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Turning games into serious money

THQ CEO Brian Farrell explains how an unlikely combination of professional wrestling, evil aliens and a happy little animated sponge has produced a recipe for a smash success in an otherwise cutthroat video game industry.

You never know just what will strike a chord in the video game business. For THQ, an independent game-publisher based in Calabasas Hills, Calif., success has been based on an unlikely combination of professional wrestling, evil aliens and a happy little animated sponge.

The company, whose shares have doubled in value the past two years amid an overall boom in the game industry, is best-known for licensed games based on the WWE wrestling empire and Nickelodeon cartoons such as "Rugrats" and "SpongeBob SquarePants." Throw in original titles such as the outer-space shooter "Red Faction," and the first game based on Britney Spears, and THQ is poised to benefit more than most game makers as lower prices for game hardware bring new customers into the market.

"We've gone from $299 to $199 for the game consoles, and that's attracting a more price-sensitive, average-consumer audience," CEO Brian Farrell said in a recent interview. "As the price points continue to go down, it will attract more of a mass-market audience looking for family titles and kids games, which plays right into our strength."

THQ also hopes to grab a corner on one of the newest niches of the game market, spinning off a separate business last year to produce games for cell phones and other mobile devices. Farrell talked with CNET News.com about where the game industry is headed:

Q: It seems like THQ is staying on the sidelines somewhat as other game companies make a big push for online gaming.
A: We're just not being as loud about it. We're not on the sidelines at all. We think one of the better applications on Xbox Live is a product we have called Moto GP. It's a motorcycle track racing game, and people have had boatloads of fun whenever we've shown it. We'll have Tetris online and some other titles.

The reason we're not so vocal about it is the business model. Being a public company, our shareholders are more worried about revenue growth and profit enhancement, and that's going to come from the console business. I know it's not sexy and it's not great press all the time, but the real issue is who's going to make money off this?

In Microsoft's own words, Xbox Live will have tens of thousands of users this fall. I mean, that's just not a market. We're not staying on the sidelines. We're just not promoting expectations to get ahead of themselves as far as the business of the online market.

Do you have preference for the Xbox closed network over Sony's do-it-yourself online plan?
Not at all. I love to watch this play out. Let's see which one works, or maybe both of them work. I think this whole business of who owns the customer is a little bit of a tempest in a teapot. The most important relationship is the content. If we own the content, I don't care if we go though Microsoft or do it ourselves via Sony.

In Microsoft's own words, Xbox Live will have tens of thousands of users this fall. I mean, that's just not a market.
I think its great to have both models, because we're experimenting as an industry. What do consumers want, what will they pay for?

Is it different for you because you haven't made a huge investment in online gaming via the PC?
We've got a few titles, but we've invested modestly, because we don't see the business model yet. It's not as if we don't think online gaming is going to be a factor. It's just not a separate business. It's an extension of our current business.

How much of a factor is broadband penetration?
That's the big question; when is broadband going to happen? The other dirty little secret is where's it going to happen? A lot of people have broadband, but it's next to their PC. I've been asking Microsoft, what about these people who have broadband in a different room than the one the Xbox is in? There's certain structural, financial and technical issues nobody has yet resolved.

What makes online different from wireless, where you are making a real investment in games for mobile phones?
There's a business model there. There's a billing mechanism through the carriers. And unlike the online world, people have shown they will pay for services on their mobile phones.

The size of the market (for mobile gaming)--I've seen some huge numbers from market analysts. They seem ridiculously large to me. But if they're even half-right, it's going to be a huge market.

The point is, there's a way to bill, collect and do value-add stuff with mobile devices, whereas on the Internet, people aren't used to paying. In fact, in the video game industry, we've taught people not to pay. We've taught our consumers that if you buy the boxed product, you get to play online for free.

With cell phones, every time you want something--directory assistance, stock quotes, downloading something--its costs you. Especially with text messaging, people are used to paying for everything.

Is it still a technical challenge to deliver a quality game experience on mobile phones?
It's getting better. Some of the color-screen phones have a bigger screen than the Game Boy. There are navigational buttons for better control. You can have a great casual game experience, things like puzzle games and sports.

Does that require rethinking game design, so that the games work in five-minute chunks/
We're doing that already in the Game Boy market. We're the biggest publisher for Game Boy behind Nintendo, and the Game Boy experience is very much different from the consoles.

Do you figure it's going to be a three-way race in game consoles for the foreseeable future?
We do, based on a lot of discussions with retail partners and what we've seen in the market. You've got three well-funded consoles with different attributes. Sony 's got the most (market) share, the most games, the broadest offerings. Microsoft has a great box; they've got the online offerings. And Nintendo has some great content--if you want to play Mario or Donkey Kong, you've got to have Nintendo.

As an industry, I think we're out in front of these issues. What we're not going to do is censor the content.

People sometimes lose sight of the fact that this business is all about the content. There's all this focus on Xbox Live. Xbox Live is appealing to the core gamers Xbox has already addressed. Microsoft's mission should be to bust beyond just the core gamer and early adopters. Yes, Xbox Live is a point of difference...but as a publisher, I need them to have 5 million, 10 million installed base to sell to. They need to be as focused on software as they are on Xbox Live.

What effect have you seen from the console price cuts?
There's been good sales acceleration all summer. The real question mark is how high is up this fall...Any CEO who tells you they don't worry about the economy when things are this soft isn't dealing with reality. Everybody's a little worried about the consumer right now. But the fact we're at a full $100 less than last year is a real counter to the economic conditions.

Some of your competitors have generated big sales by producing games that are pretty raw as far as sex and violence. Does THQ shy away from that kind of material?
We're no different from Disney in that regard. We're a public company; we have an obligation to address it wherever there's a market. "Red Faction" is a mature-rated game. I think there's a different between "Red Faction" and "Grand Theft Auto" as far as the taste factor...but there's really no line for us.

But we're not going to make games just for shock value. There are some titles coming out from other publishers where it's all about just the shock value of nudity or gratuitous violence, which I think is a mistake. Unless it adds to the entertainment experience, I think consumers will reject it. People forget that it's about the gameplay.

There have been a number of efforts to regulate sales of mature games. Is the industry doing a decent job of regulating itself?
I think the industry--and its not just me--the FTC and even Sen. Lieberman (Sen. Joe Lieberman, D-Conn.) think the industry is doing a pretty good job of policing ourselves. We have what most government experts say is the best ratings system, the most comprehensive and most descriptive rating system, among all the media. We've adopted penalties for advertising games intended for one demographic to another demographic.

As an industry, I think we're out in front of these issues. What we're not going to do is censor the content. The basic tenet of this country is freedom of expression, and we will defend that vigorously...We have a responsibility as an industry to inform consumers and parents what they're buying, but we also have a responsibility not to censor.

Why has the game industry become such a target?
It's mostly based on ignorance...Video games are a younger industry. That kind of objectionable content has been in movies and music forever, so it's not news when that happens. Video games are younger, so it makes for a good poster child.