How THQ was Murdered by Its Own Ambition

Image courtesy of http://www.joystiq.com

THQ have often been called a "mid-tier publisher", known for games that haven't been the top 20 sellers each year, but that's not to say that they haven't been successful. The company went from their highest grossing year in 2007, with net sales of $1 billion, to the surprising, unforeseen end of the company's 20 year history in January 2013. Was THQ's demise a matter of happenstance in a changing industry, or was there a deeper cause for the destruction of an empire?

In an industry that has become known for swallowing up many who enter, THQ aren't the only company to have fallen. Numerous publishers and developers over the years have also seen their dreams crumble, including Midway, Infogrames, Realtime Worlds and Psygnosis. It was only back in November that Peter Moore, the COO of EA, said that roughly the top 20 games make 80 per cent of the revenue. A fact like that raises the question: Are games being developed worthwhile if they don't make it into that top 20? While the so-called "death of mid-tier games" may have been a contributing factor in the downfall of THQ, it is definitely not the underlying cause.

The first signs of THQ's decline began in 2009 when its third quarter results posted a 30 percent drop in revenue to $357.3 million. During that year, the global recession was claimed to be affecting every company in the world, which could have been a factor in the failure. It marked the end of a fiscal year which saw the release of commercial successes Saints Row 2 and WWE Smackdown vs. Raw 2009, as well as new IP, de Blob, all of which had Metacritic ratings above 80. The company's CEO, Brian Farrell, commented: "This is a good business. It's just not as big as it used to be." He stated that THQ would change their strategy to focus on games with the "highest franchise potential."

I feel that the decision they made to change their strategy was like putting all of their eggs in one basket. THQ's most successful year was credited to licensed games from Pixar, WWE and Nickelodeon, with only 20% of their focus being on owned IP. Farrell claimed that the switch in focus was due to higher review scores leading to higher sales. One particular example to support his claim is Rockstar Games' Grand Theft Auto IV, which released in May 2008 and made £39.9 million in its first week in the UK alone. It sold 926,000 units in its first five days, shattering the UK sales record held by its predecessor San Andreas. However, the difference between THQ's potential franchises at the time and GTA IV was that GTA was a long-running franchise, whereas THQ's alternative, Saints Row, had released its second instalment, which shipped 2.6 million units. It was preposterous for THQ to think that they could make GTA level of money by attempting to turn a carbon-copy into a best-selling franchise.



Saints Row 2 - Image courtesy of http://www.ign.com

The strategic move resulted in Janco Partners analyst Michael Hickey stating that THQ had a 50/50 chance of going bankrupt. The prediction accounted for a 90% drop in share price over ten months and Farrell's decision not to renew a partnership with Disney-Pixar, despite up to 20% of THQ revenues being generated from Disney-Pixar licensed games. In 2006, Pixar's Cars grossed over $460 million worldwide in the box office, and THQ's video game sold 8 million copies, becoming the second best-selling video game for the entire year. Therefore, while THQ's failure for the 2008-2009 fiscal year could be put down to worldwide financial struggles, their decision to re-focus from licensed games based on best-selling movies was the first step that eventually led to their collapse.

The following fiscal year, THQ attempted to create success through Red Faction, and new IP Darksiders. The company's losses were reduced to $9.6 million through an 8 per cent increase in sales. THQ also spun-off two of their studios into independent companies, sold Big Huge Games to 38 Studios and downsized two more of their studios to have them focus on digital games.

The winds of change were happening in THQ, and it had created hope for the future that they would return to their earlier strength. However, investing in new and existing IP wasn't enough to meet THQ's new ambitious nature.

A product that has become regularly associated with THQ's death is the infamous graphics tablet device for Wii, uDraw. Before release, UK marketing director Jon Rooke told MCV that uDraw "is a platform launch, not a one-off proposition." I remember thinking that their plan to make a long-term commitment on uDraw was dumbfounded. THQ were a company that had focused on creating game software, but they were instead trying to develop their own platform on which other developers would create software. On top of this, uDraw was an add-on peripheral for Wii, rather than a games console in its own right.

Regardless, I admitted I was wrong when uDraw had shipped 1.7 million units in its first six months on the market. At E3 2011, an improved version of the tablet with multi-touch was announced for Xbox 360 and PS3 along with a potential killer app that could have turned uDraw into a mass-market success, "Disney Animator". However, the claimed "killer app" was never heard of again, raising the question as to why THQ would even announce the ambitious game in the first place.



uDraw on Wii - Image courtesy of http://www.joystiq.com

Questions were getting asked in January 2012, when rumours spread that THQ was going to be put up for sale and their entire 2014 release line-up had been cancelled. Naturally, THQ denied the claims and focused on the success of Saints Row: The Third shipping 3.8 million copies worldwide. There was no mention of the performance of uDraw, but Brian Farrell announced that THQ would exit the licensed kids' games market entirely so that the company would become "a more streamlined organisation focused only on our strongest franchises".

It was ultimately at the earnings call in February that Farrell revealed uDraw had sold $100 million less than they had expected. They were sitting with 1.4 million unsold units, and had decidedly ceased production. How THQ managed to over-estimate the demand of uDraw is beyond me.

MCV posted a feature that concluded that children were now consuming their games in the form of Moshi Monsters and Club Penguin. Activision's Skylanders was just taking off at the time, and the Kinect and Move had "by and large, failed to attract the younger audience." Had THQ done this research a year earlier, they could have avoided mass-producing a product that didn't have the market potential that they thought it did.  It is possible that they did do their research but released the product on Xbox 360 and PS3 anyway in an attempt to change the entire industry, but that would be ineffective. Any publisher or developer should always create games for a platform where the target audience are, not somewhere else.

Aside from the financial problem that the uDraw debacle had caused, publicity problems arose when a group of former staff revealed THQ executives' salaries and suggested that they be fired for the failing of uDraw as they were "underqualified" to have their roles at the company. The problems continued when a class action lawsuit was filed over accusations of misleading shareholders about the $30 million operating loss caused by uDraw. It was evident that uDraw's failure wasn't only caused by a shrinking kids market on consoles, but by the bad management that had been too ambitious with the manufacturing of their product.

During the lifecycle and scandal of uDraw, THQ had another overly-ambitious project in development. Warhammer 40,000: Dark Millennium Online was an MMORPG that had a release date given for the fiscal year 2012-2013. The licensed game was an odd move considering THQ decided their stance in 2009 to focus on their own IP over their prior dependence on licensed games. Regardless, DMO was happening and it was going to cost $50 million.

The decision for THQ to spend $50 million making an MMO was ridiculous. Understandably, genre-leader World of Warcraft had begun a decline which saw it drop from its all-time high of 12 million during 2010 to 10.3 million in November 2011. This could have been interpreted as an opportunity to swoop in and gather up those 1.7 million former subscribers. However, the possibility existed that the subscribers departing from WoW could have been playing a free alternative instead, as data from Pando Networks revealed that the number of people downloading free-to-play online games had increased by 450% between 2009 and 2011.

Meanwhile, subscription-based massively multiplayer games were suffering as a whole. Realtime Worlds' APB failed to recoup its $100 million through subscription costs and caused the company to close, with the game being bought by GamersFirst and shifted to a free-to-play model in early 2011. Star Wars: The Old Republic launched in December 2011, but had to include a free-to-play option within a year of its launch because of a drop in subscriber numbers to less than 1 million. To think that Dark Millennium Online would have met its break-even point with its high development cost in a world where MMOs were shifting to free-to-play and relying on micro-transactions would be wishful thinking on THQ's part.



Dark Millennium Online - Image courtesy of http://www.gamefront.com

I think that THQ ultimately realised they were pushing their ambitions too far with the MMO idea. In March 2012, it was revealed that their financial difficulties were causing them to make cut-backs and re-focus Dark Millennium as a single-player action game. This was too little too late, however. THQ had already suffered devastating losses from uDraw. The MMO investment only added to their financial difficulties. Had they developed Dark Millennium initially as a single-player action title, it would have saved them the $50 million that they would never see again.

In April 2012, CEO of Take-Two Interactive, Strauss Zelnick, infamously stated "THQ won't be around in six months." His statement got a rise out of a THQ, who responded to the statement angrily, but Zelnick wasn't wrong. While THQ lasted until December before filing for bankruptcy, it was clear to others in the industry that their strategy wasn't working at the time.

By the end of 2012, THQ seemed to have hit a realisation phase. They hired Naughty Dog co-founder, Jason Rubin to be the new President of the company in June. He expressed his intention to get THQ focused on safer titles including AAA sequels and a few new IP, cutting back on their ambition to avoid a repeat of the uDraw fiasco. Brian Farrell had made similar claims before, but had never stuck to them. Rubin also said that the remaining uDraw units would be sold off cheaply, rather than having them sitting in a warehouse, or  "buried in the desert". The ending of THQ's ambitious management would have been a saving grace had it happened a year earlier, but the damage had been done.

2012 closed out with THQ filing for Chapter 11 bankruptcy. They planned to sell the company to a "stalking horse bidder", investment firm Clearlake Capital Group, in order to continue trading. The plan back-fired when creditors ruled that other potential bidders must be given a chance. Following this, a number of THQ's IP and studios were sold off in an auction to the likes of Ubisoft, SEGA, Crytek and Koch Media.



Darksiders II - Image courtesy of http://www.videogamer.com

In retrospect, the loss of THQ is saddening to me. While their downfall was their own doing through overly ambitious risks like Dark Millennium Online and uDraw going beyond the Wii, I respect THQ for their ambition in a time where, I believe, never-changing sequels are the only thing 100% guaranteed to make money.

In their last five years, THQ had completely changed direction. They transitioned from licensed kids' games to creating their own IP, evolving their potential franchises, attempting to compete with World of Warcraft and trying to create their own hardware. As far as I know, no other company has ever attempted such a feat in such a short time. Their mistake was that THQ's management had focused on the wrong things, like competing with established 'monopoly' franchises like GTA and WoW, and trying to cater to a disappearing kids market with uDraw on Xbox 360/PS3.

If there's any lesson that should be taken from THQ's end by the industry, it shouldn't be taken as a warning against taking risks. Without creative risks, there would be no way to learn if something new would or wouldn't work. It's good to be ambitious, but they should know their limits too and not become too ambitious like Brian Farrell did with THQ.

THQ dared to be different and they were never down-heartened by their failures, they would pick themselves back up and begin working on their next project in the hope that it would be successful. That sort of dedication and ambition is nothing less than commendable in the end, regardless of the bad decisions that were made along the way.

With that in mind, I bid you adieu, THQ.