When two muckety mucks abandon the computer game industry's hottest company, could it mean game over for an important games distributor?
id software--creator of "Wolfstein 3D," "Doom," the best selling computer game of all time, and this season's "Quake," perhaps the most anticipated game ever--is hemorrhaging upper management. On Thursday, November 7, id Chief Executive Officer and self-described "biz guy" Jay Wilbur took "early retirement" at age 35. Twelve weeks earlier, id co-founder and lead designer, John Romero, known as "the ego of id," left to start his own company.
id is privately held, but that doesn't mean investors should turn the page. One popular video game firm,
GT Interactive Software (GTIS:Nasdaq)
, which has bankrolled Quake in return for publishing rights, has a lot riding on id's success.
"If this shakeup were to affect Quake sales, that would be a bad thing for GTI," says Leonard Bracken, an analyst with Oppenheimer. "Quake will be an important segment for the company, especially in their fourth quarter, probably to a tune of $10 million in revenue."
GTI has an unusually large bet on Quake. GTI's main business is buying software titles from small developers like id, then pumping those titles into its distribution pipeline. A successful Quake could further bolster its position as the dominant distributor of computer games. Already, GTI is the primary distributor of game titles to 2,000 Wal-Mart stores and nearly 700 Target stores.
But the aggressive effort to build a distribution powerhouse has been expensive.
"They blew through $50 million in cash last quarter," says Bracken. "You might call that financing for growth. But in GTI's case, they've done a fantastic job simply by outbidding their competitors on product. The advance royalties GTI was paying were just
Bracken says GTI's deal to pay id an outrageous 30% of their Quake take is par for the course. GTI needs lots of cash to make such deals. When the company revealed a relatively cash-poor position in its third quarter earnings release November 5, investors jumped ship and the stock plunged 24%, from $18 to the $13 range. In the face of such figures, GTI was forced to abort its plans for a secondary offering that would have raised badly needed cash.
GTI did not return calls for comment.
"Those cash numbers made investors suspicious about what was going on and how the company was financing their growth," says Bracken. "It also seemed that they were stuffing their distribution channels with unsold product."
If that weren't enough, chairman of the board Joseph J. Cayre unloaded 200,000 shares of the company in the last two weeks of August, netting a cool $3.7 million. The end game with GTI, beyond the vicissitudes at id, may well be more doom and gloom.
"They need to acquire new properties," says Bracken. "If you can't bring on other developers and one is going south, well, if it isn't game over, at least it's a tilt."
by Cory Johnson