The Saga Behind the Sagas: Interplay and the Business of Gaming
Though many of us delve into computer games for a brief respite from the vagaries of reality, the world of business has a way of creeping into every facet of life. The business of putting games on store shelves is fraught with risk. New developers appear, and old developers vanish. For example, Kalisto, an independent French Developer responsible for titles such as Nightmare Creatures, filed for bankruptcy in February and was ordered to liquidate (close shop and sell off all their assets) by a French court. Maximum Charisma, developer of the ill-fated online game Fighting Legends, disappeared in a rumored bankruptcy. Development teams are often disbanded upon the completion of a project.
Interplay Entertainment Corp, by its own admission, has been teetering dangerously close to the brink of bankruptcy, and was only recently pulled from the precipice when Infogrames Inc. agreed to purchase Interplay subsidiary Shiny Entertainment for approximately $47 million. Interplay owns development studios Black Isle (Baldur's Gate and Icewind Dale series), Digital Mayhem (Hunter: The Reckoning and Giants: Citizen Kabuto), and until recently, Shiny Entertainment (Messiah). Will Interplay be able to continue operations and continue to bring us games from the remaining studios? This may be of particular concern to RPG fans, as Interplay has produced several strong RPGs and had the #2 RPG marketshare in 2001.
Interplay has had a long history of financial losses, including $46.3 million in 2001 alone. How did they get to this point?
Interplay was founded in 1983 by Brian Fargo, who resigned as Chairman of the Board of Directors on January 7th, 2002. His resignation came in the wake of attempts to sell the company; a conflict with BioWare Corp. over Neverwinter Nights; and a power struggle with Titus Interactive. Interplay's problems can be divided into money problems and control problems. Amidst the turmoil, Interplay only released ten titles in 2001, compared with 32 titles in 2000. Like many companies, Interplay kept little cash on hand, and relied on credit agreements and revenue from game sales to operate. With fewer titles shipping, and problems with their credit agreements, Interplay had to find sources of cash and ways to cut costs.
Some projects were cut entirely. Interplay had to recognize $8.1 million as a loss because of cancelled projects, including the aforementioned TORN. Neverwinter Nights, of course, survived with Infogrames as publisher. That arrangement not only ended the dispute between BioWare and Interplay, but reportedly Interplay received some compensation for the exchange. Interplay gave the rights to publish their games to Vivendi, in return for a $13.5 million dollar advance. That means that Vivendi paid Interplay $13.5 million that could be used for ongoing operations, hoping to collect that amount from Interplay's cut of future sales. As of December 31st, 2001, Vivendi had recouped $3.4 million of that advance.
In 1999, Titus Interactive acquired a majority interest in Interplay, giving them effective control of the company. That investment has changed in form, as exemplified by Titus' conversion of stock from preferred stock to common stock. Interplay's common stock gives the owner voting rights, so Titus now owns more than 70% of Interplay's voting securities. Titus has used that control to replace several of Interplay's board members and named Herve Caen, already acting president, as interim Chief Executive Officer after Brian Fargo's departure. If Herve Caen's name sounds familiar, that's because he was a co-founder of Titus in 1985. First, Interplay was shopped around, incurring $0.5 million of costs associated with the failed sale, and then the company had to pay $0.5 million in consulting fees to Titus in connection with restructuring Interplay.
The conflict between Fargo and Titus came to a head when he submitted his resignation on January 7th, 2002. In his resignation letter, Fargo cited an alleged reduction in his responsibilities as CEO, to which Interplay responded in a filing with the Securities and Exchange Commission that Fargo had not attended to his responsibilities in more than four months. Interplay threatened to sue Fargo for the above allegation as well as unfair competition. Interplay claimed Fargo wanted to "secure a highly lucrative severance and separation package for himself," while Fargo claimed in an interview that he wanted nothing. Old and new management come into conflict at many companies, and CEOs often leave under less than auspicious circumstances, but what impact did this conflict have on Interplay's ability to make games?
Interplay's finances were intertwined with those of Fargo himself and failure to come to terms could have been disastrous for the company. Interplay's bank line of credit (their borrowing program) relied on a $2 million guarantee from Fargo. The lender used $1 million of Fargo's cash to repay that program. Fargo also made a $3 million loan to the company in April 2001 that was due in May 2002. Interplay was also owed $2.5 million by a business controlled by Fargo. That was written off as a loss. By the end of March, Interplay and Fargo came to terms, allowing a seemingly amicable split.
By April, however, the situation was dire. Desperately short of cash, Titus resorted to short term loans to Interplay, to fund operations and keep Interplay solvent. Titus made one month loans to Interplay in the amounts of $115,000 on April 15th of this year, and $363,000 on April 29th of this year. The sale of Shiny on April 30, 2002 offered a lot of breathing room. Infogrames paid Interplay $2,983,561 in cash and paid $26,145,925 directly to Interplay's creditors. $7,250,000 went to David Perry and the Shiny Group, Inc., in connection with Interplay's original acquisition of the developer. Lastly, Infogrames gave Interplay a promissory note for another $10,809,076, the last payment of which should be received on July 31st. This process also led to Interplay settling their legal dispute with Vivendi Universal Games, Inc. and a promissory note was given to Warner Bros., promising to pay $2,000,000 due April 30, 2003 to cover payments due under the Matrix game licensing agreement.
The purchase of Shiny by Infogrames should buy Interplay some time. By selling a proven developer and the license to make games based on The Matrix, Interplay paid off its financial obligations, and can expect the remaining cash to fund operations through the end of 2002. More good news is that Hunter: The Reckoning has been selling like water in the desert, which may bolster Interplay's finances. It remains to be seen if Interplay can release enough profitable titles to continue to make games over the long term, but we'll cross our fingers.