Unit drags on Redstone's corporate structure

Four years ago, Sumner Redstone made a bold move into videogames by accumulating enough shares to take control of Midway Games.

“Midway is clearly a second-tier producer, but it has the potential to be in the first tier, and that’s what attracted me to the company,” the Viacom and CBS chairman said at the time.

Today, even calling Midway “second-tier” is generous. After years of bleeding red ink, its market cap is a miniscule $34 million and it’s known primarily as a drag on Redstone’s entire corporate structure, with its loans from holding company National Amusements playing a role in the mogul’s recent moves to sell off CBS and Viacom shares and attempt to renegotiate NAI’s debts.

Midway’s failures are evident, but what’s not as clear is why.

With an experienced exec team, the overall videogame biz growing at double-digit rates over the past few years and several big franchises — most notably “Mortal Kombat” — under its belt, Midway seemed to have a good shot at success.

Ex-employees — of which there are many since Midway has gone through several rounds of layoffs and seen other staffers exit for more stable employers — describe a series of technical problems resulting in product delays that hobbled the publisher’s ability to maintain a stable business plan, along with a rapidly consolidating industry in which a company Midway’s size simply doesn’t have the scale to compete.

Midway seems to have been hobbled by its decision to license the Unreal Engine technology from Epic Games to use in all its titles.

“In theory it seemed like a great idea to have a core technology for all our games, but in reality we just couldn’t get it done and stuff kept slipping and slipping and slipping,” recalls one former employee.

So Midway’s cash drained as it went through several quarters with virtually no releases. Midway released only one game in both the first half of 2007 and 2008 — and both were distribution deals for properties it didn’t own.

“The lack of a predictable release schedule from the internal studios was one of the major factors that led to the strain on the company,” says Steve Allison, Midway’s former chief marketing officer.

The company’s costliest mistake may be “Stranglehold,” an original action title developed with director John Woo that was delayed from late 2006 to fall 2007. The game cost more than $40 million to produce and ended up hitting shelves just a week before “Halo 3.” Bad timing and less-than-stellar reviews resulted in sales of just 320,000 in the U.S.

Some of Midway’s licensed games, particularly one based on the pic “Happy Feet,” made a profit. Football game “Blitz: The League” performed well enough to merit a sequel this fall. But others, especially original properties that the company had to market entirely by itself, bombed.

Fall 2007 was especially disastrous, since Midway followed “Stranglehold” by rushing November’s “Blacksite: Area 51″ even though it wasn’t ready, just to generate cash before the year’s end. The game was in such rough shape that its director publicly bad-mouthed it just two weeks after release.

Unlike bigger competitors such as Electronic Arts and Activision, Midway didn’t have the resources to develop a wide slate of properties and turn the few that were hits into profitable franchises. Instead, it only had the time and money to build a few original games — and was highly dependent on their being hits.

When those titles were delayed and then sold poorly, Midway started running out of cash, to the extent that this year it twice had to borrow money from National Amusements.

“The long-term plan was to build smart new (intellectual property) and spend the time to get it right, but our capital needs became an issue because of delays,” says Allison. “Most of those issues should be behind Midway now.”

Insiders say Redstone and his daughter Shari, who became chairman last December, had been largely hands-off until last winter, when they fired longtime CEO David Zucker. Industry rumors had it that the head of another prominent company was in talks to take the job, but after he backed out, Midway was unable to find another candidate to replace interim CEO Matt Booty, the former head of internal development studios who was recently named to the job officially.

The company has basically spent this year in retrenchment, canceling major projects such as the “GTA”-like open-world game “Career Criminal,” co-created by helmer Tony Scott, laying off staff and returning licenses. Partially due to the charges from such cuts, Midway reported a huge $75.9 million loss last quarter.

Its fate now lies in large part on its one remaining release for the year, “Mortal Kombat vs. DC Universe.” If the game is a hit, the company may get enough cash to continue operating and stave off creditors.

If not, analysts say it may have to go into bankruptcy or sell its assets in a fire sale.

Full-on acquisition is extremely unlikely, since with all its debts, Midway is actually more expensive than some of its larger competitors.

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