THQ's Farrell: Focus On Fewer, Better Core Titles

Faced with a $192 million profitability gap, publisher THQ says it's recommitting to lowering costs and focusing on a smaller and stronger stable of core titles to reverse its losses. "Clearly, this is one of the most challenging holiday retail environments that I've experienced in my 18 years at THQ," said CEO Brian Farrell on the company's third quarter results call to investors yesterday, discussing the holiday's soft economy and packed competition. THQ's revenues fell 30 percent in the quarter alongside the broad loss. The company saw a profit in the same period last year. Given this "continued economic weakness", Farrell said the company will continue reducing its development and marketing spending through a 24 percent staff reduction and additional cost-cutting initiatives totaling $220 million. Specifically, said Farrell, THQ will shave $100 million or more from product development. $30 million of those cuts were already executed prior to November, and $70 million more are imminent. The company hopes to bring its fiscal 2010 development budget down to the $250-$260 million range, from $365 million in 2009. "With respect to the core gamer, the aggregate spending will come down," Farrell told investors. "The idea is focus, focus, focus. But we will compete aggressively.. .when we launch." THQ is "putting fewer core gamer titles into full production," he added, but focusing more heavily on the development and marketing of each. Farrell singled out Volition's recent Saints Row 2 as an example of that model's efficacy -- he revealed the the game has sold 2.6 million units to date, adding, "When we focus, make a great game, and market it aggressively, we succeed." Another success for the company has been Relic's PC RTS Warhammer 40,000: Dawn of War, which Farrell said has sold in excess of 4 million units including its expansion packs. The company expects its imminent sequel, Dawn of War II, to be a major revenue driver for its fourth fiscal quarter. Along with Dawn of War II, Farrell pointed to Yuke's' WWE Legends of WrestleMania, Swordfish Studios' 50 Cent: Blood on the Sand, and Rainbow Studios' Deadly Creatures as expected standout titles for Q4. Elsewhere in the Warhammer 40,000 license, Farrell addressed Vigil Games' upcoming MMO set in that universe. "We think we have a great franchise there. We have a team of professionals who have built these kinds of games down at our Vigil studio," he said. "If you look at all the things we've done with reducing products, that one was a keeper. It has a similar play pattern [to other MMOs], but a very different universe in which to do it. ...We think the Warhammer 40,000 universe is a great fit for PC MMO gaming." Notably, Farrell acknowledged the likelihood of subscriber figures that do not approach Blizzard's, and claimed THQ's budgeting and projections for the game are taking that into account. "We think at relatively modest subscriber bases, we can be very profitable on this franchise," he said. "We have a very buttoned-up business model on that franchise based on how we're building that game, and the expertise we're leveraging." On the topic of core games generally, Farrell warned that price drops are starting to affect bottom lines. "Strong premiere titles like Saints Row can retail at that $59.99 pricing," he said, but "what we have seen is very quick price erosion on titles that don't attain that top-tier status." The exec also addressed the casual and children's market, a traditionally strong segment for THQ. In particular, 5th Cell's Drawn to Life franchise was said to have shipped 1.5 million units, HB Studios' Big Beach Sports shipped more than 1.2 million units, and Blue Tongue's De Blob shipped 700,000. THQ will continue to build on these "already-profitable casual game franchises," Farrell said. On Wii, the company saw its revenues grow 72 percent year over year. Some projections in that arena were less favorable; the company expects its inevitable game adaptation of Pixar's next film, Up, to be off from usual numbers -- "even from Wall-E," Farrell noted, alluding to that game's lower-than-usual sales. Asked about the severity and length of the current economic progress, Farrell was understandably noncommittal, but hopeful about the industry's prospects. "It's a mixed bag out there," he responded. "There were some titles that, in a different environment, we would have gotten reorders on. The good news is, we ended the calendar year in pretty good shape with inventories at retail." "The post-holiday sell-through has been reasonably good, and so consumers still are buying video games. I want to be very clear about that. How they react long term, I don't think we're able to make that prognostication."