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Lara Croft's Latest Cliffhanger

By Beth Carney The video-game heroine Lara Croft of Tomb Raider fame may not seem like an obvious British export, but she is. That's one reason those concerned about the British video-game industry's future are closely watching the bidding war for Eidos PLC (EIDSY), the publisher behind her creation.

On Monday, Mar. 21, Elevation Partners, a new California-based private-equity firm whose directors include U2's Bono, offered $135.1 million in cash for the struggling British gamemaker. The next day, a British game publisher, SCi Entertainment Group, countered with a $144 million stock offer. To those worried about the erosion of a game-development industry, in which homegrown British outfits traditionally have excelled, the second bid marked an improvement -- and not just in terms of price.

"It would be very nice to have one big publisher in the U.K.," says Fred Hasson, chief executive of the Independent Game Developers Assn., a trade group in based in Brighton.

CHEERIO, REVENUE. Historically, Britain has been a leader in the development of the software for video games, whose sales totaled $15 billion worldwide last year, according to DFC Intelligence, a San Diego-based video-game research firm. With the highest concentration of game developers in Europe, Britain has created some of the world's biggest hits, including Tomb Raider and Grand Theft Auto. The latter series boasts the best-selling games in the U.S. for three of the last four years, according to market research firm NPD Group.

But the development industry in Britain is consolidating -- and increasingly sending its profits abroad. According to a report by media research firm Screen Digest for the Entertainment & Leisure Software Publishers Assn., Britain's independent video-game developers now number 160, down from 270 four years ago. The amount invested in development during that time dropped 18%, to $606 million.

Many British developers work for foreign publishers. The Edinburgh studio behind the Grand Theft Auto series is owned by New York City publisher Take Two Interactive Software (TTWO). The British developers making the Harry Potter-themed games work for the market-leading independent publisher, California-based Electronic Arts (ERTS), the world's biggest independent video-game publisher. This month, Japan's Sega announced the purchase of Creative Assembly, a British studio that produces the Total War series.

MONSTER CONSOLES. The falloff in independent companies primarily traces back to the rising expense of developing video games. According to Screen Digest, the cost of creating games for the premium console market has doubled in five years, as the consoles have grown more sophisticated. Budgets for individual games now run from $3 million to $10 million.

In the next two years, industry watchers expect the makers of the major game machines -- Microsoft's (MSFT) Xbox, Sony's (SNE) Playstation 2, and Nintendo's (NTDOY) Gamecube -- to release upgraded versions of their consoles, which will boost development costs again. "With each new generation, the barriers to entry for developers become that much higher, and some companies each time are forced out," says Ben Keen, chief analyst with Screen Digest.

The mass-market nature of video gaming has also added to the pressure, as publishers have focused on making fewer, higher-quality products in hopes of hitting on a worldwide winner. Creating for a local market no longer makes financial sense.

"The challenge with the business is getting to build it on a global basis," says DFC Intelligence's David Cole. "That's where capital, size, and things like that matter."

DISAPPOINTING DEBUTS. Britain isn't the only European country anxious about its share of the video-game industry. In December, alarms went off when Electronic Arts bought a 20% stake in France's Ubisoft, which termed the move "hostile." Some in France have called for government protection of the industry.

Eidos, which publishes and develops games, has blamed its lack of scale and the rising cost of development for recent poor performance. For the first six months of this fiscal year, sales at the publisher dropped to $59.7 million, less than half of the total during the same period last year.

In fact, the outfit has stumbled in some of its recent products. Critics panned the latest installment of the Lara Croft series, Tomb Raider: Angel of Darkness. New releases such as Backyard Wrestling 2 and Crash 'n' Burn have sold fewer copies than expected. The publisher has also repeatedly delayed the release of new titles.

WEIGHING OFFERS. The bids for Eidos came as the company felt increasing financial pressure. Earlier in March, Eidos' shares dropped to their lowest point in 10 years after word that, if a takeover deal was not announced by Mar. 25, its creditor, the Royal Bank of Scotland, had the right to force it to sell some of its assets to pay back a $43.6 million loan.

On Mar. 21, the Eidos board announced that it had accepted the bid from Elevation Partners, founded by tech investor Roger McNamee and John Riccitiello, the former president and chief operating officer of Electronic Arts. Tuesday, however, Eidos said it would consider the competing offer. The news pushed the shares up 28%, to the equivalent of $1.09, on the day the rival bid was revealed.

For the broader British industry, the worst-case scenario would have involved Eidos' being simply split up and sold to foreign companies, says Hasson. Still, he favors a SCi Entertainment takeover because it could create a British publisher of a scale that might compete on an international level. "Now we just make [the games], and somebody else makes a profit," he says. And, if the deal goes through, Lara Croft will remain a British subject. Carney is a correspondent for BusinessWeek Online in London

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