Analysis: Midway's Tragic Soap Opera

[Midway's recent story is one marked by fascinating characters, plot twists and gripping drama. Gamasutra examines how this once celebrated Mortal Kombat creator went from booming to bankrupt.] The story of Midway Games reads like a video game business soap opera: There’s the celebrated Midwest game maker with a coin-op heritage; the old billionaire media mogul – a Harvard man and U.S. Army vet who made the company his plaything, only to discard it like an old toy; a failed CEO who went from softcore porn publishing to software publishing; a mysterious investor named after two disciples – one faithful, one doubtful – who bought out the old man in a fishy scheme; a tragic bankruptcy that marked the beginning of the end. Let us also not forget the mothers who grieved for their wayward young; the children who ripped vertebrae from ninjas’ torsos throughout the 1990s. Today, Chicago-based Midway Games, which officially established as a corporation in 1988 (although its heritage goes back to the 1950s), is in the midst of a bankruptcy that began in February 2009, as pressure from creditors grew too much to bear. But Midway’s problems were mounting several years earlier. With some formerly brilliant companies, it’s easy to pinpoint the exact moment where the business went sour. In Midway’s case, the current situation is the result of a culmination of several salient factors. Profit Problems Midway hasn’t turned an annual operating profit since 1999. That’s nearly a decade’s worth of losses. The most recent fiscal year ended December 31, 2008 saw operating losses rise 52 percent year-over-year to a staggering $113.5 million. We should examine that turning point in 1999. In the late 90s, Midway, whose history traces back to the heyday of the arcade, was reporting heavy declines in its coin-op business, which steadily dropped since 1996. It’s no coincidence that the PlayStation and increasingly advanced home consoles were taking hold of gamers around that time as well. The term “arcade perfect” was quickly becoming meaningless – gamers would soon expect their consoles to perform at the same level as arcade cabinets. Midway’s financials in the 1990s are striking. Annual revenues for Midway’s home video game business didn’t surpass those of its arcade business until fiscal year 1996, when it dawned on management to begin publishing home versions of its own coin-op games instead of farming out home gaming duties to Acclaim. In 1997, coin-op revenues hit $168.3 million, compared to home game revenues of $219.9 million. For Midway, it was a banner year for its arcade business. Two short years later we would see Midway falter. In 1999, Midway managed to eke out an operating profit of $8.3 million, way down from 1998’s $65 million. Revenues tumbled $27.5 million from the prior year to $134 million. The age of decline had begun. You can argue that on a fundamental basis, Midway is in the position it’s in today because it never really broke free of its admirable but stifling coin-op roots, and failed to become a true top-tier home console competitor. Just look at Midway’s most recent top-performing game, November’s Mortal Kombat vs. DC Universe, which shipped nearly two million units in its opening weeks at retail. This is a one-on-one fighting game based on an arcade game from 1992. There’s nothing wrong with that necessarily – good on Ed Boon and the Mortal Kombat team for making the franchise commercially viable after nearly 20 years. But it exemplifies how little Midway has evolved as a company overall. The publisher is still remembered for games like San Francisco Rush, Cruisin’ USA, Hydro Thunder, Spy Hunter, NBA Jam and the original Area 51 -- arcade games, in other words, most of which saw home ports. But can one think of a Midway game that originated on home consoles that can nobly stand shoulder to shoulder in the pantheon of great Midway arcade games? A Lack Of Foresight Midway’s attempt to explain the sudden decrease in sales in 1999 seems endearingly naive, like a confused father trying to explain to his kids why the family dog dropped dead, when he doesn’t even really know the reason why: “The decrease in home video revenues was primarily due to a reliance on third party designed games that were favorably reviewed but did not do well in the market place and a reduced number of home games converted from coin-op games that generally have higher sales.” Again, the above shows Midway’s dysfunctional marriage to coin-op: coin-op properties are the key to the family room; more coin-op to home ports will turn things around; publishing third party games, even if they’re of quality – is not the answer. Also in that final year of profitability, Midway – although it just suggested in the same filing that coin-op ports are the pathway to success in the home gaming market – tried to explain away why its coin-op business was slipping away: “The decrease in coin-operated video game revenues was primarily from a reduced number of sit down driving games in the product mix and a sharp decrease in demand, during the latter part of fiscal 1999, for games that incorporate guns or a shooting theme.” Hindsight is 20/20, for certain, but knowing what we know today, the reason for the drop in coin-op revenues wasn’t because there weren’t enough sit down driving games, or because nobody wanted to play light gun games anymore: people didn’t want to play arcade games anymore. Nowhere does Midway in its filing that year address that home video game consoles like the PlayStation were beginning to eat away at the arcade business. Today, that trend is blatantly obvious. Midway realized a full two years later that it was time to drop its coin-op efforts. In June 2001, the publisher discontinued its arcade business, cutting 60 workers and saying in a press release: “…The Company implemented a strategy to focus its product development resources on next-generation home videogame consoles, which are expected to generate significant demand for game software over the next several years. As a result of this strategy, Midway is expecting to generate significant revenue and profit growth in fiscal 2002, which commences January 1, 2002.” Despite the optimism, that projected profit growth stemming from a greater focus on home consoles never happened. While Midway cut the dead weight known as “coin-op” that year, in fiscal 2002 – the year that the focus on home consoles would “generate significant profit and revenue growth” – the game maker reported an operating loss of $52 million – a narrower loss than the prior year, but still substantially negative. In May 2003, Midway appointed David F. Zucker as chief exec, the former president of Playboy Enterprises who would take the place of COO Neil D. Nicastro. Under Zucker, Midway’s operating losses continued fiscal year after fiscal year: 2004: -$25 million 2005: -$108 million 2006: -$72 million 2007: -$78 million After about four years under his guidance and nearly $300 million in total losses, Zucker “ceased to be the president and CEO” of Midway in March 2008, the company claimed. Clearly, his departure wasn’t entirely on his own volition. Nevertheless, Midway earmarked a $1.2 million golden parachute for the exec that fiscal year. A class action suit filed in 2007 that names Zucker and other Midway execs is currently pending in the United States District Court, Northern District of Illinois. The plaintiffs allege that Zucker and his colleagues “made a series of misrepresentations and omissions about Midway’s financial well-being and prospects concerning its financial performance…” Two investors who filed a similar suit earlier that year voluntarily dismissed their action in December 2008. Disaster Set In Motion Matt Booty, Midway Games’ current CEO, took over as interim CEO following Zucker’s departure. He’s been with the company since 1991 – a true grunt who’s been in the trenches – working various capacities in product development before climbing the corporate ladder. Before his departure, Zucker had already made some decisions that would impact Midway’s ability to become a viable competitor in the generation of Xbox 360, PlayStation 3 and Wii. For one, Zucker decided in 2005 to use Unreal Engine 3 across its entire slate of next generation games. While Zucker touted the capable Unreal Engine 3 as a magical ingredient that would cut costs, improve efficiency and return Midway to profitability, Booty was more transparent in an August 2006 interview (when he was EVP of worldwide studios), admitting that the studio-wide adoption of Unreal Engine 3 wasn’t wholly popular at first: “Was there a cultural hurdle we had to overcome to get everybody on the same page? Yeah. I think that's going to be true with anything. … There's a lot to adapt to in terms of infrastructure. It also impacts the art and the development pipeline. It's a major cultural shift to get that many studios aligned with each other. We're spending a lot of time working on that stuff as well. ... You've got to look at the big picture as to how you're going to build your organization around it.” Anonymous ex-Midway employees surfaced recently saying that Midway’s tech team tried layering custom modifications on top of the base Unreal Engine 3 to make a company-wide, multi-game genre solution, which caused development difficulties in adapting the largely shooter-specific engine across a range of games. Technical hurdles on the new PlayStation 3 and Xbox 360 led to the long delay of Midway’s next-gen debut, September 2007’s John Woo’s Stranglehold. Reports said the game cost anywhere from $30 to $40 million to create, a hefty amount for a console game even by today’s standards. Midway said the game sold over one million units. Following Stranglehold was Blacksite: Area 51, developed by Midway’s Austin studio. The game was rushed to market and poorly received by critics. Respected developer and lead designer for the game Harvey Smith called the project “so fucked up,” citing everything from technical issues to management snafus. And then there’s another one of Midway’s major current gen titles that was supposed to shake things up: Wheelman, a property that, along with Stranglehold, was supposed to be part of Zucker’s major cross-media strategy. Originally announced in early 2006, following multiple delays, the game finally released this year – although published by Ubisoft due to Midway’s weakened position. As late as 2006, analysts had held hope that Midway could turn itself around, even in the face of mounting losses. The above games were supposed to be the ingredients of a comeback. But instead of blasting into the room, two pistols blazing as doves scatter in slow-motion, Midway faltered out of the next-gen gates in poor form, setting the company up to continue the losses incurred in the years prior. Midway had botched the all-important console generational transition, just as it botched the arcade to home transition. What happened in the years to follow were job layoffs, studio closings and snarky game journos who found it advantageous to use images of Mortal Kombat fatalities in their Midway doomsday articles. Let The Real Finger-Pointing Commence But Zucker can’t be the only one to blame for Midway’s most recent misfortune. The buck ultimately stops at the desk of 85-year-old media mogul Sumner Redstone, whose company National Amusements bought a controlling stake in Midway in 2004. Under his watch, Midway languished until he offloaded the company to a mysterious investor by the name of Mark Thomas in late 2008 for $100,000, although Thomas agreed to assume $70 million in debt. With the change of hands, creditors got the go-ahead to demand the money owed to them by Midway. Without the ability to pay the loans, the firm decided to file for bankruptcy on February 12, 2009. The drama didn’t end there. The sale of the company to Thomas came under scrutiny, and accusations of shady dealings emanated through news reports. Redstone and his daughter Shari, Midway’s former chair, were subpoenaed in March over the sale. A bankruptcy hearing in April had a judge summing up his thoughts on Redstone’s handling of Midway: “This is a game company. But that did not give National Amusement the right to treat a public company as if it were a toy.” Of Friendships And Fatalities Midway is now on the chopping block, with its pieces ripe for the picking. Management hopes to sell Midway's assets, including its crown jewel Mortal Kombat, for a total of at least $30 million. Midway made five-and-a-half times that much in one year in sales from its coin-op business in 1997 alone. The company has fallen far. It’s easy to kick a company while it’s down, criticize the failings that past custodians “should” have seen long before problems became insurmountable. But the current reality is that here we have yet another fabled video game brand that will likely never be the same again (add Midway to the list of Acclaim, Sierra, Atari, etc.), not to mention hundreds of workers whose livelihoods have been negatively affected. When a plane smashes into the ground, what do you do first? You look for the black box and find out what went wrong. Not because you’re sadistic, but to learn how to prevent future disasters. Sure, mourning for a video game brand that isn’t quite dead is probably being too nostalgic and over-dramatic. Although what’s a good video game business soap opera without a healthy dose of drama?