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) - Get Report

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.

When you say, "Can THQ compete in that?" not only have we done it, we will continue to do it. We're one of the larger, best-capitalized companies in the industry. If you look at our forward guidance this year, you've got EA up here, and

Activision

(ATVI) - Get Report

vs. THQ is very much of a fair fight

for No. 2.

In terms of your wireless business, your growth rate has slowed. What's going on there? Is that an effect of EA's Jamdat acquisition?

No Jamdat effect whatsoever. We were an early leader in that space, and we tried a lot of different things. We tried games that were targeted to girls. We tried mass-market games. We tried conversions of our regular console games. We tried sports games. And what we found is there are certain things that work very, very well, and there are some things that have not worked as well as we would have thought.

You're seeing a little bit of a slower growth -- the growth is not going away -- as we trim back the things we found didn't work in the market, and we're adding more to the things that did.

Many of the companies in the industry, THQ included, are making a big push to develop games based on internally generated content. You, though, are still heavily dependent on licensed content, whether it's from Pixar (PIXR) or Viacom's (VIAB) - Get Report Nickelodeon shows. With royalty rates rising, to what extent does it hurt you that you are so dependent on licensed content?

What's kind of interesting is when people use the word "dependent on." It's actually a strategic choice we've made.

When you have these types of brands, yes, you pay a licensing fee for that, but your commensurate marketing costs go down. ... People know what a Pixar game is, so all we have to do is say, "Here is a great game based on

Cars

."

We've built a couple of our own brands now ... but the marketing investment to build those brands has been significant.

At the end of the day, your overall marketing expense -- licensing plus marketing and then marketing a new brand -- they tend to sort of balance out. So, one of the things that gives us a strategic advantage is we're one of the few companies that has that real balance in our portfolio approach.

What's your target for internally owned content as a portion of your overall sales?

Somewhere around just under half is what we're targeting. ... It's going to be based on our release schedule, but that's about the right balance.

THQ's bread-and-butter has traditionally been mass-market games. That seems to be a great business: Such games do well in times like these when the older consoles are in the hands of tens of millions of consumers; development costs for those games tend to be a lot lower than those for cutting-edge titles, and profit margins are higher. Why not stick with what you know?

Well, I'd argue we know the core gamer pretty well.

Look at

Juiced

,

Destroy All Humans

, even

Dawn of War

. That title with its expansion packs has gone over a million units in a very high-margin business.

If you look at our management team ... our two top product guys have a lot more core gamer expertise than most of our competitors right now. We have a core competency there. Yeah, we've been very successful in the mass market, but there's a growth opportunity to ramp properly our offerings against the core gamer.

We're not walking away from Pixar and Nickelodeon and Bratz. ... There's a lot of great things about that younger demo, but there's no reason why we can't do both.

For companies to continue to play in this industry is requiring more and more resources, more and more money. The hope for the industry seems to be -- at least for the lower tier guys -- this idea of the online casual games, the mobile gaming space, potentially online advertising or online gaming or selling ancillary content. How do you see things shaking out, and where do you see THQ in this evolving marketplace?

The bets are bigger, and it's going to be the larger, well-capitalized multinational, multiproduct ... companies that are going to be the ones that survive. You've got to be broad-based in your content, broad-based in your distribution capabilities and broad-based in your approach to the market. ... That requires scale.

I'm glad we're in the "have-scale" camp. But when you look at the other opportunities -- in-game advertising and the online -- those are generally a function of how the underlying products do. So, those of us that do the 1-, 2-, 3-, 4-million-unit sellers, the advertising revenue, the online revenues are going to flow that way as well. So it's only going to exacerbate that issue of the big getting bigger.