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Interview: Brian Farrell, CEO, THQ: “The Rapid Growth Rate Will Resume”

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imageTHQ (NSDQ: THQI) is pinning its hopes for a turnaround from a lackluster performance on a just-announced slate of 2008-2009 games. THQ CEO Brian Farrell told in an interview that the turnaround will depend on the games released this year, and that he was heartened by the good reception of the line-up at a launch event in San Francisco this week. “Historically, we have been the fastest-growing company in the sector,” said Farrell, admitting the past year had been tough. “We’re quite confident that — presuming we can execute crisply on getting the games to the level of quality we want and getting it to the market on time — we think the rapid growth rate will resume.” Some excerpts from our conversation about THQ’s plans:

Segmentation is key: “One of our big overall themes is we have to segment the market,” said Farrell, segmenting the market based on the different platforms used as well as the different “types” of gamers, such as core, casual, family, etc. He believes success will come from targeting each segment. For core gamers, THQ is banking on Saints Row 2 and Red Faction: Guerrilla, both sequels to strong games. Saints Row 2 will have an online co-operative play feature, which will let two people play the game as a team — either from the beginning or joining during the game. THQ also has ambitions on the massively multiplayer game market, planning to use the Warhammer 40,000 license to launch a massively multiplayer online game, which is “probably still a couple of years out” according to Farrell. Lots more after the jump…

For the casual and family segments Farrell touted THQ’s Wii games, such as de Blob and All Star Cheer Squad, which will use the Nintendo’s new balance board. THQ is also entering the burgeoning music game market with Battle of the Bands, and, of course, it expects success with its Pixar licenses. THQ recently bought Elephant Entertainment, which will be integrated into Valusoft and should boost its casual gaming business. Farrell also promised a “more comprehensive announcement about our overall casual strategy” in the future, adding it would involve integrating PC online casual games with wireless casual games.

Asia plans: In Asia, THQ is working to convert the PC game Company of Heroes to a free-to-play online game based on the micro-transaction model. “In Asia as a whole that is the only way to go,” said Farrell. “It’s very much a PC-internet cafe market, so being online is essential and the best way to monetize the game is through the micro-transaction model.” THQ is partnering with Chinese company Shanda, which understands how the micro-transaction model works in China.

In-Game advertising small but growing: Advertising is a common method touted as a panacea to falling revenue growth, and Farrell said that THQ is “already one of the leaders in in-game advertising.” The market is still small — for THQ it’s “under a $5 million business” while the company pulls in more than a billion in revenue per year — but it’s growing fast. Farrell reckons it will continue to grow because advertisers love the demographic that plays games, especially the “very hard to find 17-34 year old video game market.” “What we like about that is that it’s a net-revenue business,” said Farrell, saying that while $5 million is a small figure it goes straight to the bottom line.

Multiplatform in various forms: Farrell said that the market for multiplatform games — where people play against other people on different platforms — is “still unproven, still experimental.” THQ has some games with the feature on Games for Windows and Xbox Live, but Farrell points to technical issues when one person is playing with a mouse and another is playing with a controller: “That market today is more fiction that fact but we have been experimenting with that.”

He sees far more promise with an “upload extension” strategy where people can play the same game in different formats on different platforms, for example training a character on a PSP and then uploading the improved character to a PS3. “That is an emerging market and game publishers like it because it keeps that engagement with our game [when players are using another platform],” said Farrell.

The eternal promise of mobile games:The upload extensions strategy also works with mobile phones, connecting the games with PC versions. After a reasonably strong start THQ Wireless has been gradually losing business, which Farrell spins as “we’ve learned an awful lot about what works and doesn’t work in the mobile space, and we see it as a legitmate platform”, adding that as handsets such as the iPhone become more prevalent the market for games will increase. Farrell sees the problem with mobile games as being a playability problem, which the iPhone has solved — THQ has announced a number of games for the iPhone. The other difficulty with mobile games is promotion, and THQ’s primary strategy for mobile is to release games based on big brands (whether game brands or otherwise) so they can be launched on the back of the publicity for the brand — and it’s certainly not alone in this. For those mobile games it develops based on original IP, Farrell said the marketing is difficult and has to be around word-of-mouth.

Activision (NSDQ: ATVI) – Vivendi: Farrell thinks the merger between Activision and Vivendi Games is a good deal for both companies, as they’re two very different businesses coming together. THQ competes with Activision, and intends to compete with Vivendi’s (EPA: VIV) World of Warcraft in the MMO business, but “competing with them now they’re merged doesn’t change the landscape.” Farrell neither confirmed nor ruled out further acquisitions for THQ, instead saying that “when we look at acquisitions we always look at content…what drives this business is developing game content.”So to take over a company ,THQ looks at the content in the portfolio, or at the company’s proven capability to generate new content. However, Farrell said that THQ is “in the content acquisition business,” and pointed out that new content can also come from licensing IP or by entering development agreements.