Is There Life Aftermortal Kombat?

At some points in the controversial video game Mortal Kombat, a fighter rips out the hearts of his victims. That image might seem unpleasantly familiar right now to Gregory E. Fischbach. The chairman and chief executive of Acclaim Entertainment Inc. recently learned that the video-game publisher would lose its licensing contract with WMS Industries Inc. For Acclaim, it wasn't as lethal as what happens in Mortal Kombat, but it was painful. WMS created Mortal Kombat and NBA Jam, Acclaim's two top hits--and its games, by some estimates, produce 75% of Acclaim's revenues.

The blow came on Mar. 30, when Nintendo of America Inc. said it had reached an exclusive agreement with WMS to form a joint venture to sell games for Nintendo's Project Reality system. That made it clear that WMS was jilting Acclaim, which converted some WMS video-arcade games into home versions for Nintendo and Sega Enterprises Ltd. systems. The relationship began to unravel when WMS demanded $8 per cartridge in licensing fees; Acclaim had been paying about $1. In response, Acclaim's stock tumbled 50% in two weeks, to 13 3/4.

3-D IMAGES. Fischbach calls the sell-off "an overreaction" and argues that losing the WMS contract is hardly fatal. He says the four-year relationship generated only two megahits, and he believes Acclaim, the largest independent video-game maker, can surpass that record on its own. Fischbach, an entertainment lawyer and former president of RCA Records International who co-founded Acclaim in 1987, vows to release a slew of top-selling games in the months ahead. Acclaim recently purchased rights to develop games based on three new movies, including Arnold Schwarzenegger's True Lies. And it spent $65 million to acquire Voyager Communications Inc., the No.3 comic-book publisher and home to characters that might find new lives in games.

Fischbach also says Acclaim's technology should give it an edge as video-game formats keep shifting. In April, the Oyster Bay (N.Y.) company signed a deal with Sega to become the first U.S. software publisher to make games for its Genesis Super 32X machine. Meanwhile, Acclaim plans to unveil a new line of games in 1995 using a technology called "motion capture" that could revolutionize the video-game business by producing three-dimensional imaging and graphics.

Still, Acclaim must prove it can make a megahit video without WMS. "Their product development has never been spectacular," says Joseph Morici, senior vice-president at CapCom USA Inc., a leading rival. That's a big reason investors remain wary. "We look for consistent and demonstrated profitability in a company," says Rodney L. Linafelter, a portfolio manager at Berger Associates Inc. in Denver, which recently sold its remaining 500,000 shares in Acclaim. "And we were not as comfortable with the stream of new products coming from Acclaim." Berger originally owned 750,000 shares.

MOVIE LINKS. Acclaim does have some breathing room to develop its new offerings. It can still sell existing WMS games: Mortal Kombat has already topped 5 million copies, and more than two million copies of nba Jam have been shipped since it was released Mar. 4. Mortal Kombat II is due this fall. Analyst Lee S. Isgur of Volpe, Welty & Co. in San Francisco estimates that Acclaim's profits could rise almost 50% this fiscal year, to $42.9 million, as its revenues climb 40%, to $457.4 million.

And Acclaim already has some strong games of its own, including versions of The Simpsons and Terminator 2. Besides True Lies, it has the rights to Stargate, a science-fiction film starring Kurt Russell due out in November, and Batman Forever, a sequel with Michael Keaton, upon which its first arcade game will be based. Still, movie-based games are risky. When Schwarzenegger's Last Action Hero bombed at the box office, so did a rival's game version.

Fischbach believes Acclaim's future success may rest on its motion-capture technology. The process uses 4 cameras and 150 sensors attached to 2 actors to record body movements. Data are then entered into a computer to simulate live action. While other companies are dabbling in the process, Acclaim's technology was what persuaded Sega to sign the company up for its new 32-bit system. "We chose Acclaim based on the strengths they have in development and in digitizing real-live action," says Paul Rioux, executive vice-president at Sega. With such endorsements, the loss of WMS may not hurt so much after all.

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