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Playing Hard

Prior to becoming the Chairman, President and Chief Executive Officer of Calabasas Hills-based video game publisher THQ Inc., Brian Farrell had never been the CEO of a major corporation, as most of the former CPA’s time in the business world had been on the financial side. Yet that lack of experience hasn’t stopped Farrell from leading THQ to 10 straight years of sales growth, with the company’s 10-year compound annual revenue growth rate measuring a robust 36 percent. In these years at the helm of THQ, Farrell has transformed the company from a relatively small niche player to being one of the most prominent independent video game publishers in the nation. The company that had an $8 million market cap in 1995 has become one with an approximately $1.6 billion market cap today. In accordance with this size increase, Farrell has grown THQ’s global marketing and sales force to where it now directly serves more than 75 countries worldwide, with offices in the United States, United Kingdom, France, Spain, Australia and Korea. Farrell has also been the mastermind behind the company’s decision to expand its internal intellectual property development division to the point of where it employs 1,100 people, scattered across 12 studios. This growth is not just organic, but also includes several strategic acquisitions including Relic Entertainment, Rainbow Studios and Volition Inc. And despite the video game industry’s current sales slowdown due to a transition into the next generation of video gaming platforms, Farrell has managed to keep the company’s earnings projections on track while keeping its stock price on the rise. Question: The video game industry has been in a relative slump of late. THQ’s main competitors Activision and Electronic Arts recently said that their third and fourth quarter results would be below expectations. However, THQ’s earnings expectations have been on track. How has the company managed to overcome this industry-wide trend? Answer: We’re not immune from industry-wide trends but since 1991, I’ve been through four platform transitions and we were able to plan our product launches in through the year, very very well. We thought that we’d have the best success coming out with new brands directed at the core gamer segment away from the holiday season, and the hype that it typically brings, and this decision has paid off well. In the fall quarter, we came to market with big brands (games from licensors WWE, Nickelodeon, Pixar) aimed not at the core gamer but the mass market and this also paid off for us nicely. Q: Do you anticipate that as the next generation of video game platforms hit the market, the software market will pick up accordingly? A: We agree with most industry and financial analysts that the calendar year 2006 is a transition year with the launch of new hardware platforms. The industry will probably be flat to slightly up this year, but the big growth story for the industry will be between 2007 and 2009, as all of the new platforms will be hitting their sweet spot. This has been the normal trend and we think that we’re going to grow significantly in our next fiscal year based on the introduction of a couple of things including the “Cars” video game that we’ll launch with the film in June. We’ve got to manage through the transition, but the future looks bright Q: In recent years, THQ has branched out significantly in the wireless video game realm. How important is the THQ Wireless division to the company’s future and what are your plans for it? A: We were one of the really early movers into the wireless game space. We saw wireless devices and continue to see them as a great platform for gaming. The upside is that all of these handsets around the world can turn into mobile gaming devices. The flipside is that interface on phones isn’t great and the graphics are still relatively primitive. We see it as a high growth market. Our guidance is roughly $50 million for the wireless market this year. It’s small now, but we see it as a potentially high growth market that will continue to be important in the future. Q: Recently, EA purchased Jamdat, one of the major players in the wireless game space. Do you anticipate that the competition will become more fierce in the sector? And if so, how will THQ overcome this heightened competition? A: In all of our segments, whether it’s platform, PC gaming, online gaming or mobile gaming, it’s going to be fiercely competitive. The answer is that the best content will win. We also have to have great distribution to compete. We currently have relationships with 90 to 100 carriers around the world on all platforms. The best content will win and we think our portfolio for wireless is impressive, including licenses like Star Wars and Major League baseball and the National Football League that we don’t have for the platform games. Q: You recently signed a deal to have dynamic ads placed in THQ’s upcoming games, making the company the first major United States publisher to do so. Why did you feel that this was important for the company and what are your plans for its future? A: As we look into the future overall, the big vision is the fact that our consumers are now online a lot of the time. This creates the opportunity for some new revenue models and one of them is game advertising. The thing that we like about our deal that we signed with Massive is that we have a lot of control as to what’s being served up to consumers and when the ads are being served. This will allow us to maximize revenue without interrupting the game experience. If you look at our chief demographics, gamers now are not just teenagers and 20-somethings. Gaming is for 4-year olds to people in their fifties. But the sweet spot for advertisers is the males in the 17-34 category and one can expect manufacturers of consumer products, apparel, food and beverages to want to get into this new advertising market. Q: In recent years, the major Hollywood studios have intensified their efforts to make headway in the video game sector. How has this altered the competitive state of the industry? A: It really hasn’t changed it. The studios have gotten in and out, but our strategy has been fundamentally aligned with making games for our three core brands: World Wrestling Entertainment, Pixar, and Nickelodeon. However, we also have 1,100 people in our product development organization that are working on intellectual property owned by THQ. We have a very extensive pipeline of IP that we have control of. Q: With Disney purchasing Pixar, do you anticipate this changing your relationship with the company? A: We’re currently prepared to launch with Disney and Pixar the games that are based on their upcoming film “Cars.” We’ve worked with Disney on a number of initiatives in the past and we have an ongoing relationship wwith Pixar. Our track record is unparalleled with over seven million units sold of the “Finding Nemo” video game and five million units sold of “The Incredibles” video game. We’ve done an amazing job with Pixar and we have long-term rights for the next five Pixar films. We’ll stand on our record. Q: As the market continues to consolidate, has THQ been approached often by companies eager to acquire it? Conversely, is the company in an active acquisition mode itself? A: We have the same position on mergers and acquisitions whether they’re upstream or downstream. It’s all about content when we look at acquisitions, we think what content can the acquisition create. THQ is a company that has shown the ability to do both. What we’re seeing now and what we’ve been saying publicly is that the consolidation in the industry isn’t really because of mergers and acquisitions. It’s more a result of the dominance of key players like THQ. We’ve been steadily gaining significant market share and we’re not nearly finished with our growth path. As long as we continue to see significant market share gains, our view is that we want to do that independently and aggressively. One never knows what’s going to happen and there are a lot of discussions that are held over time, but we think we’re one of the long-term consolidators based on our business model and management team. Q: What is your vision for the long-term future of THQ and the industry? A: We think that the interactive entertainment industry is going to continue to grow. One of the big picture trends currently going on is the growth of these systems not just in the United States, but worldwide. We’re in a growth industry and we have a strategy of core brands that make sense, we have an enviable network of global distributors and we think that we’re going to be one of the major players and will continue to consolidate that position over the next five to six years.

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