SAN FRANCISCO -- The video-games industry grew a blistering 43% last year as sales reached $17.9 billion, bolstered in large part by eagerly anticipated titles and the arrival of the latest generation of consoles. Despite a breakout year, a number of senior video-game executives in the past four months have been forced out or had to step down. Games publisher THQ ( THQI) was the first to see an executive go. On Nov. 11, CFO Edward Zinser resigned by "mutual agreement" after three years in the post. Two days later, Atari ( ATAR), a smaller video-games company that has been in danger of getting delisted from the Nasdaq, saw its CEO David Pierce leave. In February, Phil Harrison, head of worldwide studios for Sony Computer Entertainment, stepped down. This month, publisher Midway's ( MWY) CEO David Zucker found himself in the firing line. His exit was followed by an announcement that Warren Jenson, CFO of Electronic Arts ( ERTS), would leave his position at the end of the month. While each company cited its own reason for the change, industry watchers say a common thread behind the executive shuffle is the inability of the companies to capitalize on the industry's tremendous success last year. The actions underscore the point that senior game executives are being held accountable for poor company and stock performance as investors' patience runs thin with underperforming companies in the highly competitive sector. "Each company took a right when the road was bending left," says Jesse Divnich, an analyst with The simExchange, an online fantasy stock market for video games. Michael Pachter, an analyst with Wedbush Morgan, agrees. "The pressure is big if you don't succeed," he says. "Investors are less patient with companies that don't go up in value." The companies' missteps have been glaring in a year when the industry saw explosive growth. Nintendo's Wii console and its handheld gaming device, DS, turned into one of the industry's biggest catalysts, creating a lucrative casual gaming audience that preferred easy, fun games to more drawn-out, complicated story lines. By contrast, Midway and THQ failed to have any big blockbusters. And EA saw itself bested by its rival Activision, which moved to the top of the pack with its hit games. "EA and Midway focused more on titles within ultra-competitive genres such as action and first-person, while THQ simply had no sense of direction and failed to appeal to gamers at all ends of the market. Sony's ( SNE) failure is similar," says Divnich. Despite being the clear market leader with its older PlayStation 2 console, Sony's latest console -- PlayStation 3 -- trails its smaller rival Nintendo by a wide margin. Similarly, games publisher THQ saw its market share slip significantly in 2007 after the company delivered two duds: Stuntman: Ignition and Juiced 2. The company didn't have a single title in the top 10 selling games in 2007, according to the NPD group.
In 2007, THQ grew revenue 27% to $1.02 billion from a year ago. But for fiscal 2008 ending on Mar. 31, analysts expect the company to report revenue of $1.04 billion. EPS, excluding items, is expected to fall to 5 cents share in fiscal 2008, vs. $1.24 for fiscal 2007. That dismal performance has sent THQ shares down 15% over two years. Not surprisingly, Zinser took the fall. "His 'mutual agreement' to resign was likely due to the company's financial condition, poor investment decision in new IPs and its overall poor market position," says Divnich. In January, Zinser took up a new position as the CFO of Boingo Wireless, a company that provides access to Wi-Fi hotspots. Earlier this month, David Zucker, CEO of struggling game maker Midway, stepped down after nearly five years at the top job. The move came after years of losses at Midway and declining revenue. In fiscal 2007, the company's revenue fell to $157.2 compared with $165.6 million the year before and $150 million in 2005. Excluding items, the loss per share widened to $1.07 in 2007 from a loss of 86 cents a share in 2006, and a loss of $1.30 the year before. "Midway has not turned a profit since Zucker arrived nor is the potential to reach profitability even in the realm of possibility," says Divnich. "This, of course, is happening during a time when the industry itself is showing explosive growth so clearly wrong decisions were being made." The company's attempt to bank on Hollywood star power with its game, Stranglehold, based on a John Woo movie, failed to catch on with gamers. Another game, a first-person shooter title, Blacksite: Area 51, sold fewer copies than expected. In fiscal 2008, analysts expect Midway to report revenue of $233.7 million with a loss of 58 cents a share. Midway's stock has fallen a whopping 73% over two years. Zucker's departure was expected, if not overdue, says Pachter. "David was going on five full years of turnaround," he says. "He probably left because the Redstones are tired of waiting for this investment turnaround and wanted someone new to execute." Viacom ( VIA - Get Report) chairman Sumner Redstone holds an 87.5% stake in Midway, individually and through Viacom parent National Amusements. Just days later, on Mar. 24, EA said its CFO Warren Jenson would step down after nearly six years on the job. EA is in the midst of a $2.1 billion, or $26 a share, bid for its smaller rival Take-Two Interactive ( TTWO - Get Report). Jenson will be replaced by Eric Brown, former chief operating officer of EA's studio in Redwood City, Calif. Despite releasing some big games last year, EA lost its position as the No. 1 publisher to Activision ( ATVI - Get Report), which topped the industry's best seller charts, thanks to games from its franchises such as Guitar Hero and Call of Duty. Since EA CEO John Riccitiello took over the job last year, he has made a number of changes to bring in a team he's comfortable with. Riccitello has promised to take EA's revenue to $6 billion by the end of fiscal 2011. Analysts polled by Thomson Financial are expecting revenue of $3.9 billion for the current fiscal year.
Meanwhile, EA's stock has lagged its rival Activision. EA shares have slid 5% over the last two years. By contrast, Activision has seen its stock soar nearly 96% in the same period. In December, Activision agreed to merge with Vivendi Games in a $9.85 billion deal that will make it the industry's largest company. For EA, keeping up with Activision and re-establishing the company's position as the clear market leader won't be easy. If it is successful in its bid for Take-Two, EA's senior executives' suite could see more changes, as will Take-Two, with its CFO and some of the company's senior vice presidents likely to move on. Take-Two's management can certainly understand that. Last year, its shareholders voted to replace former CEO Paul Eibler and its entire board of directors following investor dissatisfaction with the company's performance.