But Farrell, who joined the company in 1991 as CFO, didn’t want to reinvent the wheel. Instead, he saw a better opportunity to reuse the same wheel, putting shiny new hubcaps on it each year.
Under Farrell’s innovative leadership, THQ has been on a 10-year tear, rapidly expanding from a $13 million business with a limited product offering into a dominant force with licensing agreements for some of the world’s best-known brands.
“This is not a business without risks,” says Farrell. “But you take risks on things you think can be successful through disciplined research and reviews. You make sure you are hitting the market target.”
And hitting the target is what Farrell does best.
In the early 1990s, he looked around his industry and saw that industry leader Electronic Arts had a good thing going with titles built around professional sports that it could reissue annually. “What they had that was enviable was the sports business,” Farrell says. “They didn’t have to reinvent a product every year. Some companies said, ‘Let’s go into the sports business.’”
But Farrell had other ideas.
What if he sought out major players in the entertainment industry, acquired licensing agreements with them and built a library of reccurring titles in this market where there were no real competitors fighting over limited market share?
Ten years later, that strategy combined with a dynamic line of THQ-branded and developed games has led Farrell’s company to new heights.
Last fiscal year, powered by a library of games based on license agreements with household names including Nickelodeon, Disney/Pixar, World Wrestling Entertainment and Scooby-Doo, THQ raked in a record $757 million in revenue, including net income of nearly $63 million. And six of its games have sold more than 1 million copies since their release dates; four have sold more than 2 million.
Farrell isn’t shy about explaining his company’s strong position. In THQ’s most recent annual report, he put it this way: “With some of the best mass-market brands, more than 900 people in our internal studio organization, a growing international sales team and more than $330 million in cash and short-term investments, THQ is poised to expand our leadership position in the video game industry.”
Finding the right formula for success
Farrell’s strategy hinges on identifying the right partners with whom to forge deals. He started out with a bang in 1997 with Nickelodeon.
Through a licensing agreement, THQ produced a line of successful titles involving SpongeBob SquarePants and the Rugrats. Three years into the relationship, the two signed a master licensing agreement that gave THQ exclusive worldwide rights to produce games bearing the Nickelodeon name.
Farrell says the deal was profitable for both parties, and in October 2004, the two companies extended their deal through 2010.
The next piece of Farrell’s puzzle was put into place in 1998, when he recognized that pro wrestling had a large following, including many of the same people who play video games. That led to a deal with World Wrestling Entertainment (at the time World Wrestling Federation) to add its brand to THQ’s stable.
Then in 2002, Farrell hit the jackpot when he inked a deal with Disney/Pixar to release a video game based on the movie “Finding Nemo.” Its success quickly led to an expanded relationship with Disney/Pixar and resulted in what became last year’s most-shipped product for THQ “The Incredibles,” also based on a movie which sold a whopping 4.5 million units.
“We have the foundation of three huge brands with long-term licenses that provide a base of cash flow,” says Farrell. “It’s great to have that base, and now we’re building our own brands on top of that.”
These brands include “Destroy All Humans,” a THQ original title that is arguably the most popular game in the world right now. Says Farrell, “That’s given us another brand to sequel or extend.”
To accomplish all of this, a few years ago, Farrell made the decision to put a premium on human capital and research and development.
When he started with the company in 1991, THQ had between 30 and 35 employees; today, it employs more than 1,300. And to bolster the R&D ability of the company allowing THQ to develop organic titles to complement the licensed brands over the last year, Farrell has more than doubled THQ’s product development team, going from 400 people to 900. His philosophy is simple hire those who can perform in their functional area but who also bring something else to the table. At THQ, that something else often means deep industry experience.
“We know the industry very well, and we make sure the core engine keeps going,” he says.
Despite the influx of new faces and the company’s quest to continuously expand its product offering, the key, says Farrell, is to remain focused on quality, not quantity. On average, THQ adds one to four new brands per year.
“This is a very challenging business,” he says. “It’s a long business cycle. It takes two or three years to develop a product. So what we try to do at THQ as well as anyone is marry the creative side of the business with the consumers as young as 3 or 4 (years old) and as old as 50. You have to entertain your consumers with a wide variety of products.”
This broad-ranging but focused thinking has also led Farrell to expand the company’s distribution methods and strengthen its global marketing and sales force to be able to directly serve customers in more than 50 countries worldwide.
Meeting changing industry needs
While THQ’s strong base has been the linchpin for its stratospheric growth, innovation still steers any video game company’s ship. Game consoles such as PlayStation and Xbox account for 75 percent of the overall game market, but Farrell knows that THQ must continue to branch out and address other ways people play video games.
“We have a very rapidly growing wireless group THQ Wireless,” he says. “We think we’re going to do $50 million in revenue (over the next year). It’s still a small portion of revenue, but it’s still growing rapidly. It’s a way to serve your customer.”
Over the last fiscal year, THQ Wireless more than tripled its revenue from $7 million to $25 million, fueled by games centered around major sports, including an agreement with the National Football League; Nickelodeon; and a motocross game called MotoGP.
Farrell is also making sure THQ is prepared for whatever the market brings, including the ability for gamers to download, for a fee, clothing or weapons for game characters.
These are big strides for a company that initially built itself with games for Nintendo’s GameBoy. “We are still the leader in that category,” says Farrell of the company’s roots. “We always wanted to serve all gamers. It just took some time to get where we are now. I came in as chief financial officer when we went public. We had a couple good years and a couple challenging years. After the second of those (challenging) years, I was elevated to CEO to try and turn it around.”
So far, Farrell has hit pay dirt. But as the company grew, he says he had to adapt not only the company but his management style as well. He was forced to change from being a hands-on manager to a team leader. And along the way, he hired a management coach to help him evolve with the company and better himself.
“At the end of the day, I have to make the final call,” he says. “But when a decision has to be made, I expect the managers here to be able to make a decision based on the strategy set forth. I try to empower people. That being said, we don’t always agree. But a good executive wants people to think. It’s good to have different points of view.”
Farrell says all of these moves are worthless if he doesn’t listen to customers, the marketplace, his team and his board of directors.
“The more info you can get, the better,” he says.
And in the fast-paced gaming industry, Farrell measures THQ’s overall success over a longer time horizon but with short-term milestones such as his goal to hit $1 billion in total revenue for the 2007 fiscal year in place. “We’ve more than doubled revenue in each of the last two cycles,” he says. “You do what you say you’ll do in the short term and set building blocks in place for solid growth.”
For Farrell and THQ, those building blocks have been put in place, and solid growth has followed. And Farrell oversees all of this with the humble realization that his personal connection to the gaming industry is more through his son than himself.
“I’m a ripe old 51-year-old,” he says. “I’m a boring CPA. I used to play Tank and Seawolf, but I don’t categorize myself as a gamer. I get creamed by my 14-year-old son. I do not walk into a studio and say, ‘Change this,’ or ‘Change that.’
“My job is to say, ‘Here is where the company is going, and here is how we are going to get there.’”
How to reach: THQ Inc., http://www.thq.com