The Mighty M: Reboot Edition

When I was at Eidos I found myself in a room with Avi Arad, then CEO of Toy Biz. It was Toy Fair and he was trying to convince me to let Toy Biz make a second Lara Croft action figure. If you ever saw the first one, you would know why he was fighting a losing battle. Avi told me he wanted Eidos to partner with him to acquire Marvel. Toy Biz was going to buy it out of bankruptcy. The thought was intriguing because the Eidos business plan was partially modeled on Marvel. The prospectus I wrote for the NASDAQ offering in 1996 started with "If Marvel were started today, it would be a game company." Eidos was an IP company which happened to use games to inject intellectual property into the world's psyche. Once injected, we could move them anywhere - and we did with Lara. I spoke briefly about the Marvel opportunity with Charles and we both thought Avi was nuts. In hindsight, Avi was nuts, but he also acquired Marvel and not only turned the company around, but created more value in the IP than it ever had before. He targeted Marvel because the company owned a library of known IP. Spiderman, Hulk, Xmen were already injected. Of course they were not deeply known beyond a small circle of American otaku, and bad exploitation of the properties occurred in other businesses – sound familiar yet - but he showed the properties were actually in the long term, not the short term memory of the public.

Because the game business is relatively young - Marvel was started in 1939 - we don't have a lot of libraries floating around. We also don’t value library content. We look at IP as franchises to platform sequels, but do not look for extensions or windows for the underlying content. If we look to those same folks Avi catered to and mention Defender, Gauntlet, Smash TV, Joust, Killer Instinct, Spyhunter, Rampage, Robotron, Tapper, and of course, Mortal Kombat, we would see a warm, fuzzy glow growing from the listener. These games are the foundation upon which our gaming knowledge is built. For many of us, these arcade games were our introduction to the business. $60 for a 360 game is a bargain relative to what I dropped in Defender. For people like my 12 year old son who did not play these games when they are new, they are time tested, proven, fun game dynamics. Sure, bad versions of many of these games made it to the console, but remember Marvel? Did you ever see the 1970's cartoons where the character's mouths didn't move? How about the Roger Corman’s Fantastic Four movie? As we saw with Spiderman, one good product can erase the short term memory. The properties live in long term memory.

So why is the company with one of the deepest libraries in the business languishing? I think they forgot they had it. Midway has yet to articulate a cohesive strategy to leverage its valuable IP from casual through hardcore markets, in and out of games. By failing to do so, they are trying to compete against better capitalized companies with one hand tied behind their back. They must be agile, and cater to their strengths.

If we look at games on a cost/complexity continuum with minesweep and Solitaire at the bottom and Grand Theft Auto IV and World of Warcraft at the top, we would see all of the games being produced by major publishers crowded into a very, very narrow band at the top. At the bottom, you would see a very, very narrow band containing all the products populating facebook, miniclip, addicting games and garage games. Both ends are very crowded and very noisy. Getting above the noise, takes marketing and a bit of luck. In between the two bands is an, empty gaping hole of nothingness, some publishers are calling “advanced casual.” For the purposes of this post, I will call it the place where all of Midway’s games reside. Because games in the top band games are expensive, and people won’t pay for bottom band games, the middle market is the most attractive to publishers. Due to their scale and structure, it is difficult for them to get there. Don’t rely on my opinion; look again at what Bing Gordon said he wants to do after he leaves EA.

Core gamers scoff at this market as irrelevant to “real gamers,” but real gamers are playing these games. Even though they want to sit down for 4 hours and unlock some achievements in Mass Effect, or lose 5 hours in some Halo 3 multiplayer, they may work for a living. Gamers, and non-gamers, are choosing to play discreet, easy to pick up and play games. Arguably most Wii titles fit in there at the high end, and Publishers are starting to fill the space from the top down with titles like Boom Blox, Rock Band and Guitar Hero. Even though these titles are less expensive to make, they are more expensive to market, because this is a new category and the titles have to be explained. Publishers either spend a lot of money and effort on marketing, or they secure a license to create awareness for the game. Licenses are expensive. To the great pleasure of musicians, EA and Activision are locked in an arms race to secure the best music for Rockband and Guitar Hero. Jamdat paid USD 137 million for a 15 year Tetris license. Midway doesn’t have to worry about this cost. The company proved the relevance of its library with straight ports of arcade games to Xbox Live, and they get the brands for free.

I am not saying Midway should forego the top band and focus exclusively on the middle, but if they have a competitive advantage in the most lucrative and fastest growing sector of the market, why are the giving the games away for free? Midway has the opportunity to leverage its IP to grow a dedicated and committed community while they build their top band titles. Before TVland, no one saw value in ancient dated sitcoms, then Viacom built the channel and the value in the IP. The TVland investment did not stop the company from building MTV, Showtime and a myriad of other distribution brands. Where is Gameland? Every one of those Gameland customers is providing two available eyeballs for the top band product. I really don’t have to explain this to Midway when its second cousin once removed company, Nickelodeon, is one of the strongest marketing channels on the planet.

Midway is building AAA games for the top band. The company just had its gamers day where it revealed the 2008 lineup. The press responded well to the slate which includes This is Vegas, Wheelman, NBA Ballers: Chosen One, TNA Impact and Unreal Tournament III:360.. While Midway does own the Ballers franchise, and it could be a great counter to EA Sports with a committed effort in other sports – the slate is completely devoid of known, Midway owned IP.

Assuming a competitive quality level, each of these games will require significant marketing dollars to launch during the second half of the console cycle. As Midway saw with Stranglehold, even the first half is tough for a new IP. TNA and Unreal will get support from Spike, and the existing brand, respectively, but these also carry lower margins due to license fees. If the properties are successful, the brands are being built for companies other than Midway. Why not look inward? In 2004, 2005 and 2006 the Mortal Kombat franchise contributed 18 to 22% of the company’s revenue. In 2007 and 2008 it is not represented. When EA found itself in a similar position with The Sims, it turned it into a separate business unit. There is more stuff in there as well.

You may think this is inconsistent with my earlier posts in which I bitch about sequalitis and lack of risk. I assure you, it is not. I am advocating a balanced portfolio of low risk licenses, medium risk sequels and and high risk original IP. Here Midway is missing the middle piece. I just want to put a couple more chips on the roulette table. A more balanced approach would produce the funding and p and l room necessary to take risks and build new valuable IP next to the old.

There is tons of other stuff to talk about, like downloadable content, ancillary markets, alternative distribution channels and ancillary licensing, but this gaseous belch is really about a simple way to leverage value into a financially predictable system for the creation and exploitation of intellectual property. But who am I to tell them how to run their business?