Fragile Licensing Deals Vital for Struggling Interplay
By ANDREW SIMONS
In the summer, officials at Irvine video game maker Interplay Entertainment Corp. thought they were driving the company toward a sale. Now they’re hoping they keep their license.
One of the most pressing questions facing Interplay going into 2002 is whether the company will lose licenses to game titles considered vital to its future. Like other game makers, some of Interplay’s most popular titles are based on movies or characters licensed from movie studios and other sources.
“They’ve built some good games,” said Miguel Irabarren, an analyst who follows Interplay for Wedbush Morgan Securities in Los Angeles. “But they’ve got some problems.”
Interplay officials didn’t return phone calls for this article.
Many of the more than 100 titles that comprise Interplay’s game library are the company’s original work, including the successful role-playing series “Baldur’s Gate.” Others are based on licenses of movies such as “Star Trek” or places such as Caesars Palace in Las Vegas.
“If we are unable to maintain current licenses or obtain new licenses for the underlying content that we believe offers the greatest consumer appeal, we would either have to seek alternative, potentially less appealing licenses, or release products without the desired underlying content,” the company said in a recent Securities Exchange Commission filing. “Either of which could limit our commercial success and cause material harm to our business.”
Interplay’s licenses already have been hit. This year, the company lost out with Viacom Inc. to keep making the “Star Trek” series, a license set to expire in 2002. Interplay stands to lose six titles as a result.
The company also is in talks with French video game maker Infogrames Entertain-ment SA, which co-publishes with Interplay “Heart of Darkness” based on the Joseph Conrad novel. Interplay has failed to make scheduled royalty payments to Infogrames under the current pact.
“Disputes regarding these license agreements may also negatively impact our ability to market products based on these licenses,” the company said in a filing.
Even Interplay’s potentially lucrative pact with Warner Bros to make games based on “The Matrix” isn’t rock solid. The pact, struck in February, led to an exclusive deal with Microsoft Corp. in May to produce the title for Microsoft’s Xbox game console. Interplay also got a $5 million loan from Microsoft.
But any change in Interplay’s ownership could scuttle the Matrix license, according to the terms of the deal. A loss of the “Matrix” license also likely would end the Microsoft pact,and trigger repayment of the Microsoft advance.
While Interplay’s bid to find a buyer earlier this year fell through, French video game maker Titus Interactive SA recently upped its Interplay stake from around a third to slightly more than half.
The move hasn’t impacted Interplay’s “Matrix” deal. But the change in ownership condition could have been why Titus and Interplay weren’t able to find a buyer earlier this year.
“The loss of the ‘Matrix’ license would materially harm our projected operating results and financial condition,” the company said in a filing.
Some game industry watchers have questioned whether Interplay is up to the task of creating a “Matrix” game. Big titles generally cost $5 million to $10 million to make. The Microsoft advance helps. But Interplay counted just $2.2 million in cash as of Sept. 30.
And Interplay is relatively new to games for consoles such as Xbox.
“They were historically a personal computer platform company,” Irabarren said.
Interplay and Titus seem intent on making a go of it. They stand to benefit from the Dec. 3 release of the latest in the “Baldur’s Gate” series, which likely will see strong sales among its core following.
“Furthermore, we still expect to have an excellent lineup of games scheduled for release next year,” Herve Caen, president of Interplay, said in a statement.
But Interplay faces other challenges. The company needs to raise money, according to Irabarren.
In the spring, Chicago-based LaSalle Business Credit Inc. ended its credit agreement with Interplay, leaving the company without easy access to cash.
In September,on the day of the terrorist attacks,Interplay revealed that talks to sell itself had failed. The company said it had retained Europlay 1, a European advisory firm, to help it restructure.
Last month, the company registered to sell 16.7 million shares that it likely will use for future fundraising.
But with Interplay’s stock at about 50 cents last week, the likelihood that it could raise a significant amount of capital is slim. Interplay, which counts yearly sales of about $48 million and $23 million in debt as of Sept. 30, could have a tough time getting credit without guarantees from Titus.
Despite its woes, Interplay’s task isn’t all that different from other publishers in the hit-driven game business, Irabarren said.
“They need to focus on building the most profitable games,” he said. “That means ‘The Matrix’ and ‘Baldur’s’ Gate.'”
