Analysis: THQ revamps its business strategy a few years too late

THQ's announcement Wednesday morning that it was completely abandoning the kids' licensed video game industry shouldn't really have come as a surprise to anyone who has been watching the company lately, as the publisher has been backing away from family and kid games for a while now. But it's still a move that's going to alter the structure of the industry. While it has desperately been trying to change its image for years, THQ is still largely known for its kiddie games. That is, after all, what happens when your company builds its fortunes on titles for the toddler set. The decision to shed that facet of its identity might be coming too late to have a dramatic impact, though. Kids games haven't been big sellers for a while – and THQ's earnings underscore that. Licensed games, in particular, have been suffering as audience tastes change. For every title like Double Fine's Once Upon A Monster, which posts respectable numbers, there are a half dozen Rios. Five years ago, things were a lot different. Titles like Cars were gold mines for the company. Made cheaply and surfing on the marketing budgets of the film studios, THQ became a cash rich company and a favorite of investors, especially when the stock hovered in the $30 range. When Disney realized exactly how much cash it was giving away by licensing the gaming rights to its films, though, things began to change. THQ had plenty of other licenses, like the Nickelodeon properties, but many of those were getting long in the tooth – and new licensing deals (like a 2009 agreement with DreamWorks) never produced any substantial hits. The end of THQ's licensing business was actually foreshadowed last year, but no one took notice of it at the time. Germaine Gioia, who came on board as senior vice president of licensing and merchandising in 2009 (and had previously worked at the company for a 14 year stint in a similar capacity), quietly left THQ in June 2011. Similarly, Martin Good, who ran the company's kid, family and casual games division left in January amidst the company layoffs that followed poor uDraw sales. The real question about today's move is simple: Is it too little, too late? THQ is a company at a precipice these days. It's stock has been below the $1 mark for roughly a month, likely putting it at risk for a delisting threat. Analysts fear its cash reserves are running low. And no one is looking forward to next week's earnings numbers from the company. THQ's decision to abandon licensed children's content is one that its competitors reached long ago. "Licensing content is dead," proclaimed Ben Feder, then CEO of Take-Two Interactive Software at the 2010 Digital Hollywood conference. Video games, he says, "are getting closer and closer to (the studios') core business." The ironic thing about the decision to focus solely on core franchises and digital initiatives is that THQ seemingly ignored a potential way to salvage its licensed content business. While licensed children's games aren't selling on consoles, they're extremely popular in mobile app stores. Dora, Sponge Bob and pretty much any other kid's character has their own app – and as kids spend more time with iDevices or Android phones and tablets, that market could grow. By renegotiating the terms of their licensing deals, THQ could have slashed development costs and potentially found a way to eke out a small profit from children's licensed titles. Instead, other developers will reap the benefits. In fact, by abandoning the field, THQ creates a hole in the traditional gaming space that could cede the licensed children's game genre to mobile platforms. Now, the company is betting its future on a core lineup that has been uneven historically. Saint's Row has performed well, but UFC is (if you'll pardon the pun) hit and miss. And we all know what happened with Homefront. It's a risky wager, but ultimately, it's one the company should have made a long time ago.