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8:46am EDT November 23, 2004
When David Zucker took over as CEO of Midway Games in May 2003, he must have felt like a character in Mortal Kombat, one of the action-packed video games the company produces.

Midway, which had successfully transformed itself from a maker of legendary coin-operated amusements such as Space Invaders and Pac-Man into a top video game producer, was being assaulted from all sides. It was posting huge losses and bleeding cash at an alarming rate. Its stock was on its way down, from $18 a share to $2, and it was garnering its worst product ratings ever.

"The company lost $115 million [that] year," Zucker recalls.

The new CEO was given a mandate to get the company back on track. He brought instant credibility with a resume that includes stints at two major companies targeting young males, the primary audience for video games. His last job was as president and COO of Playboy Enterprises Inc., and he spent 11 years with The Walt Disney Co., primarily at ESPN, where, as an executive vice president, he oversaw the highly successful launches of ESPN2 and the X Games.

"At ESPN, what we were doing is making and selling entertainment to young men," he says. "Playboy, I think, is the definition of making and selling entertainment to young men, and the video game business is now the making and selling of entertainment to young men."

Midway Games began as an independent manufacturer of amusement equipment. Over the years, it has had several well-known owners, including pinball giants Bally and Williams. But none are as well-known as the current majority shareholder, Sumner Redstone.

The multibillionaire chairman and CEO of Viacom has increased his stake in the company to about 75 percent, raising expectations that Midway will be bought by Viacom, parent company to CBS and Paramount Pictures, among other entertainment properties. Redstone's increased interest in Midway has boosted the company's shares back to the $10 range.

Smart Business spoke with Zucker about where Midway Games failed, how he plans to return the organization to its former glory and what it's like to work for an entertainment industry legend like Sumner Redstone.

How has the industry changed in the past 10 years?

It's a big market; there're a lot of young guys --increasingly older guys -- playing video games. Today, two-thirds of all gamers are over 18, and, depending on which study you look at, the average age of the gamer is 27. It's trending upward.

People grew up playing games, and they continue to play them. That's part of it. A lot of it has to do with technology. The processing power of the boxes (has increased), and developers have gotten better and better in creating immersive and realistic experiences in the video games. From an entertainment standpoint, it has become really competitive with movies and television programs and in the more mature categories.

For an older audience, you have games like Grand Theft Auto and Mortal Kombat that have grown to become bigger than movies. Grand Theft Auto is $500 million. Mortal Kombat is still selling $125 million in retail. These are bigger than many movies.

What is the company's financial status?

The company lost $115 million last year. We will improve our operating performance by almost $100 million this year. We're going to significantly increase our revenue. We're now making the best games in the industry from an aggregate review score standpoint. We're in the middle of what's been a turnaround year for us.

We're performing better on the marketing front; we're performing better on the product development front, so we're in much better shape than we were a year ago.

What went wrong?

The company strayed from it core competencies, for example, made platform games outside its core competency. We (now have) the company focused, first of all, on making quality games. Last year, if you look at the average review scores, which are very important in the video game business, Midway was No. 20 among all publishers. This year we're No. 1. Year-to-date, we're No. 1.

Succeeding in business is all about leveraging what you do well. Go back to the PS 1 console cycle. Midway -- in terms of mature-themed games -- was No. 1 in terms of units and dollar sales, and on the current generation of platforms, we've fallen to No. 9. Why? For one reason: We stopped making them. We made 13 titles for the PS 2 that were M-rated.

Prior to this year, we only made three. (We're) getting back into our core competence -- games for older gamers.

What changes have you made to ensure the company will meet its goals?

It's very important in our business to create the kinds of assets the marketing guys need to create interest in the products and also to increase discipline on the product development side. If you go back 18 months, Midway Games was going into Sony and Microsoft (for quality analysis) and typically, we were going through three, four, sometimes even five times before they were getting approved.

This year, with our new emphasis on process and quality control, in most cases we've gone through first time and in some cases second time. It's really a dramatic improvement and symptomatic and emblematic of the improvement in the quality of the games themselves.

What are doing to convince the investment community you are on the right track?

We've been talking to the Street, we've been doing earnings calls. We've met with investors. We've actually raised some money this past year. I would say the years of huge losses are behind this company.

We've got plenty of cash, which is a big change from when I first got here. We ended the second quarter with $140 million in cash. We were down to $20 million or $30 million when I got here. So, we're well-positioned. There are no guarantees of profitability, but the days of major losses for this company are behind us.

What can we expect from Midway Games in the future?

The company is putting in place the right building blocks for the future. We're working on improving things one game at a time. The most visible progress is we're going to have two games this year we expect to do over 1 million units -- which is a big deal -- with NBA Ballers and Mortal Kombat: Deception.

Review scores are putting us at the top of the heap in terms of the industry. We still have plenty of work to do, but we're certainly making progress.

What did it mean to have Summer Redstone become a majority shareholder in the company?

It's been great for the company. He's clearly one of the great entertainment visionaries and entrepreneurs, business-builders of our generation. His record speaks for itself. Just having him as a shareholder has been a good thing.

It shows confidence of a savvy investor in what we're doing and in our business plan. It's been a great thing for the company.

HOW TO REACH: Midway Games www.midwaygames.com or (773) 961-2222