Behind the Fall of THQ: Could Third-Party Publishers Become a Thing of the Past?

The video begins with a camera slowly zooming in on a group of people congregated outside the headquarters of major third-party video game publisher THQ (third-party referring to THQ’s lack of affiliation with a particular gaming console). As the camera zooms in, we see Neal Pabon, a former employee, solemnly pouring a bottle of beer onto the front steps, or as the video puts it, “pouring one out for the homies”.

The recent fall of THQ from relative prosperity to Chapter 11 bankruptcy and an eventual liquidation of all assets shocked the gaming industry; THQ is the first major gaming publisher to collapse in years. In the liquidation, THQ sold off all but one of the studios and properties it owns. While Chapter 11 bankruptcy generally only requires a plan of reorganization, THQ was in such poor financial straits that the only option for the publisher was to sell off its assets and close its doors for good.

On January 23rd, THQ’s chief executive officer Brian Farrell and president Jason Rubin sent a letter to employees explaining the results of the auction, adding: “During an auction process that lasted over 22 hours, the final conclusion was that the separate-asset bids would net more than a single buyer for the majority of the company.” The letter went on to thank employees for being a part of THQ: “It has been our privilege to work alongside the entire THQ team … For those THQ employees who are part of entities that are not included in the sale, we are confident that the talent you have displayed as part of THQ will be recognized as you take the next steps in your career.”

The death of THQ was certainly a shock, but when looking back at the publisher’s recent history one can see signs of bad things to come.

A Brief History of THQ

THQ, or Toy Headquarters, was originally incorporated in 1989. True to the original name, THQ was initially a toy company, not a video game publisher. Over the years, the company began to produce video games and in 1994 decided to focus exclusively on video games.

In 2000, THQ introduced their iconic slanted logo, which coincided with the beginning of the company’s renaissance. In the following decade, the publisher began to develop one of the strongest internal studio systems in the industry, acquiring well-known developers such as Relic Entertainment, Vigil Games and Volition, Inc. During this period, THQ published many hit video game franchises including the Saints Row and Company of Heroes franchises. In 2007, THQ reported a record one billion dollars in net sales, up 27% from the previous year.

Unfortunately, the recession hit THQ hard. Technically, the gaming industry continued to grow after the stock market crash in 2008, but gamers were not buying as many games. THQ’s profits dropped significantly, prompting CEO Brian Farrell to respond with a more conservative business plan, telling the LA Times “we just can’t make as many bets as we used to.”

An example of a “bet” THQ made that failed miserably was their uDraw Tablet, a peripheral for the Nintendo Wii, Playstation 3, and Xbox 360 systems. According to Eurogamer, while initially selling well on the Wii, the uDraw was ultimately a retail flop, with revenue from the PS3 and Xbox 360 versions coming in at roughly $100 million below THQ’s expectations.

On the surface, costly failures like the uDraw combined with the recession seem responsible for THQ’s demise, but a letter from a disgruntled former employee sheds light on potential systemic issues in the company:

“…THQ had been known through the years for having a formula. They find a hot license, make a cheap game, barely advertise it, and make money. This formula worked during the Playstation and Xbox and Gameboy days and made the company a lot of cash. Unfortunately, THQ’s old guard executives seem to be stuck trying to manage the company the same way they did back then and haven’t realized the industry has changed.”

The letter goes on to criticize THQ’s management, especially CEO Brian Farrell:

“The issue with THQ has never been one of lack of staff creativity, intellect or business intelligence. It all rests of the failure of its management team and you the Board of Directors … This Board has allowed Brian Farrell, the CEO, the ongoing ability to take a cash-rich profitable company and drive it from a $30 share price down to around $.70 …”

The Results

As previously stated, THQ had built a talented group of developers over the years, and while many were sold off to other companies and will continue to make games, one notable developer will have to close its doors. Here are the results from the auction of THQ’s assets (as reported by Kotaku):

Evolve – Bought by Take-Two Interactive for $10.894 million
Homefront – Bought by Crytek for $554,218
Metro – Bought by Koch Media for $5,877,551
South Park – Bought by Ubisoft for $3,265,306

Relic Entertainment – Bought by Sega for $26.6 million
THQ Montreal – Bought by Ubisoft for $2.5 million
Volition, Inc. – Bought by Koch Media for $22.3 million
Vigil Games – Not sold, no bids

Vigil’s Darksiders series was one of THQ’s best-selling and most critically acclaimed series’ in recent memory, so it is quite surprising that THQ could not find a buyer for the studio.

What Does It All Mean?

THQ’s fall from prosperity to bankruptcy shows that even the major gaming publishers are not recession proof and cannot afford to be creatively stagnant in this economy. While first-party (console-affiliated) publishers such as Sony and Nintendo are in relatively secure positions, there are only three major third-party gaming publishers left: Electronic Arts, Activision Blizzard, and Ubisoft. Each of these publishers rely almost entirely on several major titles each year for revenue: EA relies on their sports game franchises, Activision Blizzard relies on the Call of Duty and World of Warcraft franchises, and Ubisoft relies on the Assassin’s Creed franchise.

In addition, more and more developers are choosing to self-publish their games instead of signing deals with major publishers. Services such as the website Kickstarter and downloadable content provider Steam’s Greenlight program allow developers to easily and independently fund and publish their games.

Ultimately, THQ’s demise was the result of poor decision-making, a recession, and a failure to adapt to major trends and changes in the gaming industry over the past several years. Recently, it has become very easy for many developers to cut out the middleman and self-publish their games. At the same time, the smartest third-party publishers are consolidating and becoming more conservative, relying on sure hits instead of taking risks. While publishers are alarmed by the current trends in the industry, developers are embracing their newfound freedom to make the games that they want to make and that their fans want to play. In the end, while the future may not look bright for many gaming publishers, it has never been a better time to be a developer.