Games begin for Activision, THQ: strategies clash in bid for holiday hit.

It's a tale of two holiday strategies. Locally based game makers THQ Inc. and Activision Inc. have struggled in different ways for much of the year--and both their stocks have had rocky rides. Now, however, comes the critical holiday shopping season when earlier miscues can quickly be forgotten with a top-selling game of marketing strategy.

Activision, the larger of the two both in revenues and market capitalization, has taken a more conservative approach, paring the long shots from its list and focusing on big-name, branded product.

THQ, whose $642 million market cap is half that of its larger competitor, is throwing lots of internally developed products onto the market in hopes that the success of the winners will more than make up for the ones that fall flat.

The fate of both companies reflects an inherently turbulent industry that, not unlike movies or music, is reliant on finicky young consumers--as well as retailers who reserve much of their shelf space for the biggest sellers.

"Anybody in this business sees something like 40 or 50 percent of annual revenue coming in the December quarter," said Stewart Halpern, an analyst at RBC Capital Markets who covers both companies.

At stake is a share of an industry that continues to expand and become more competitive, thanks largely to platform manufacturers Sony Corp. (PlayStation2), Microsoft Corp. (Xbox) and Nintendo Inc. (GameCube). Total revenues for game software in 2002 was $10.3 billion, a 21 percent increase over the year earlier, according to NPD Group. Sales are projected to be even higher this year.

THQ costs

THQ, based in Calabasas, plans to release 32 games in the October through December period, nearly three times as many as Activision. Among those titles are "Finding Nemo," based on the Walt Disney Co./Pixar Animation Studios film, and professional wresting tie-in "WWE Smackdown: Here Comes the Pain."

But most lack extensive cross-promotional opportunities. As a result, the cost of development and marketing is substantially higher.

The hit was felt in financial results for the third quarter, with net income of $3.6 million, down from $4.8 million for the like period a year ago. Perhaps more telling, total costs and expenses were 37 percent higher than the year earlier, leaving its income from operations at $1.3 million, compared with $6.1 million in 2002.

THQ attributed the drop in part to costs associated with the launch of three original properties: "Sphinx and the Cursed Mummy," "Tak and the Power of Juju" and "Full Spectrum Warrior."

Both "Sphinx" and "Tak" are fourth-quarter games whose cost analysts and company executives are not expecting to recoup with year-end sales. "Full Spectrum" is a first-quarter 2004 release.

"A number of THQ's products won't sell well because they aren't the highest profile games," said Ian Corydon, an analyst that covers both companies at Los Angeles-based B. Riley & Co. "There's so many games coming out and limited shelf space. Retailers decide just to dedicate space to the biggest games."

It's a risk THQ executives understand.

"There were 30 to 50 new titles (in the first week of November) and many are sequels to known brands, so it's tough," said Peter Dilly, vice president of global marketing at THQ. "We haven't forecast our year thinking that 'Sphinx' will develop numbers."

Game makers faced the glut last year as well, and while THQ hasn't responded by slashing its list as drastically as Activision, it has pulled back a bit.

"At end of last year, there was too much product. The publishing community took a hard look at what happened and shifted to getting behind bigger titles. That is a strategy we took to heart," said Dilly. "For the year, we cancelled about a dozen projects across multiple platforms."

Even so, the company is the largest independent publisher of games for Nintendo's Game Boy Advance SP handheld device, and the cost of developing games for that device is less than half that of PlayStation2 or Xbox games. What's more, their popularity may help deflect disappointing results on some console games.

"The Game Boy hardware continues to sell very strongly, and because they have more titles, they're positioned to capture that," said Halpern.

Plus, there is "Finding Nemo," which has received a big marketing push behind the release of its video and DVD versions. The wrestling tie-in, "Smackdown," was the fourth best selling game in the U.S. last month, according to NPD.

"People are looking this Christmas for THQ to have strong revenue that flows down to the bottom line," said Halpern.

Production values

Meanwhile, Santa Monica-based Activision cancelled production of 30 games during the past year to concentrate on three in particular: "True Crime: Streets of L.A.," "Tony Hawk's Underground" and "Call of Duty."

"Call of Duty," set in World War II, follows on the success that market leader Electronic Arts Inc. has had with its "Medal of Honor" war franchise. "Tony Hawk Underground" was the fifth best-selling game last month, and an RBC Capital Markets survey of 70 retailers showed "True Crime" was expected to be a top seller.

"Those three games will make it to the top one or two games in their categories. That's the right strategy," said Corydon.

Wall Street was not as upbeat, at least at first.

Activision announced that for the second quarter ended Sept. 30, it would take a pre-tax charge of $23 million and another $15 million after-tax charge in the third quarter as a result of its various cancellations.

The stock fell 3.2 percent to $15.59 on Nov. 14, and it has traded near that level since. It had reached its 52-week high of $16.59 on Nov. 12 on the strength of strong sales projections for the fourth quarter.

Robert Kotick, the company's chief executive, did not return calls. But in a November conference call with investors, he said the shift was a calculated move. "We have focused on the quality instead of the quantity of our releases. The market is getting increasingly concentrated on a smaller number of high quality releases," said Kotick.

"True Crime" is the company's first effort in the mature action genre--and comes a year after Take Two Interactive Software Inc. launched "Grand Theft Auto: Vice City," which became the top-selling game of the year after strong holiday sales. The success in the 18- to 25-year-old male demographic was a wake-up call to an industry that traditionally markets to teenage boys.

The company plans on releasing sequels to "True Crime" set in other major U.S. cities. "It will allow the franchise to live for many years to come," Kotick told investors.

The new game is an example of Activision's focus on creating original franchises that lead to sequels. Unlike the movie industry, videogame sequels often outsell original titles and have the obvious advantage of being cheaper to produce, analysts said.

"Tony Hawk Underground" is Activision's latest sequel from its original franchise based on professional skateboarder Tony Hawk. It hopes "Call of Duty" follows in the steps of Electronic Art's "Medal of Honor" and spawns multiple sequels.

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