Where Did Atari Go So Wrong?

The picture from Atari and parent company Infogrames has been unremittingly dismal in recent years: it hasn't turned a profit since 1999. Can they win the most crucial game of all...staying afloat?

You know your game company is in trouble when videogame editors are scrounging for synonyms for "troubled" whenever they are writing stories about your organization.

It seems that every time "troubled" or "struggling" Atari or its parent company Infogrames makes the news, the reports are negative. Whether it's dismal quarterly financial reports, the announcement of a big workforce cut or, most recently, the collapse of company shares, news regarding the companies simply takes on varying degrees of misery.

But where exactly did Infogrames and Atari go wrong, and why hasn't parent Infogrames turned a profit since 1999?

SHOPPING SPREE. The major contributing factor--cited by Infogrames and Atari chairman and chief creative officer himself, Bruno Bonnell--is the sizeable acquisition-spree that went on in the late-90s and 2000, which was financed with "convertible and other bonds," according to a recent letter to shareholders. As a result, the company incurred a staggering debt in excess of 600 million euros, and it has continued to feel the effects of choices made six or more years ago.

Since its European beginnings in 1983, Lyon, France-based Infogrames was all about acquisitions. As the company expanded its reach to the US, it carried on that tradition. In 1999, the company acquired a controlling stake in GT Interactive for $135 million, giving Infogrames a firm hold in the US. GTI was later named Infogrames, Inc. for North America, which was later branded Atari after 2001's $100 million acquisition of Hasbro Interactive, the firm that previously owned the classic brand. Now the US subsidiary for Infogrames is known as Atari, and has been since 2003.

Other Infogrames buys over the years included Accolade for $60 million in 1999; not exactly the most prolific of brands these days.

FEVERISH FINANCIALS. Perhaps the most obvious symptom of Infogrames' ailments is the fact that the company hasn't posted a profit since 1999. For fiscal 2006, it reported a $189 million net loss, much worse than the $42.4 million net loss from fiscal 2005.

In June, Atari likewise posted substantial losses for the most recent fiscal year, after which the company offered up the following ominous comment: "As the year-end results were substantially below the Company's expectations, the uncertainties resulting from the Company's financial condition raise substantial doubt about the Company's ability to continue as a going concern."

Needless to say, the statement was a bit disheartening for investors.

You also have the high-level personnel issues, such as the resignation of former Atari CEO James Caparro, the resignation of Atari CFO Diane Baker in February and the dismissal of Infogrames CFO Thierry Detloff a month later. In March, Atari said that 20 percent of its workforce would be cut.

The list goes on: An overdue quarterly filing, continuing reports of debt issues and loan defaults, a Nasdaq delisting and a seemingly endless string of dismal financial results preceded this week's latest bad news that Infogrames' shares are now worth a paltry 0.25 euros.

Is there nowhere to go now but up?

THE "NEW" ATARI'S HIT-AND-MISS GAME HISTORY. Back in the videogame "olden" times, Atari was a respected moniker, but as anyone that follows games can tell you, the brand has taken a beating since its inception 24 year ago. Failed hardware and sub-par software marred the brand nearly beyond recognition before it almost disappeared completely in the 90s.

But how has the company done game-wise since Infogrames officially started "reviving" the Atari label in 2002?

From a commercial standpoint, Atari is doing well to hang onto its Dragon Ball Z license, which has a built-in audience with games that traditionally sell quite well. For example, Dragon Ball Z: Budokai Tenkaichi, while receiving mixed reviews (71 percent at GameRankings.com), was one of the best sellers in late 2005. The most recent DBZ game, Super Dragon Ball Z for PS2--which was designed with the help of a former Street Fighter II producer--has received better reviews, but hasn't registered as high on the sales front.

Still, it may be a bit reassuring that Atari employed some real fighting game talent to create the title as opposed to relying solely on the license (see Atari's Terminator 3: Rise of the Machines, which was packaged crap).

Atari took decent advantage of another popular license with Enter the Matrix, developed by internal studio Shiny Entertainment. The game made a killing at retail despite unimpressive reviews, but the follow-up, The Matrix: Path of Neo didn't perform as well in stores.

Atari also hosted Epic's respected Unreal franchise for a few releases and also published this year's Dungeons & Dragons Online: Stormreach for PC, although that game appeared and disappeared from top sellers charts quite rapidly. The critical darlings/commercial flops Indigo Prophecy and Ikaruga were also branded with the Atari logo.

Of course, Atari has made more significant missteps since its revival. One notable Atari screw-up on the software front was the virtual destruction of the Driver series, which was recently sold off to Ubisoft along with developer Reflections for $24 million. The original Driver game, published by the old Infogrames label GT Interactive in 1999, showed that the series had potential to grow into Grand Theft Auto-like stardom, but instead sank to the embarrassment of Driv3r and the mediocrity of the most recent Driver: Parallel lines.

Another major Atari disappointment from this year worth pointing out was the hyped and controversial release of Marc Ecko's Getting Up: Contents Under Pressure. The game met with very mixed reviews, and it under-performed enough to have Infogrames point to the game specifically in its most recent disappointing annual report. Apparently, gamers don't care if a game has a clothing designer's name attached to it.

Surely, there are other hits and misses of Atari's and Infogrames' past, but it's the future of that's of the most concern.

THE SOUL AND THE BRAINS. As far as the future Atari game catalog is concerned, things don't look too bad on paper from a gamer's standpoint. Obsidian-developed Neverwinter Nights 2 is set to hit next month, a new Alone in the Dark is looking pretty sharp, Dungeons & Dragons Tactics received some E3 accolades, Dragon Ball Z: Budokai Tenkaichi 2 just might appease the brand's fans and the recently released Test Drive Unlimited is achieving good review scores (82 percent, GameRankings). Still, it remains to be seen how these titles do at retail.

But while games are the soul of a game publisher, the business decisions and strategies are the brains. Since Infogrames' acquisition-laden past, subsidiary Atari has chosen the reverse path, opting to sell off studios and assets instead of buying them left and right. Bonnell said that it's part of getting the company lean, and focusing on core products. The company has sold off the aforementioned Driver series and Reflections studio to Ubisoft, THQ has picked up Stuntman 2 and developer Paradigm, and Vivendi Games bought the game TimeShift.

But some analysts say what Infogrames and Atari consider a "focus on core products" may actually be detrimental to the company's future. Following the announcement this week of a plan to get the company out of its enormous debt, Exane BNP Paribas analyst Brice Mari told Reuters, "There are no reasons to feel comfortable with the group's operational situation or the mid-term outlook as Infogrames has sold some of its valuable franchises and studios in recent months."

However, one has to ask how exactly would Atari benefit from keeping those studios and brands around when it hardly has the cash to maintain them. They would just become dead weight without proper support.

A DEEP HOLE. This week, Infogrames announced a debt-restructuring plan that it is relying on to help keep the company afloat while it manages its massive debt.

Wedbush Morgan Securities analyst Michael Pachter told Next-Gen that the plan is only a band-aid.

"The debt restructuring bought them time, and if they end up with convertible debt, they can ultimately pay back debt with stock." He continued, "The problem is how to get the stock price up.

 The companies are quite lean, but [Infogrames] essentially split one business into two, so it is an inefficient structure. There aren't many assets left, so the only way to make a comeback is to generate a disproportionate return from each dollar or euro invested."

Pachter added, "They need to get publishing revenues up to $400 million or so, and can do that with 40 $10 million games or four $100 million games. The dilemma is that they don't have the assets to generate four $100 million games, and it takes a lot of effort to put out 40 modest games."

The analyst also said that the company kept its cost structure "too high for too long, in the face of declining revenues," and that although Infogrames is much leaner now, it's  "cash constrained."

STEPPING TOWARDS A FIX. The effectiveness of Infogrames' restructuring strategies has yet to be seen, but no one can deny that the company is at least making a commendable effort to save itself.

Last week, Atari appointed former Universal Pictures, MGM and Sony Music Entertainment executive David Pierce as its CEO. Bonnell had been temporarily holding the position while searching for a replacement.

Another more consumer-direct decision took place this year when Atari chose to release Test Drive Unlimited for Xbox 360 at the bargain price of $39.99 in the US, undercutting the typical third-party next-gen release by $20. By making the game more financially accessible to consumers at retail, Atari is counting on higher unit sales to make up for the lower price, and it may charge for downloadable items for the game.

In addition, Atari's sales and marketing VP Nique Fajors told Next-Gen recently that the firm aims to become more consumer-friendly: "This industry has been taking consumers for granted for way too long," he said.

THE ARMADILLO. The point is—well, there are a few points. First, the days of acquiring left and right are history, at least for now. Infogrames became a bloated and gassy mess, and now it's trying to do the opposite, and drop some weight to inch towards profitability.

Second, Even though there were some high-profile stinkers in the past, Atari's future catalog has some potential, although few really have "blockbuster" written all over them (Neverwinter Nights 2 appears to have the most potential here).

Finally, Infogrames and Atari are down, but the fat lady hasn't sung—yet. Certain problems have been recognized, and it remains to be seen whether the plans implemented to turn the situation around will actually work.

Infogrames' mascot is an armadillo. Co-founder Bonnell has said that one of the reasons he admired the animal was because of its resilience. Right now, the company is rolled up in an ultra-tight defensive ball, but in time, it may stretch its legs and get moving once again.

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