Video game makers find that Hollywood can be tough town.

Be careful what you wish for.

That's the lesson video game developers are learning after disappointing results have sent their shares skidding.

Products of the technology industry, video game developers have encouraged investors to look at their business as entertainment--striking high-profile deals with Hollywood and marking growth in video game revenues by comparing them with box office receipts. Now the gamers have hit a dry spell.

After three of the largest video game publishers--Electronic Arts Inc. and locally based Activision Inc. and THQ Inc.--all warned investors earlier this month that they expect to post losses in upcoming quarters, the companies were skewered on Wall Street for relying too heavily on expensive blockbuster titles to drive the bulk of holiday sales.

Now analysts want them to roll out titles on a more regular basis, rather than saving all their best stuff for the holidays--a familiar dilemma in Hollywood.

"The video game business is a lot like the movie business and if you don't make the same number of movies every single week, your revenue is going to move around a lot," said Michael Pachter, director of research at Wedbush Morgan Securities.

Despite a banner year in 2004, game makers now find themselves struggling with higher marketing costs, expensive licensing agreements and stiff competition.

And while the marketing challenges are similar to the movie industry, video game makers must still cope with high development costs and rapid change that epitomize technology.

Some savvy consumers aren't buying games at all fight now. They're waiting until the new version of Microsoft Corp.'s Xbox console, due out in November, hits store shelves. Japan's Nintendo Co. Ltd. and Sony Corp. are working on a new generation of consoles.

Shares of industry leader Electronic Arts Inc., based in Redwood City, have fallen to the low $50s from a high of around $71 on March 9. Shares of Santa Monica-based Activision traded between $17 and $18 in mid-March, but last week they were around $15. And THQ, based in Calabasas, was down 10 percent.

Pachter said investors have overreacted to the bad news. But there are always unforeseen events when the video game industry releases a new generation of consoles.

The last cycle kicked off in 2000 with the release of Sony's Playstation2 system. It has done the best in the most recent cycle, fending off threats from Nintendo's GameCube and Microsoft's Xbox. (When Xbox and GameCube sales weakened, the industry slowdown spread to game publishers.) Another high-profile entry, Sega Dreamcast, brought great reviews for having an online component that allowed multi-player use. But it failed, and game publishers that invested in developing games for Sega lost oodles.

Game developers are now trying to coordinate the release of new games with the debut of Microsoft's Xbox 360. Interest in the new device has been so intense that pictures have already leaked over the Internet.

Video game publishers are also jockeying for position in advance of the release of Nintendo's Revolution console and Sony's next-generation Playstation.

"There's definitely a transition going on because of the different consoles coming out and the problems they have with content," said Tom Taulli of Current Offerings. "There's more competition coming into the market."

Holiday spirit

If those challenges weren't enough, game makers must also deal with a heavily cyclical release cycle that leaves their revenue streams lumpy and dependent on big hits.

Historically, at least half of all video games are released in the one-month period between Nov. 15 and Dec. 15, the time frame when video publishers earn much of their revenues. The holiday season accounts for roughly 40 percent of annual sales for video game makers, according to Jupiter Research.

Peter Dille, senior vice president of worldwide marketing at THQ, said Christmas will always be the dominant period for the industry.

"With publishers and developers, there's always that nagging doubt in the back of their minds: 'Would this be better out at Christmas?' Many publishers make that mistake."

Last year, some publishers held off from releasing new titles at Christmas to avoid competition from four blockbuster titles--Microsoft's "Halo 2," Take-Two Interactive Software's "Grand Theft Auto: San Andreas," Valve Software's "Half-Life 2," and Vivendi Universal's Blizzard Entertainment unit's "World of Warcraft."

Dille said THQ tried to duck the competition by going after different segments of the market with its releases of videos for "The SpongeBob SquarePants Movie" and "The Incredibles."

"We try to find opportunities year round," he said.

Of all the video game makers, THQ posted the best results with an 86 percent jump in fourth-quarter profits, to $10.1 million from $5.4 million in the year-ago period. Sales rose 40 percent, to $171.9 million.

But even THQ warned that it expects a wider loss in the first quarter because of marketing costs to support two new game franchises: "Destroy All Humans," and "Juiced."

Meanwhile, Santa Monica-based Activision reported a 46 percent decline in fourth-quarter net income to $3.6 million, compared with $6.7 million a year earlier. Sales rose 25 percent, to $203.9 million.

Activision is looking for titles such as "Doom 3," "Madagascar" and "Fantastic Four" to drive first-quarter sales.

Even as publishers spend heavily on games for the next-generation consoles due out later this year, they are also wading into development of games for cell phones and handheld devices, including Sony's PlayStation portable and Ninetendo's DS handheld.

In January, THQ teamed up with Jamdat Mobile Inc. to invest in a Chinese wireless content distributor that gives them access to distribution of cell phone games in China. THQ has a separate division focused solely on moving into the wireless arena and has made a number of acquisitions.

Jamdat, which focuses exclusively on this market, saw its shares soar 35 percent earlier this month after the company reported an optimistic forecast for the end of the fiscal year. Costs to build games for mobile devices are not as high as they are for console-based games.

But as development commitments rise, analysts say the most vulnerable video game publisher is Electronic Arts, which is burdened with costly licensing agreements with sports leagues and movie studios.

In addition to releasing its core 30 to 35 video games a year, Electronic Arts has committed to produce 15 to 20 video games for mobile phones.

"To build a game for a console is like making a movie--it takes a long time, it's extremely expensive and there's a lot of production value," Taulli said. "I think we're going to see a lot more action in mobile devices because the product costs are not as high."

Mixed messages
Video game publisher's fourth-quarter earnings.

Activision Inc.          (46%)
Electronic Arts Inc.     (91%)
THQ Inc.                  86%
Take-Two Intractive *     42%

* January 31 quarter

Note: table made from bar graph.

KATE BERRY Staff Reporter