Is THQ Doing the Right Thing? Selling off the UFC License

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In a few days troubled video game publisher THQ will release their quarterly earnings report. The publisher, whose stock price has fallen 80% in the last year is cutting down operations and looking for strategic focus in an attempt to remain with a leaner more profitable organization.

And while the firm’s prospects are far from certain, THQ’s management is making a concerted effort to become more efficient. In this light, at the June 2012 E3 conference it was announced that the UFC license was sold off to EA for an “undisclosed cash payment”.

While I am convinced that THQ is doing the right thing in most of their reforms, here I will argue that selling off the UFC license was a strategically questionable decision.

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THQ Stock prices (June 2011-May 2012)

Evidence of the fact that EA was proactive in their effort to take over the popular fighting licence can be found in THQ’s yearly report. THQ’s licensed games targeted at core gaming audiences almost exclusively comprise of WWE and UFC games.

WWE Smackdown! vs. Raw and UFC 2009: Undisputed are some of the more successful instalments from these licenses. Not only are these games successful standalones, THQ relies in large part on these licenses for their yearly income.

Indeed, in the publisher’s annual report it is stated that together, the WWE and UFC licenses account for approximately 32% of THQ’s yearly net sales. Furthermore, THQ had the exclusive video game rights to the UFC license until December 31^st 2018.

It is no coincidence that THQ jointly mentions the WWE and UFC games. Besides both being games for core audiences based around popular fighting franchises, the games are in large part developed by Japanese developer Yuke’s. The OSE listed developer has been working on the WWE and UFC licenses since 2001 and 2009 respectively.

In other words, Yuke’s has considerable experience with the fighting genre in general and the aforementioned licenses more specifically. From a technical perspective it would not be misplaced to assume advantages of scope from working on both licenses simultaneously.

Yuke’s engine and human resources can be advantageously allocated across licenses for lower development costs and higher quality games. Whilst not owning Yuke’s, THQ does hold a 15 per cent equity stake in the developer allowing it to exercise certain strategic influence as well as benefit from these scope advantages..

These scope advantages would hold partially if EA were to endow Yuke’s with the development of EA published UFC games. The new licensee however recently announced that Fight Night developer EA Canada would be responsible for future UFC games, hereby undoing the advantages of having seminar licenses under one roof.

Not capitalizing on Yuke’s core competencies, THQ degenerates the value of its share in the developer. Notwithstanding reports of struggling profitability for recent UFC games, I believe that THQ made the wrong decision in selling off the UFC license to EA.

Not only does THQ loses out on a strategically valuable license and development advantages from having both WWE and UFC licenses under one roof, by selling off the license to EA it has created a very capable competitor in the licensed fighting genre.