THQ Keeps Up the Competitive Heat

If there's something that THQ (THQI) CEO Brian Farrell wants the world to know, it's that his company does more than make kids' games based on other people's ideas.

Though best known for titles based on characters such as Nickelodeon's SpongeBob SquarePants, THQ has been investing heavily in recent years on developing games based on its own content to appeal to older, more affluent consumers.

Earlier this year, it released The Outfit, a World War II fighting game, for Microsoft's (MSFT) new Xbox 360 game console. And the company has other titles in the works, including Saint's Row, which is in the cops-and-gangsters genre, and Frontline: Fuel of War, another combat game.

In addition to creating kids' games, THQ has long been a big player in games for portable devices, such as mobile phones, handsets and Nintendo's handheld systems. Building on those strengths by investing in games for the hard-core gamer audience has given THQ the best position of all the video game software companies, Farrell says.

But the company has faced skepticism about its move toward older gamers. Reviews of The Outfit were tepid, and the title wasn't a big seller. Although sales at THQ rose last year, it's profit margin fell 50%, thanks in part to rising development costs.

At the E3 video game conference last week, I talked with Farrell about THQ's evolution and the changing industry.

TheStreet.com: You've argued that THQ is the best-positioned video game company right now. Some analysts would likely dispute that. With its Jamdat acquisition, Electronic Arts (ERTS) has positioned itself to be the No. 1 wireless game company. Everyone seems to be pursuing the handheld market now. And some would question that THQ has the resources to make the massive investments needed to be competitive in next-generation console games.

Brian Farrell: I actually agree with most of those. In wireless, we always knew we were going to have competition. So, if you look at the Jamdat acquisition, is the glass half-full or half-empty? I mean, Jamdat was always going to be a competitor, and EA was always going to be a competitor. Now I have a single competitor. I still like our competitive position there. In handheld ... as in any market, he who has the best content wins. In terms of the next generation ... [it] is a time when the deck gets reshuffled and, again, he who has the best content wins.