cost over $100 million in development, and is the primary reason that THQ is in the situation that it is today. 

But while the uDraw has turned into an extremely expensive anchor for THQ, it is not the only misstep in recent months. As part of the shift in strategy the company is planning in the wake of the layoffs, THQ has also announced that it will no longer produce games aimed for children, and will instead focus solely on “high quality core games” for adults. As part of that change—or perhaps because of it—THQ, which had an exclusivity deal with Disney to produce movie tie-in games for it, will no longer carry that license. The current game adaptation of the upcoming Pixar film Brave, will mark the end of that contract. A license contract with Nickelodeon will also be ending.

The break follows countless rumors that Disney had canceled the license with THQ, and that the publisher had returned IPs it was working on. According to THQ though, this was all part of its restructuring, and the timing coincided with the end of the contract. 

Whatever the reason for the break, the reaction from the shareholders was not good. The stock fell by 5-percent and reached 70-cents per share, which led to the delisting warning from Nasdaq. That in turn led to the changes THQ is now facing.

“We have since concluded an extensive review of our operations to realign our business, focusing on our key franchises with the most potential. We are implementing a plan to bring costs in line with our lower anticipated level of revenue,” Farrell said. “With our focused product plan, leaner cost structure, cash balance, and existing credit facility, we believe the company has adequate resources to execute on our plan and deliver on our strong multi-year pipeline of games.”

The thing about THQ is that in all other regards, the company still has potential to do well. Saints Row: The Third has shipped nearly four million copies and a sequel is certain, and the developer has several big name games that have a core audience which should make them profitable at the very least. But the massive losses accrued from the uDraw, as well as the smaller losses from the lineup of children’s games and disappointing big budget releases–all of which led to huge layoffs–have put the publisher in the unenviable position of needing to convince employees, fans, and (most especially) shareholders that despite these problems, things are looking up.

Righting the ship

THQ has already begun to take the first steps it needs in order to position itself for at least the next year or two. The layoffs were a result of poor decisions from the management levels, but in order to save the jobs of those left it was an unfortunately necessary step at this point. That won’t make the reality of it any easier on the people now unemployed, but what’s done is done.

We even attempted to contact THQ regarding this article, but did not receive a response. Sadly many of the phone numbers and email addresses are no longer active.

The CEO and the board of directors are all taking a one year 50-percent pay cut, but cutting 50-percent of a high six figure salary is still much better than the 100-percent cut that those laid off received. It may have been a better symbolic gesture to take a salary built around bonuses based on performance instead.

Farrell should have considered taking a single dollar salary and loading up on performance bonuses, as many other CEOs do, including Google’s former CEO Eric Schmidt, current New York City Mayor and founder of Bloomberg L.P. Michael Bloomberg, and Facebook’s Mark Zuckerberg. Of course those three don’t need the money and are tied into their companies with stock and bonuses, but it still sends a strong message, which is what the shareholders are looking for.

The uDraw tablet did what it was meant to do. It preformed to specs, which means the fault lies with the people that approved and pushed it—namely the board. Along with the half pay, Farrell also accepted a restructuring of his severance package. Now, if he is fired or resigns, he will receive compensation that matches his highest recorded bonus, instead of three times the bonus, as he would have received. Beyond that, the board will remain as it is.  

While it is better than nothing, it needs to be more. The salary cut is for a single year only, which means that unless he is fired or resigns (in which case Farrell will still receive a sizeable golden parachute), and even if THQ is forced to lay off more employees, Farrell will still claim nearly three-quarters of a million dollars in salary even while presiding over the demise of his company.

By all indications Farrell isn’t a bad executive, and he has a vision for both THQ and the gaming industry in total, so it isn’t fair to lay all the blame at his feet, nor is it entirely fair to demand that he receive more than a 50-percent salary cut. But THQ is battling a major perception problem, especially with its shareholders. Taking a larger paycut, and possibly even accepting some of the currently much maligned stock would have sent a powerful message that Farrell and the board still believe in THQ, so much so that they will tie their livelihoods to its success-just as the employees working under them do every day.

Fair or not, Farrell and the board were at the controls when the S.S. THQ hit the iceberg, so to speak. With 240 people now out of work, they need to be held accountable, and the next THQ shareholders meeting should be an interesting one.  

Although it won’t make or break THQ, the salary cuts feel like a half measure, where the company needs more than that. If it can succeed with its upcoming projects, in the end it won’t make a difference. For now though, the board missed an opportunity to take responsibility and show real leadership.

If you’re not first, you’re tied for last

As for the company in general, it will now focus on its proven franchises, and probably begin to look ahead to the next generation of consoles. Introducing a “must-have” game for the launch of a new console can make a developer and publisher. Bungie did it for the Xbox with Halo: Combat Evolved, while Metal Gear Solid 4 unquestionably helped sell more than a few PS3s (MGS2 did the same for the PS2).

With the Wii U scheduled for later this year, and the next Xbox and PS4 due out in the near future, it makes sense for THQ to begin investing in a new property for the next generation. A well known franchise would be welcome as well, but the timing seems to be off. THQ has confirmed that it is planning a game exclusively for the Wii U due out this year, as well as at least one other game that will feature a Wii U port, but both games are as yet still unannounced.

Introducing a new IP is always a gamble. It can either spawn a franchise or end up in the same position as the uDraw (although for different reasons). But if THQ wants to try to return to its glory days, it needs to take some measured risks. If it can release a new “must-have” game for the Wii U this year before Christmas, and be among the first adopters of the next gen Microsoft and Sony consoles when they arrive (perhaps a Saints Row 4 on the next Xbox and PS4), that could help to quickly reverse its fortunes.

On the same note, it should–and is–taking a wait and see approach to the Vita and the 3DS. The Vita will unquestioningly be a behemoth as far as hardware goes, but the early numbers from Japan have not been great. They haven’t been bad either really, but THQ will need to make the most out of its now limited resources, and even a port of an existing game can be costly. THQ did well with the DS, but the 3DS sales are only just beginning to pick up, which makes developing for it still risky–especially now that THQ is moving away from titles for younger audiences. It would be nice to see THQ re-enter the handheld ring eventually, but for now that is a luxury it can’t afford.

Go small to go big

But while it is still treacherous to jump into the Vita and 3DS games for some, casual and social gaming has exploded over the last few years and shows no signs of slowing down. THQ currently has THQ Wireless, a division dedicated to java based games. At the moment, many of these are ports and adaptations of existing games, but THQ is in a unique position. It has the people and the money (to a degree), plus the connections to expand its mobile presence quickly.

THQ has already confirmed its commitment to social gaming, and later this year will release a Facebook game based on the Jimmy Buffet song, titled Margaritaville Online. Farrell even suggested months ago that the company had more interest in developing for mobile devices like iOS and Android than for Sony or Nintendo’s systems. Smart move.

Lay off the cloud

Farrell has repeatedly espoused his love of cloud computing, and sees it as the future of gaming. He may very well be right—in fact he probably is—but it is still far too early to go all-in on cloud. While there is something to be said for being a pioneer in a new medium, there still isn’t a clear consensus on how cloud is going to be fully utilized for gaming.

It is no doubt tempting for Farrell and THQ to look at the potential of cloud and see an untapped gold mine, but research and development costs on the uDraw are part of what put them in this position in the first place. Unless THQ can come up with a very specific goal that is low risk, it cannot afford to put money into technology that is still in its relative infancy. As tempting as it may be.

Grow what you know

The real focus for THQ needs to be on making the most of what it has. Even with all the issues, the publisher is still in a decent position, even if it is in terrible shape structurally. It has lucrative properties to build on, still employs top talent, and still has the name recognition to open doors newer developers and publisher can’t. THQ’s position is precarious, but soluble.

This year and next will determine if THQ can rebound from this disastrous turn, or if the company is just delaying its own inevitable demise. Coming out later this year and next are several major releases that could make or break the company.

The next game up for THQ will be UFC Undisputed 3, which will be released on Valentine’s Day. Its predecessor, UFC Undisputed 2010 received solid reviews, but sold below expectations and led to quarterly losses. THQ should be in a better position to forecast the sales this time out, and a loyal fanbase could make this game a small hit—the same is true for the upcoming WWE Brawl, which is due out later this year.

Although a date has yet to be announced, there are a handful of new Warhammer 40,000 games due out either this year or (more likely) next, including the eagerly anticipated sequel, Warhammer 40,000: Dawn of War III.

The upcoming tie-in game, Brave, THQ and Disney’s final collaboration, should also do well enough to make its money back.

Perhaps the most important games on THQ’s schedule are both sequels: Darksiders II and Metro: Last Light. The original Darksiders was considered a disappointment in terms of sales. With the sequel due out this June, it needs to surpass the first or it will be a problem. The other sequel coming, Metro: Last Light, could be one of next year’s sleeper hits. The original, Metro 2033, was barely a blip on the radar of most in the U.S., but it did surprisingly well in Europe and was among THQ’s most profitable titles in 2010.

Saints Row 4 and Homefront 2 are also going to be huge releases for THQ, but neither will likely be released until at least 2014, and both may be released on the next generation of consoles.

Two other games on the horizon could go either way: Guillermo del Toro’s inSANE, and Tomonobu Itagaki’s (the creator of the Dead or Alive series, and the developer that brought Ninja Gaiden back to life) Devil’s Third. Not a lot is known about either game accept that they are both due in 2013. Having the name of Guillermo del Toro on the cover will likely help to sell a few copies regardless of how the game is, and Itagaki has a good (and controversial) enough record that people will at least give his title a look. If both games can deliver on their potential, THQ could have two new franchises and generate some much needed excitement amongst shareholders

The road back

Make no mistake, THQ is in a very dangerous position. The last few years have been rough on developers and publishers in general and if it can’t turn things around, and quickly, it could soon become a memory, with its properties being sold off to competitors. The good news is that the brand, plus a few of its properties, is strong enough that it could be bought rather than dissolved, but either way THQ as we know it would be gone.

Perhaps its time has come, and the end is inevitable, but watching THQ fold would be the end of an era of sorts. There is still a chance for it to make the changes necessary to survive, and possibly even thrive, but it needs to execute its plans almost perfectly. The first major issue is to find a way to increase the stock price and avoid being delisted by Nasdaq this summer. Good luck, THQ. You’re going to need it.