Vidgamers Wont Play By Hollywood’s Rules

When Mickey Mouse meets Donkey Kong, who picks up the lunch tab?

The answer is Hollywood – where big spenders, looking to turn videogames into big-budget movies, and vice versa – are investing heavily in acquiring and creating interactive divisions.

To tap into Hollywood’s largesse, organizers of the Electronic Entertainment Expo (E3) – the first trade show devoted exclusively to interactive games – chose the Los Angeles Convention Center for its first outing, May 11-13.

The expected crowd of 30,000 will include more than a few studio execs and movie producers looking over 1,300 freshly unveiled titles, hoping to buy the next “Doom” or “Mortal Kombat,” two top game titles already snapped up for films.

The electronic entertainment industry, on the other hand, has resisted opening its wallet to filmed entertainment, despite a fat $5 billion in revenue in 1994 – approximately the same as domestic box office.

With studios looking for co-production money and game companies like Electronic Arts, Acclaim, Sega and Nintendo seeking pre-promoted titles to exploit on the interactive market, equity investment by game companies in Hollywood movies seems a natural way to go – but not to the game companies.

Acclaim, for example, is the richest non-Japanese interactive game company, with about $500 million in annual sales. Long Island-based Acclaim recently sold a 10% stake in the company for $80 million to Tele-Communications Inc., and gave “Mortal Kombat II” a $20 million marketing launch last year.

But it was New Line that put up the $18 million for the movie version of “Mortal Kombat,” not the game company.

They can afford to stay out of the movie biz,” says producer Larry Kasanoff, who is readying “Mortal Kombat” for a July release. One of the few Hollywood producers who has successfully bridged the gap between the two industries, Kasanoff doesn’t think the vidgame industry will get into movie production any time soon.

“The day Acclaim announces it’s producing movies,” he predicts, “its stock falls by half.”

While heading up action-director James Cameron’s Lightstorm Entertainment, Kasanoff brought Bally-Williams-Midway, the arcade game company, into licensing “Terminator 2,” and put together a deal that gave Acclaim exclusive rights to create games based on Lightstorm films.

Fruits of that deal are a game based on “T2” and a “True Lies” title, but sources say it was a licensing agreement, rather than an investment in Lightstorm.

“Game companies are in the hits business,” Kasanoff says. “Hollywood is in the risk business.”

Upfront factor

An agent at one of the top ten-percenteries who specializes in setting up deals between Hollywood and Silicon Valley agrees. “The game companies love Hollywood to promote their products,” he says, “and they all talk about being the next Disney. But they’re not interested in upfront money.”

Licensing movies to turn them into games can cost as little as a few hundred thousand dollars for a CD-ROM game, to $1 million-plus for a surefire movie title on a cartridge game, according to Richard Thompson, an attorney at Bloom, Dekom who pioneered interactive deal making. But he is not convinced that the movie-to-game or game-to-movie equation adds up.

“Film-based games haven’t done very well, and they’ve done horribly when films have tanked,” says Thompson. For example, Fox Interactive’s “Pagemaster,” based on the Fox film, has done poorly in the stores, despite a big studio push.

One exception, he says, may be the “Johnny Mnemonic” game produced by Propaganda Code for Sony Imagesoft, based on the upcoming Sony Pictures feature. Unveiled at the Writers Guild booth at last week’s New Media Expo in L.A., the “Johnny Mnemonic” CD-ROM game caused a buzz with its innovative cinematic style.

“The added value to the game,” says Thompson, “is that the film shaped and inspired the creativity of the game.”

As for movies based on games, says Thompson, “every single one has been horrible.” For example, “Super Mario Brothers” grossed only $21 million domestically. “Double Dragon” did $2.4 million.

Shallow pockets

Another reason game companies don’t invest in Hollywood is even simpler: most of them don’t have the bucks.

Only four companies have deep pockets: Sega, Nintendo (both Japanese-owned giants who pioneered in-home players) and U.S. mini-majors Acclaim and Electronic Arts.

Electronic Arts, based in San Mateo, Calif., has a healthy $100 million in the bank, with annual revenues of over $200 million. Even so, says Mark Stevens, an attorney at the Interactive Law Group based in Silicon Valley, “they can’t afford to diversify.”

Whatever EA can afford, an agreement was recently reached to make an equity investment in Indieprod, the film company headed by Hollywood veterans Daniel Melnick and Allen Shapiro. The deal gives the games company exclusive interactive rights to Indieprod’s films, but terms have not been disclosed.

Stevens says that other investment opportunities less costly than movie-making, such as online technologies, are beckoning the vidgame companies. “It’s much more profitable for them to stay in the licensing end” of the movie business, says Stevens.

Sega and Nintendo are truly flush, having combined annual revenues in excess of $6.8 billion, including hardware sales.

Nintendo recently spent $17 million to launch its “Donkey Kong Country,” selling 6 million cartridges in the first six weeks of release late last year, a total of $400 million in sales.

But it was a straight licensing deal with MGM/UA that put Nintendo in the James Bond business. The company is developing a “Goldeneye” game that will hit stores simultaneously with the Christmas 1995 release of the 17th 007 film, starring Pierce Brosnan.

Mega-Sega

Sega, which will report $4 billion in sales for 1994, has more than 14 million of its Genesis game-players in American homes and over 500 available titles. Sources say Sega execs came calling at Hollywood agencies a few years to explore the idea of investing in Hollywood production. But nothing came of it.

Perhaps they saw a better way. When it came to developing a game about firefighters, Sega didn’t even need to license Universal’s feature “Backdraft.” Instead, it just put out a game called “Fahrenheit.”

And its most popular titles, including “NFL ’95,” aren’t even based on Hollywood entertainments.

More importantly, Sega is getting ready for the battle of its life. The company announced its new Saturn system will be on shelves Sept. 2, firing the first shot of the all-new platform wars in which Sega and Nintendo, as well as Atari, 3-DO, Sony and six other companies are all launching the next generation of 32-bit CD-based game machines. Each system’s software is incompatible with the others’.

Consequently, this would be the worst time for Hollywood to hit up the vidgame industry for cash. Revenues are flat. Budgets are heavily allocated for the impending platform mishegoss.

“I think a lot of companies out there are hurting,” says Jun Aida, director licensing for Capcom, pointing to a decline in sales over the last 12 months. “There’s a great unknown on the horizon, a lot of people tend to believe. The business is going through a transition from cartridge-based to CD-ROM. Some believe the days of the cartridges are over. A lot of people are wondering where the next wave of sales will come from.”

In terms of movies and vidgame companies coming together, Capcom is perhaps the exception that proves the rule. Japanese-owned Capcom, which posted $844 million in net sales in 1994, spent $40 million to finance its Christmas ’94 feature film release, “Streetfighter,” toplining Jean Claude Van Damme. It became the first vidgame company to produce a movie, albeit through the Edward R. Pressman Co.

With “Streetfighter’s” domestic box office at $33 million, it all seems to have been a learning experience for the company.

“We needed to learn the production process,” says Aida, pointing to live-action shoots for CD-ROM as the future for the vidgame industry.

Already, companies like Digital Pictures and Propaganda Code are spending more than $2 million on live-action production, with SAG actors, Writers Guild scripters and DGA directors.

But they’re doing it their way.

“Just because you know how to make movies,” says Digital Pictures’ head Tom Zito, “doesn’t mean you know how to make an interactive game.”

In short, buzz off, Hollywood.

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