Bracing for Big Battles.

Two L.A. game makers are placing their bets on which video console manufacturer will emerge victorious this fall -- Sony, Microsoft or Nintendo

SOARING stock. Rumors of major mergers. Aggressive acquisitions. Boom-bust cycles. Consumer confusion. The state of the gaming industry has all the makings of an action-packed character-based video game.

And two heroic characters would have to be Los Angeles game makers Activision Inc. and THQ Inc. For these muscled-up rivals, the gaming industry, already notoriously cutthroat, has become more intense than ever.

The looming console war between Microsoft Corp.'s Xbox, Sony Corp.'s PlayStation 2 and Nintendo Co.'s GameCube, which will play out in the fall when GameCube and Xbox hit shelves, is one of the more feared and eagerly anticipated events in recent gaming history. While console wars long have been a part of the gaming industry, there is no clear-cut No. 1 and No. 2. What is clear is that it will be the largest console war in the history of gaming and the most important year ever for game makers, who are bracing for battle.

"It's a stressful time for publishers like THQ and Activision because they are making bets on some of these consoles. But the Xbox and GameCube are yet unproven," says Edward Williams, gaming analyst with Gerard Klauer Mattison. "And we're not talking about an insignificant amount of revenues going there."

Many expect one of the console makers to drop out, leaving two to compete for market share. But picking winners in this war is not easy, especially after last May's Electronic Entertainment Expo (E3) in Los Angeles. At that event, Nintendo emerged as a surprising hit, while Microsoft got railed by the industry. E3 proved to game makers that no console can be ruled out and that under-appreciated Nintendo deserved more respect.

"A lot of hopes were pinned on Xbox as being the spiritual heir to PlayStation, but Xbox had an extremely weak showing at E3," notes a gaming industry executive who spoke on condition of anonymity. "Microsoft concentrated on the wrong kinds of titles for the launch. Just as suddenly, publishers very quietly started shifting their focus to Nintendo, which had a remarkable showing. Nintendo has always understood that platforms are about content, that software drives hardware adoption. They really get it."

Multi-platform strategy

Activision executive vice president Lawrence Goldberg agrees that Nintendo "caught everyone by surprise," but stresses that Activision continues to take a multi-platform approach -- a strategy that seems to be working, considering that its stock price has soared almost 600 percent in the past year. "Competition is healthy for the industry because it creates awareness for gaming," he says. "We want to be good partners with each of them. We think that all three can survive and thrive over the next five years."

He wishes. If all three are successful, game makers like Activision and THQ will be in a great spot. The more successful the three console makers are, the more fighting Microsoft, Sony and Nintendo will do to get their software.

"If you're Activision or THQ, you don't want one console maker to win the whole thing," Williams said. "That gives all the power to one player. You want the second and third player to be strong, so you get better terms on your relationships with them."

Activision, the No. 2 game maker behind Electronic Arts, was one of the first game makers for home systems. Founded in 1979, it got its start creating titles for the Atari 2600. After going public in 1983, it found itself operating under Chapter 11 Bankruptcy Court protection in 1990. The management, led by cochairman and chief executive Robert Kotick, has been widely praised though for taking the company through several successful transitions since then.

Offering titles based on licensing agreements with popular films and comic book characters has been a hit with gamers. In the late 1990s, Activision began aggressively acquiring game developers and inking additional licensing deals. The titles Activision produces for console game systems account for almost 50 percent of the company's sales. It reported revenues of $620 million for its fiscal year ended March 31, up from $572 million in the previous year.

Fast-growing THQ

No. 3 game maker THQ, whose stock price is up 400 percent in the past year, has been named to countless fastest growing company lists since its founding in 1990. Like Activision, its strategy to make games based on popular licenses, such as those with the World Wrestling Federation, have boosted sales. Also like Activision, THQ continues developing new titles for oldergeneration consoles. Fast on the heels of Activision -- even as a potential buyer -- THQ reported revenues of $347 million for the year ended Dec. 31, up from $303 million in the previous year.

THQ won accolades for its recent acquisition of Silicon Valley game developer Volition Inc. Since that move, THQ seems to be ramping up for other acquisitions. The company said it would seek shareholder approval to issue new stock in July. Rumors began flying in late June that THQ might buy Activision, a merger that would make a formidable competitor to leader Electronic Arts. Neither company would comment.

Historically, game sales slow during a switchover from old consoles to new consoles, and analysts expect as much for THQ and Activision through 2001, or at least until November. But both companies have plenty of cash on their balance sheets to help them during a slowdown. Activision has $125 million, while THQ has $72 million in cash reserves.

With its early lead and strong market share, Sony remains a favorite to win, and big game makers like Activision and Redwood City-based Electronic Arts have been putting considerable resources behind creating PlayStation hits. Sony's other big advantage is its built-in DVD and CD player. Also, Sony plans to release a hard drive and network connector for broadband later this year. Sony's hardware, however, has been criticized by developers for being too complicated and time-consuming to work with.

Microsoft, which has said it expects to spend $500 million on marketing alone, seemed like the only worthy contender to PlayStation until E3. Xbox has a built-in hard drive, high-speed Internet connection and can play music and movies. Microsoft, which will release the $299 Xbox in November, expects to ship 600,000 to 800,000 units initially and at least 1 million units before year's end.

Nintendo will sell its GameCube for $199.95 and release it in November, just before the Xbox arrives. It's betting on price and its lofty status among hard-core gamers. The console will have the ability to connect to the Internet but will not have a hard drive or DVD player.

Online gaming alternative

A big uncertainty everyone faces is the nascent online gaming market. Online content subscription-based models are a kind of holy grail because of the ongoing revenue streams they could generate. That would be welcomed in the industry, which has almost always had boom-bust sales cycles. Broadband use has yet to reach the critical mass that the gaming industry would like to see before it puts resources into making all of its games online-ready.

A local game maker in a much less stressful -- and some would say enviable -- position is Santa Monica-based Naughty Dog, developers of the hugely popular Crash Bandicoot series. Scooped up by Sony last January, Naughty Dog has been focused on creating games solely for PlayStation since 1994.

"It puts us in a great position because we can focus on doing the best game for a single machine," says Naughty Dog Co-President Andrew Gavin. "It's difficult to develop a game for multiple platforms, because you have to make so many compromises."

When it comes to making online games, Naughty Dog's Gavin is tentative. "We're keeping an eye on it and trying to figure it out," he says. "None of us in the industry know how it will take shape."

In the Game: L.A. Firms' Releases

THQ

"New Legends." The new martial arts action-adventure game about a character named Sun Soo's battle for China is coming soon for Xbox.

"Summoner." From THQ's Volition team, the fantasy role-playing game for PlayStation 2 offers a complex universe with various characters, spells and monsters. The game takes users on an elusive quest for the Summoners' rings.

"Red Faction." Also from Volition, this role-playing action game on Mars has been rated one of PlayStation 2's most popular games.

"WrestleMania 2000." The game released for Nintendo features more than 50 of the stars of the World Wrestling Federation doing their signature moves and taunts.

ACTIVISION

"Hawk ProSkater 2X." The classic skateboarding game Tony Hawk gives birth to a sequel, which is popular among many platforms. Activision is releasing its latest version on the Xbox. It will include an ability to play head-to-head online.

"Matt Hoffman's Pro BMX." For multiple platforms, this popular BMX game features extreme rider Hoffman and other pros performing hundreds of tricks on the road and on the dirt.

"Spiderman." The superhero game created by Activision's Neversoft team continues to spawn blockbuster sequels for multiple platforms.