Midway's Hobbits on Hand

The video-game publisher mines Middle-Earth for online multiplayer profit.
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The Fellowship of the Ring is set to expand.

Video-game publisher

Midway Games

(MWY)

is preparing to launch an online multiplayer game based on the

Lord of the Rings

franchise.

The game set in the fantasy world of J.R.R. Tolkien's enduring epic will be taking on monster hit

World of Warcraft

, developed by Blizzard Entertainment, which has now more than 8.5 million users worldwide.

With

Lord of the Rings

, Midway is taking a bold step into a category -- called massively multiplayer online games, or MMOGs -- that has become one of the fastest growing in the video market.

The category, so called because the games allow thousands of users to play at the same time, was expected to hit the billion-dollar mark in North America and Europe by the end of 2006, according to a Screen Digest forecast. The North American subscription market was estimated at about $576 million, while Europe was worth $299 million.

Midway plans to debut the

Lord of the Rings

online game to users in a public beta starting April 6, where at least 1 million players will be invited to test it before it hits retail shelves on April 24.

"It is a really huge, huge franchise and people love it," says David Zucker, CEO of Midway. "This franchise, with a top-quality game, has the potential to become a big hit and to be one of the few massively multiplayer titles that can effectively become the market leader."

With an MMOG game, Midway is entering a territory that larger game publishers such as

Activision

(ATVI) - Get Report

,

THQ

(THQI)

and

Take-Two

(TTWO) - Get Report

have shunned.

"It's a risky bet," says Alexis Madrigal, an analyst for research firm DFC Intelligence. "There have been only a few medium-size launches since the

World of Warcraft

became the juggernaut that it is, for a reason."

MMOGs tend to be more expensive to develop and manage. Then there's the fact that

World of Warcraft

rules the market.

World of Warcraft

accounted for 54% of the subscription market in 2006, generating revenue of $471 million.

"MMOG is a big and growing category, but also a difficult one," acknowledges Zucker. "

World of Warcraft

is the dominant No. 1 player, but in terms of another franchise that has potential -- if well executed -- that can compete with

World of Warcraft

, it's

Lord of the Rings

," says Zucker.

He may have the right instincts there, says Madrigal.

Lord of the Rings

has a huge fan base, and more than 200 million copies of the books have been sold in 40 languages worldwide, indicating a very strong core audience the game can tap into.

"Having a nice brand is very important because the initial investment is very large compared to what it takes to make other kinds of games," says Madrigal.

Midway has tried to get around some of the other challenges presented by development costs and subscriber management. The company is co-publishing the game with Turbine, one of the largest independently owned online game studios in North America.

Revenue from retail sales of the game will go to Midway, which will pay a royalty based on those sales to Turbine.

Turbine has funded and developed the game, which was nearly four years in the making. "Our goal was to make the product as fully featured as possible," says Jeff Anderson, CEO of Turbine. "This world has every character and every story line told in the book."

The game offers about 50 levels of advancement and 400 different skills that become unlocked once a user starts playing. "It's a massive undertaking," says Anderson.

So far, the game looks good, says Madrigal, who estimates it may have cost more than $10 million to develop. "Good-looking games tend to be expensive, and this seems like a high-quality product, "he says. "So far it has been a stable beta."

Midway says it has in place an aggressive marketing plan to get the product to users. But the company is forgoing subscription revenue from the game, all of which will go to Turbine, something that could limit Midway's upside if the game is a huge hit.

In MMOG games, users pay a monthly subscription fee to continue their membership in the game. For instance, at

World of Warcraft

, users pay $14.99 to keep their accounts active.

Turbine hasn't finalized the subscription fee for

Lord of the Rings

online but is offering a price of $9.99 a month for those who preorder the game.

In the long term, subscription revenue for MMOG games far eclipse those from retail sales. "Turbine took most of the risk and raised all the finance for the game, so naturally their risk-reward ratio will be higher," says Madrigal.

"But this could also be one reason why

Turbine took on a smaller publisher, because someone like

Electronic Arts

(ERTS)

would not give up all the subscription revenue," he says.

On Thursday, shares of Midway were up 4 cents, or 0.7%, to $6.24 . The stock has been down 5.5% in the three months since Jan. 4.