THQ, Nickelodeon licensing deal extended through 2010

It's fair to say there's been little sleep in the executive suite in Calabasas, California, the home office of game publisher THQ.

The coffee urns first came out on Tuesday morning when THQ was named as a defendant in a lawsuit brought by World Wrestling Entertainment (WWE). The suit named THQ, Inc., THQ/Jakks Pacific LLC (the joint venture of THQ and Jakks Pacific) and Jakks Pacific, Inc. as defendants is a complaint alleging that the WWE video game license currently held by THQ and Jakks was obtained fraudulently, by a "commercial bribery scheme."

Staffers were up early again this morning when THQ announced it had locked down an existing licensing deal with Viacom brand Nickelodeon, extending an existing master license through 2010. "The exclusive worldwide partnership grants THQ rights to continue to publish games based on all existing and future animated TV and movie properties targeting kids ages 6-14 across all viable game systems," the parties said in a statement. Variety is estimating the deal cost THQ more than $75 million, though neither party specified the amount today. The license was set to expire next year.

In addition to news of the extension--a feather in THQ's cap as the company drives some 16 percent of its revenues from Nick-branded games--the companies added some premium Nick brands to the lineup of properties that will soon surface in the gamespace.

Nickelodeon properties that are new to the THQ game pipeline are: The Barnyard Movie, a joint Paramount Pictures and Nickelodeon Movie theatrical release due later this year, as well as the Danny Phantom and EverGirl brands. THQ expects to bring games based on those licenses to market on numerous but unspecified platforms.

Calling THQ "a great partner to date," Nickelodeon and Viacom Consumer Products president Leigh Anne Brodsky elaborated, saying in a statement, "since the inception of our partnership in 1998, THQ and Nickelodeon have pioneered kids gaming, releasing six number one titles and selling through more than 20 million units worldwide."

In an interesting sideshow, Viacom issued an additional statement, possibly designed to smooth any ruffled feathers at Midway Games, which has so far walked away with zero Viacom business, in spite of Viacom CEO Sumner Redstone being its majority shareholder. (It should be noted that there has been some payoff for the two companies: Viacom brands have optioned two Midway games for films: Fear & Respect and Area 51.)

So moved by a desire to address the issue, Ms. Brodsky's division issued an additional statement this morning: "Viacom Consumer Products and Nickelodeon are very much impressed by Midway's capabilities as well as their thoughts and ideas for our business. Viacom Consumer Products is in discussions with Midway about properties in the Viacom Consumer Products portfolio for development into mutually beneficial game concepts by Midway."

As for Midway's take on the news, a spokesperson today told GameSpot, "Midway was very interested in the Nickelodeon license but at the end of the day the deal did not make sense financially."

In related THQ news, Wedbush Morgan senior analyst Michael Pachter sent a lengthy and detailed memo to investors today giving his informed assessment of the WWE lawsuit and its possible impact on THQ. "It is our view that regardless of its role in the alleged conspiracy, THQ is exposed to the termination of the WWE license." Pachter wrote. "We believe that if the WWE is successful in proving that the license was obtained by fraud (without regard to THQ's participation in the fraud), the license may be legally terminated. Whether or not THQ is exposed to restitution, disgorgement, or treble damages, we believe that it is subject to losing a large part of its revenue stream going forward."

Pachter continues, saying that "In the event that any of the individual defendants are found by a court to have acted as agents of the THQ/Jakks joint venture, we believe that THQ is subject to liability for damages. It is impossible to determine from the complaint whether the individual defendants are guilty of the activity alleged, but if the allegations are proved, we believe that THQ may face some economic exposure."

THQ trading was flat today. At press time, shares of THQ were trading up $.24 at 17.10, but still off by more than the $19 the stock traded at before last week's news of the lawsuit.

[UPDATE]
Shortly after the news was announced, GameSpot spoke with THQ senior vice president of worldwide marketing Peter Dille.

GameSpot: Big news, Peter. Another day, another license?

Peter Dille: We are very excited to announce the renewal of our long-term relationship with Nickelodeon. Our relationship with Nick has been one of the most successful relationships in the video game business and securing Nick through 2010 is a big win for THQ.

GS: This marks THQ's commitment to the mass market as even more pronounced. That so?

PD: Nick is the dominant player in kids' content with a tremendous track record of generating premier kids programming. THQ is the dominant player in kids gaming. And as we head into the mass market phase of the current console cycle, we're only now tapping the kids and family marketplace. The best is yet to come.

GS: The Nick license has proved essential to contributing to the company's top line. With the renewal costing THQ a reported $75 million (Variety) one has to wonder what value there is save for merely being victorious in securing the license. Why does THQ see such value in the Nick license?

PD: First, we don't comment on the specific financial terms of our agreements. With respect to its value, Nick is one of the most sought after licenses in the business because they generate hit programming that provides a predictable and recurring revenue stream.

GS: Do you still see Nick-based games as contributing heavily to the company's top line?

PD: We're estimating that approximately 15 percent of our fiscal 2005 revenues will come from titles under the Nick master agreement--that's more than $100 million this year alone. There aren't many $100 million pieces of business available these days.

GS: How do you read their strengths?

PD: If you look at history, Nickelodeon's ability to identify, develop and market kids' content is unparalleled--Rugrats, SpongeBob and Fairly Odd Parents are just a few of the brands we've published games for over the years.

GS: Can you bring us up to speed on units sold: past and future?

PD: In total, we have sold 20 million units across 10 Nickelodeon brands. In the future, we'll continue to build on some of those brands while introducing more new properties to the interactive space including Barnyard, Danny Phantom and everGirl.

GS: Of the total number of SKUs planned for calendar year 2005, how many will be based on the Nick license?

PD: We haven't confirmed plans for calendar 2005 but approximately 20-25 percent of our SKUs for fiscal 2005 (which ends March 31) are based on Nick properties.

GS: Thanks, Peter.