'LICENSE-ITIS' PICKING UP STEAM

Video games based on blockbuster movie licenses are likely to sell well regardless whether their quality impresses game critics or not. That is just one of the findings of financial analysts who have compared boxoffice numbers to video game sales.

"The clear takeaway is that games tied to movies that do very well tend to also sell very well," says Jason Kraft, co-author of the "Video Game Journal" report. "There is a high correlation there. Unless, of course, the game is terrible. Then the first couple of weeks' sales could be good and then fall off a cliff when word of mouth spreads about just how awful the game is." Kraft is a financial analyst at Bala Cynwyd, PA-based Susquehanna Financial Group (SIG), an institutional research, brokerage, and trading firm.

The two largest video game publishers -- Electronic Arts (EA) and Activision -- don't disagree, at least not entirely.

"What the movie does is buy you some insurance," observes Neil Young, vp and general manager of EA Los Angeles. "So that kind of protects the downside. What you really want to do is have a movie that's incredibly successful plus an 85+ rated game, and then you're giving yourself the best chance of creating a hit."

"I believe there needs to be a core level of quality," notes Will Kassoy, senior vp global brand management at Activision, "although there have been exceptions. For instance, 'The Matrix' and 'Star Wars' were mega, mega movie properties but had games that were just average in quality -- and their sales did okay. But to plan your business around those exceptions is just not prudent."

SIG's Kraft is looking forward to seeing what sort of impact movie boxoffice will have on the sales of video game "Pirates of the Caribbean : The Legend Of Jack Sparrow" from publisher Bethesda Softworks. It was released day-and-date with the film "Pirates of the Caribbean : Dead Man's Chest" which took in a record $132 million in its first three days.<P>

But the game has been critically panned with an average 56.2% rating based on 15 media reviews, according to GameRankings.com. (For example, Monty Phan, video game critic at "Newsday," remarked: "Arrggghh! That's the sound you'll likely make while playing this game, and not because you're imitating a pirate.")

"I'll be anxious to learn whether the game supports our theory that it can do well despite its quality -- or lack of it," adds Kraft. No sales figures are available yet; the game launched just three weeks ago.

Meanwhile, attesting to the benefits of a good movie license is the fact that both EA and Activision have games based on movies in their near-term release schedules. And each company has released, since 1998, eight games based on Top 10 grossing movies. Activision created games from "X-Men" and "X-Men 2," "Spider-Man" and "Spider-Man 2," "Shrek 2," "Madagascar," "A Bug's Life" and "Toy Story 2," while EA built games from "Harry Potter and the Sorcerer's Stone," "Harry Potter and the Chamber Of Secrets," "The Lord of the Rings: Two Two Towers," "The Lord Of The Rings: The Return of the King," "Harry Potter and the Prisoner Of Azkaban," "Harry Potter and the Goblet of Fire" and "Batman Begins."

In fact, SIG's report calls Activision "by far the publisher with the largest exposure to movie-based games" having recently "taken the throne" from EA in terms of number of licenses owned when it acquired the rights to the James Bond franchise two months ago. EA had owned that franchise since 1999.

But industry observers have been vocal in their criticism of the growing "license-itis," saying that it stifles creativity.

Indeed, EA's president of worldwide studios, Paul Lee, said in March that it was time to get creative and develop at least one new franchise each year, boosting his company's games based on original IP to over 50% from the then-30%.

However, bringing new IP to the market is extremely difficult, observes SIG's Kraft.

"It's all about risk management," he says. "I mean, how many millions of dollars does a publisher want to spend creating new IP, marketing it and then finding out that it only sells 200,000 or 300,000 units, when there's a high probability that, if they had licensed a well-known brand, nine out of 10 times that brand affinity would have given them a decent return on their money?"

That is certainly one reason why the movie-based game category has practically tripled in size in the last five years to almost $1.5 billion in sales, says Activision's Kassoy. Established franchises currently represent about 80% of the video games market while new IP -- the smallest category by far -- represents only 5%, he adds.

Such dramatic growth in movie games is bound to continue, given the release schedules of publishers like EA and Activision -- games based on "Over the Hedge," "Transformers," "Spider-Man 3," and "Shrek 3" from Activision and on "Superman Returns" from EA.

"The situation isn't going to change unless licensing costs increase to the point where it's cost-prohibitive to develop a game around a movie," says Kraft. "It's a very easy strategy for those publishers who have good licensing arrangements with solid, brand-based movies, because they can count on a sequel and can piggyback off of the theatrical marketing."

While license-itis isn't about to disappear any time soon, it may very well take a breather as the next-generation of game consoles -- Sony's PlayStation3 and Nintendo's Wii -- hits the market this November.

"Traditionally, the early part of a new hardware platform's life cycle has always been a good time for publishers to come out with original IP," notes EA's Young. "That's when there are fewer products competing for the audience's attention. Then, as the platform gets more broadly adopted and you need to find new mechanisms to be able to differentiate your products on the shelf, that's when licenses start to become a little bit more appealing."

EA's strategy will be to adjust its product portfolio accordingly.

"Right now, about 30% of our portfolio is original, wholly owned IP and we intend to grow that to about 50%," Young says. "We reserve the right to change that mix in the future as the market warrants it. Our goal is to always operate a balanced portfolio, trying to capitalize on where we are in the life cycle of the marketplace. Right now we're taking the dollars that we might have invested in licenses and we're putting them into new and original products."

Those include "Black," a new franchise of first-person shooters for the PlayStation 2 and Xbox released in February and the much-anticipated simulation game "SPORE" early next year from Will Wright, the creator of "The Sims." Also, the next game in the long-running "Command & Conquer" real-time strategy franchise is due out next year, as is "Army Of Two," a next-generation third-person shooter. And heavily under wraps is the deal with Steven Spielberg to create three original intellectual properties.

At Activision, there is also the belief that new hardware platforms breed new IP.

"The idea is to establish new franchises early in the cycle to exploit them in the mid- and latter portions of the cycle," notes Kassoy. "It's easier to take chances then because of the smaller base of people who have the hardware. Also, the early adopters of the hardware are usually part of the enthusiast base that's looking for game innovation. Later on, the mass-market consumers will be more apt to buy games based on established brands than unfamiliar properties. That positions the movie-based properties well for future growth."

SIG's Kraft emphasizes that movie-based games must be released day-and-date with the film in order to take advantage of the expensive marketing campaign funded by the production company.

"It will be interesting to see how EA's 'Superman Returns' does this October since its release will come four months after the movie debuted, probably around the time that the DVD comes out," he says. "I suspect that EA wanted more time to improve the game, to make it longer, perhaps to sell it during the holiday buying season. It'll be an interesting test case."

Similarly, the next James Bond movie, "Casino Royale," will be out in October, but Activision has chosen to wait to time its first Bond game to the following Bond film.

"Sure, we would have loved to have a game out with 'Casino Royale,' but there was no way we could create a quality game in such a short time span," says Activision's Kassoy. Activision snapped up the Bond franchise in May after EA chose not to pursue it, having licensed that brand for seven years now.

"We had reached the point where we felt it was less appealing to the audience," recalls EA's Young. "And when we saw the direction that the franchise was taking, we felt it was going to be harder for us to make the type of game that we wanted to make inside that universe. We decided it would be better to put our development resources to use on some of our own IP."

But Activision perceives its having nabbed the Bond franchise as a marketing coup.

"This is one of the most valuable movie-based IPs in the video game category," says Kassoy, "and it will be even more valuable when it is timed to the movie releases. During the term of EA's deal, it had only one game that was timed to a movie release and that was "Nightfire" back in 2002. We believe that when you time a game to a movie, together in combination with great gameplay, that is a key formula for success. There are a lot of Bond movies coming up and we intend to time our games with them."

Another key to success, of course, is finding the right movie to license. But SIG's Kraft says the number of available licenses for successful films that would make good games is drying up.

"With all the publishers trying to outbid each other on licenses, what's left other than movies that haven't been announced yet?" he asks. "I mean, a 'Jaws' video game just came out and 'Scarface' and 'Reservoir Dogs' will be out soon. Talk about really reaching back and dusting off old titles. What's next -- a 'Rocky Horror Picture Show' game?"