UDraw Accessory Won’t Be ‘Loss Leader,’ THQ CEO Says

THQ expects the uDraw GameTablet accessory it will ship this holiday season for the Wii (CED Aug 18 p6) will make money, just like the games it will field for the device, CEO Brian Farrell told the Goldman Sachs Communacopia Conference in New York Wednesday. “I'm not interested in loss leadering at all,” he said, when asked if the game company just intends to use the accessory to help build an installed base for uDraw software. “The margins we expect on that hardware are very similar to our normal software margins,” he said.

THQ is investing heavily to launch uDraw this fall, Farrell said, without specifying how much it is spending. “Once we get past that window, the margins get fairly interesting,” he said. Nintendo, which helped THQ design uDraw for its game console, will be paid an unspecified, standard peripheral royalty by THQ, he said.

THQ tapped an unspecified contract manufacturer in China to make the uDraw accessory for it, Farrell said. That manufacturer will “do all the heavy lifting” and handle the “production flow” and the shipping by boat from China to the U.S., he said. “All that supply chain stuff we're not familiar with we've outsourced,” he said. THQ had “no interest in being in the plastic manufacturing business in China,” he said. But he said, “We still have the inventory risk” for the device. Accessories are not like software, which have “quick turnaround times,” he said. If the uDraw accessory sells well, it remains to be seen “how quickly can we ramp -- that’s what we're trying to spend a little more time with over the next few weeks,” he said.

Despite the major plans that THQ has for uDraw on the Wii, Farrell said: “As we think about our capital allocation going forward, the real growth in hardware this year … has been in 360 and PS3.” He predicted that “for the next couple of years, that’s where the major action is going to be from a software standpoint.” Therefore, he said, “That’s where a lot of our capital in the traditional boxed product business” is going to be.

But THQ thinks uDraw is “uniquely positioned” to take advantage of seasonal strong demand for the Wii this holiday season, Farrell said. Nintendo’s console “performed very much like a toy at holiday” last year, he said. UDraw also “gives Nintendo something to talk about” in the peripheral market as Microsoft launches its new Kinect for Xbox 360 motion-sensing control system Nov. 4 in the U.S., and Sony continues rolling out the PlayStation Move motion-sensing control system for the PS3, Farrell said. Move launched last week in the U.S. The cost of developing games for the new control systems is “a fraction” of what it costs to make a typical core console game, Farrell said. It also takes less time to bring Kinect and Move games to market than typical core console games, he said.

THQ expects to ship about 1 million uDraw accessories by the end of its fiscal year in March, Chief Financial Officer Paul Pucino told the ThinkEquity Growth Conference in New York last week (CED Sept 17 p10). “Probably slightly more than half” of that will be in the December quarter, he told a Kaufman Brothers investor conference in New York. The company sees potential “long-term revenue and profit opportunities” from it also, he said. If the product is “successful,” for example, one “option” THQ might have is “licensing out the software” to other game makers, he said. THQ would then make money from the hardware and potentially a royalty from the software sold by others, he said.

The GameTablet will ship one week before Thanksgiving at $69.99, bundled with a drawing game, THQ said. Additional games expected to ship at the same time are Pictionary and Dood’s Big Adventure at $29.99 each. More games will follow from THQ, it said.

Industrywide game sales have been slow for much of this year, Farrell said Wednesday. But the results haven’t been quite as dire as it appears on the surface, he said. For one thing, NPD sales data doesn’t factor in sales of non-packaged games and subscription revenue from massively multiplayer online games, he said. The industry’s game release slate has been merely “OK,” not “compelling,” he said. But THQ remains upbeat about the rest of this year, thanks to its own slate of coming products and some key titles from rivals, he said. “The back half should be reasonably strong,” he said. THQ heard from retailers that Microsoft’s Xbox 360 game Halo: Reach has been “performing very, very well” since shipping last week, he said.

Farrell also stressed the growing importance of transmedia strategies in which franchises are extended along multiple forms of media. On Tuesday, Danny Bilson, executive vice president of core games at THQ, told the NY Games Conference that almost every core game at the company now has a transmedia strategy. As an example, he pointed to Red Faction. THQ said in July that a two-hour live-action movie pilot based on its Red Faction game property will air on the Syfy channel in March (CED July 20 p9). The “transmedia collaboration is one of many strategic initiatives in place to dramatically increase awareness for” the game Red Faction: Armageddon and “extend the Red Faction brand across a wide variety of entertainment channels,” Bilson said then.