Midway Games Placing Bets on Quality

CEO David Zucker believes a strong title portfolio will drive the company's turnaround.
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David Zucker, CEO of

Midway Games

(MWY)

, is trying to learn from the company's mistakes.

While the video-game market boomed over the last five years, Midway largely missed out, posting 16 straight quarters in the red and seeing its revenue shrink to less than $95 million in fiscal 2003 from nearly $335 million in fiscal 2000.

Zucker has started turning Midway around. Not only did the company finally post a profit in the fourth quarter of 2004, but revenue for the year jumped 75%. With a new generation of consoles coming soon to store shelves, Zucker is hoping to build on that momentum.

I spoke with Zucker at last week's Electronic Entertainment Exposition about the keys to Midway's turnaround effort, his goals for the company, and majority stakeholder Sumner Redstone. (For other interviews from E3,

click here.)


David Zucker

Q: What's Midway's approach to the console transition?

There are a couple of things. First, there are a lot of existing, legacy consoles out there, so we're continuing to make games for the current generation of hardware. We have a bunch of big titles, even next year, on the PS2 and some on the Xbox.

We're also investing in the kids business. We're launching with (

Time Warner's

(TWX)

) Warner Bros.-The Cartoon Network a number of products this fall And then, of course, we're also in the high-end PC business. Both the kids business and the high-end PC business can work well through a transition.

And, of course, we're also investing in and we're building next-generation games at all of our internal studios. We just announced today John Woo's

Stranglehold

game, which is really sort of in the spirit of "Hard Boiled," his first Hong Kong action movie. And we've got Chow Yun-Fat reprising his role as Inspector Tequila. So that's really our strategy. We plan to make some very ambitious games that are in development for the next generation of hardware.

Q: The conventional wisdom after the last transition was that developers were too quick to abandon old consoles in favor of the new. How are you balancing old development between the old and new generation machines?

We're doing both. Certainly, our major technology thrust right now is next generation development, but we're also going to continue to make big investments in PS2 games. So, we're really balancing both.

Q: I understand you want to balance both of those, but what are the tradeoffs of doing that?

We're certainly going to have games for the launch of the PS3, but we don't have any games for the launch of the Xbox 360.

Q: Why?

It's a pretty small install base. To really maximize, to get the performance out of some of the games, it's going to take some time to do that. And we want to make sure we're launching high-quality titles.

Q: You posted your first profitable quarter in a while in the fourth quarter. Then you swung back to a loss again in this past quarter. Do you have an expectation of when the company will post consistent profits?

We're not big enough at this point to consistently generate significant profits. We've said that on a number of occasions. We have a plan to get there, and we're focused on growing our revenue -- we grew our revenue last year by 70%. We'll grow it this year by 40% -- that's our plan. And we'll grow it again in 2006. Our goal is to get to critical mass in terms of revenue as quickly as possible in the next generation of consoles. But right now, we're investing. We're investing in more ambitious games, so that we come out with a bigger market share on the next generation of consoles.

Q: What are the keys to getting to critical mass?

More games and more ambitious games -- look, I've been here almost two years now. The prior management, coming into this console cycle, really slowed down its investment in the product pipeline. We've been addressing that aggressively. We've doubled the run rate of our product development spending on an annual basis. We have doubled the size of our internal product development teams. We have 12 teams today; we had five teams a year ago. We went from 275 people to 540 people. And we're going to grow again this year. We're going to make some additional acquisitions. And we're going to continue to grow headcount at our existing studios.

Q: One of the things you have been talking about is trying to put a real emphasis on improving the quality of your games. How is that working out?

If you go back to Jan. 1 of last year to today, there's only one publisher whose average review scores for all their games -- I mean, obviously, for nonbudget titles -- is above 80.

Electronic Arts'

(ERTS)

is about 78. And that's Midway. So Midway has the No. 1 review score over the last 16 months, year-to-date...

We don't care whether we are No. 1 or No. 5, but our goal is really to be among the top five in the industry. If you go back to 2002, 2003, we're No. 20. So, is it paying off? You've got to make quality games. You've got to market them effectively. You've got to make the right games. And that's what we're very focused on right now.

We're concept-testing all of our games that we're putting into development for the next generation. We're going to make sure that they are titles that, if they're good, have the potential to be big sellers. There's a lot of very good games in this business that before they even started being made were never going to be big sellers -- because of their subject matter, because of the type of game they were. And that's a mistake you really have to avoid in this business, because if you make a great game that nobody cares about, it doesn't really matter.

Q: You said your goal this year is to grow revenue by 40%. But revenue actually declined in the first quarter. What happened there?

Quarters don't mean anything. I think last year we had

Mortal Kombat

in there, so quarters don't mean anything. Our guidance for this year is $225 million in revenue, up from $161

million last year. That's a 40% increase.

Q: Can Midway continue as an independent publisher.

Absolutely. Why not? If you go back and look at

Activision

(ATVI) - Get Report

and

Take-Two

(TTWO) - Get Report

, their revenue was the same as ours is today, and they both were able to grow their revenue base very rapidly and successfully to critical mass. Why? They were making quality games, and they were making the right games. And that's our plan.

Q: You have a wide library of classic arcade games. What are your plans for using those?

We're annualizing

Mortal Kombat

, the fighting game. This fall we have

Mortal Kombat: Shaolin Monks

, which is a game we're very excited about. It's an action-adventure game. We plan to alternate -- generally over time, alternate fighting with an action-adventure game in the

Mortal Kombat

universe. We have

LA Rush

, which is the most requested Midway title to bring back. It's a game that's coming along very well for this fall. We're bringing back

Gauntlet

, of course, in Q4. We'll continue to mine those. We have

Spy Hunter

for next year. If it makes sense, we'll continue to leverage the franchise value.

Q: Sumner Redstone has a huge stake in Midway at this point. What is the future of that relationship between Midway and Redstone and Viacom (VIA.B) , which he heads?

Sumner's our largest shareholder. He's very supportive. He's obviously a big believer in the video-game business, a big believer in Midway Games and our long-term strategy.

But our kids business really is centered around The Cartoon Network. So, we've got a big deal with Warner Bros. We're doing one of the big CGI films for next year. We hope to work with Paramount and some of the Viacom entities as well. ... We're working with all the big studios.