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Sumner Redstone, Video-Game Whiz

It would be hard to find a video-game enthusiast more unlikely than Sumner Redstone. The 81-year-old chairman and CEO of Viacom (VIA) made his fortune in theaters, then built an empire by buying such traditional media assets as the Paramount studio, CBS TV, and book publisher Simon & Schuster. But last May, Redstone increased his stake in Chicago-based Midway Games (MWY), taking control of the company that makes the successful video game Mortal Kombat but has been a longtime industry laggard, with $276 million in losses over the last four years.

Now, Midway seems to be in the midst of a turnaround under 41-year-old CEO David Zucker. The former Playboy Enterprises (PLA) executive was hired in mid-2003 and has beefed up Midway with the purchase of smaller game companies, expanded its overseas presence, and signed agreements for new properties upon which to base games. Midway's stock has more than tripled in the last year, and there's talk of the company being a potential acquisition target, likely by Viacom (see BW, 2/18/05, "Game Wars").

BusinessWeek Los Angeles Bureau Chief Ron Grover recently met with Redstone at his hilltop mansion in Beverly Hills, Calif. After giving a tour of his house, the media mogul, his long-haired dachshund Murray by his side, sat down and explained why he's such a fan of the video-game industry -- even though he has never played such a game himself. Edited excerpts of their conversation follow:

Q: What got you interested in the video-game industry?

A: In many ways, the game industry has a lot in common with the studio industry, although as you know [video game] revenues have well outpaced box office. There is a lot in common, including the whole business of creating a buzz and advertising being so important.

Q: Why Midway?

A: The last time I bought some of the stock was about 10 minutes ago. I really like the company. And David Zucker has taken this company -- which was hardly known a year ago -- and transformed it into a company that's on the cutting edge of everything important in this industry. And it is doing better financially.

A year-and-a-half or two years ago, the company was rated [by critics at various video-game magazines] as No. 20 in quality. Today, it's rated No. 1 -- ahead of [industry leader] Electronic Arts (ERTS). And that's important -- not just in the gaming world, but to big conglomerates like Warner (TWX) or Disney (DIS) or Viacom or whatever. Midway turned profitable in the fourth quarter after being unprofitable under prior management, and revenues are escalating at a pretty rapid rate. And it will continue.

Q: And what will you do with the company now?

A: I don't have any information that is not public. I have told David to never give me any material inside information. But I can see that revenues are escalating at a very rapid pace, and I can see something else: Any [media] company that doesn't recognize that games by companies like Midway are competing with them for both audience and advertising has its head in the sand. And this company has a number of great franchises -- and not just Mortal Kombat, but Midway Rush and now LA Rush and the game Fear and Respect. I think that David is doing everything right. But he more than anyone else has seen the convergence of the studio and game industries.

Q: Convergence?

A: Yes, the first person who got me thinking about that was Richard Parsons at Time Warner. I recall watching CNBC (NBC), and someone asked him, "Does your company lack anything?" And he said, "Yes, gaming." So he was one of the first to see the advantage of the convergence of the studio and the gaming industries.

Paramount is making a movie about Area 51, which is a sensational game. Speaking of that, I have nothing to do with those decisions. I have absented myself completely. [Because Redstone also owns a 70% stake in Viacom, he has recused himself from Viacom discussions concerning Midway to avoid conflicts of interest. Those discussions are handled by an independent committee of the Viacom board.] A Paramount executive really liked the game and called Zucker.

Q: Does the game industry threaten TV?

A: Right now, there are as many young men playing these games as there are watching television. Our company, because of CBS and MTV, I doubt has lost anything so far. But pretty soon more men will be playing games than watching TV, which is why I think that all of the major companies will buy a game company. They're the fastest-growing part of the entertainment industry and are competing with [traditional entertainment] companies both for audience and advertising. So I think that sooner or later, smart companies will get into this business themselves.

Q: Even as expensive as the game companies have become? Electronic Arts has a huge market cap.

A: Look, I think that the one company -- and this is just a personal opinion -- that is not likely to be bought is EA. In fact, I think that Viacom made a statement publicly that it was not interested in buying EA because it would cost at least $20 billion.

Midway would cost $1 billion. I'm not saying that it would cost a billion to buy it, that's the market cap. If I'm the seller, it will cost a lot more.

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