State-side consumers spent US$9.4 billion on video game hardware and software last year, edging the category well above feature films (US$8.35 billion) as the most popular entertainment choice country-wide. The sector’s 43% year-on-year sales growth also dwarfed toy sales, which were up only 1.7% over 2000.

As video games continue to claim a greater share of kids’ leisure time, studios are clamoring to find ways to leverage the gaming world’s creative strengths. For several years now, and to varying degrees of success, Hollywood has traded on the equity of video games by developing well-known titles such as Tomb Raider and Resident Evil into feature films. Likewise, developers have capitalized on the pre-existing market awareness of well-known TV and film properties with their licensed titles.

But Nickelodeon’s recent co-development deal with Calabasas, California-based THQ, which calls for the two companies to co-create games and potentially develop them into TV shows and films, has broken new–and possibly less risky–ground in the realm of studio-gameco relationships. ‘We’re using the video game arena to introduce properties that we think have potential in other media because we can connect with kids where they’re already spending a good deal of their time,’ says Stephen Youngwood, Nick’s VP of media products. THQ’s vice chairman and COO Jeff Lapin says the deal allows the gameco to participate in the creation of a game property that will receive considerable marketing and advertising muscle from Nickelodeon’s various media assets.

Furthermore, should the property be turned into a TV show, film or line of merchandise, THQ would get a cut of the resulting ancillary revenues. ‘Both game companies and studios are looking for content, and if there’s a way to mutually support each other, I think more companies are going to gravitate towards this type of alternative means of finding it,’ says Lapin.

Under the terms of the deal, THQ will cover game development costs, as well as overseeing distribution and marketing of the titles through non-Nick channels. THQ will pay Nick a royalty, the amount of which will depend on a number of variables, such as how much marketing support Nick provides and where the game concept originates. Typically, the sum will be lower if the game hails from THQ’s team and higher if it comes from Nick or an outside developer.

The deal structure, says Lapin, is not that different from a traditional licensing agreement. ‘Nick gets a little more on the royalty side, but the tremendous amount of marketing and creative support–which I wouldn’t ordinarily get–is worth us paying the marginally higher fee.’ Should Nick or THQ decide to pass on any proposed concept, the deal also allows for either party to pursue it with another partner.

Nick and THQ have two game properties in the works so far, and they plan to launch Tak and the Power of JuJu (a candidate for TV series development) and Interstellar P.I.G. (currently on Nick’s feature film development slate) in 2003 and 2004 respectively. Tak–a 3-D game set in an ancient world in which players use magic to try and save Tak’s village from an evil sorcerer–was created by Salt Lake City, Utah-based indie developer Avalanche Software. Centered around the same-name book by William Sleator, P.I.G–an action-adventure game in which players search for a valuable P.I.G. chip whilst trying to prevent aliens from taking over the Earth–originated from Nick’s theatrical division. Both games will launch on PS2, GameCube and Game Boy Advance. Ideally, Lapin expects the deal to yield at least one game property a year.

Not surprisingly, the deal has triggered a wide diversity of opinion within the entertainment world, and whether or not companies give it the thumbs-up or thumbs-down depends on the criteria they use to assess risk. Given the high cost associated ‘with developing new intellectual properties, seeing developers and studios collaborate makes a lot of sense,’ says John Sutyak, chief creative officer in charge of new business development at New York-based gameco Infogrames. In fact, according to Sutyak, Infogrames is exploring similar content development deals with several studios.

Michèle Martell, senior VP and general counsel at Canoga Park, California-based SD Entertainment–the producer and U.S. licensor for Chorion series Make Way for Noddy–concurs, adding that the deal helps eliminate some of the uncertainty inherent in the typical licensing relationship. ‘Nobody knows if anything is going to pay off, so the more you can stack the odds in your favor by creating a clear, consistent story that can cross different media at the concept stage, the better your chances of succeeding,’ she says.

In fact, Martell would take the Nick-THQ deal one step further. ‘I think the ultimate paradigm is when you have similar deals with all of your major partners [i.e., toys, TV, interactive]. That way, everyone is contributing to the creation of the property and making sure their needs are addressed early on.

THQ’s Lapin believes that greater studio input into game properties that have since been turned into feature films could have resulted in more successful entertainment extensions. ‘I think if you had a studio work on Tomb Raider, Final Fantasy or Mario Bros. up-front, rather than trying to adapt it for the screen on the back end, they would have had a much better chance of succeeding,’ says Lapin.

Though the benefits the two parties stand to accrue from their new relationship sound great in the abstract, some industry watchers doubt that the creative dynamic between a powerful developer and studio will work without the principals’ interests colliding. Currently, the creative process involves Nick and THQ jointly reviewing all gaming concepts, which can be submitted from either company or from outside developers. So far, the two companies have assessed 50 pitches–and only settled on two.

‘Let’s just say there have been some spirited discussions,’ says Lapin, which is fine, he adds, as long as the ideas that Nick proposes don’t detract from the property’s chances for success in the gaming world. Making the game 2-D, for instance, would be out of the question. But adding a character is not a problem. In the case of Tak, for example, Nick suggested that the lead character should have a sidekick. Though such an insertion wouldn’t be important in the gaming world, THQ created one because Nick felt it was essential to making the property work for TV.

However, even if the studio-gameco relationship is a harmonious one, not all gamecos are convinced that the benefits of the Nick-THQ deal model outweigh its potential costs. The conventional thinking is that game developers pay a fee to license an established brand, says Kathy Vrabeck, executive VP of global publishing and brand management at Santa Monica, California-based Activision. ‘When we do deals with Viacom or Disney, we’re willing to give up profit-and-loss points because they’re giving us ready-made brand awareness. The Nick-THQ deal reverses that. They’re building a game that may or may not be produced as a TV show. That’s riskier than the traditional licensing model,’ says Vrabeck.

What’s more, she adds, THQ is tying up top development talent (a limited resource) to work for two years on what is an unproven property. However, Vrabeck readily acknowledges that the X-factor mitigating these potential negatives is Nick’s tremendous marketing might. ‘That’s the value THQ is counting on. Everyone knows the power Nick has over kids,’ says Vrabeck.

An example of that marketing prowess was on full display in the lead-up to last year’s film launch of a then-unknown Jimmy Neutron: Boy Genius. A week before the film’s release, Jimmy Neutron had an 80% awareness score with kids. ‘That’s unprecedented,’ says Youngwood, who is confident that Nick will be able to use its various platforms (including on-line, TV, publishing, retail and recreational relationships) to provide ample support for any game titles it creates with THQ. ‘Tak and P.I.G. will be stars before the games come out on the shelves,’ he enthuses.

Nick’s marketing capabilities aside, some in the industry, like Universal Interactive president Jim Wilson, feel that Nick is ultimately taking a bigger gamble than THQ. ‘It’s much more expensive to develop a TV show than it is a game. And frankly, the economic model for video games shows a faster return than TV does.’

While he acknowledges the risks involved in launching an unknown game into a crowded market are greater, Nick’s Youngwood feels there is tremendous cost savings to be had through the partnership, especially if the game makes the leap to TV or film. Beyond the obvious benefit of not having to create a world and a set of characters from scratch, Nick’s TV development group is looking into ways of amortizing production costs on the show. For instance, it might be possible to use character models that THQ created for the Tak game in the production of the show.

While the co-development deal model has received mixed reviews from the entertainment world, whether or not other developers and studios are poised to strike similar agreements will depend largely on the success/failure of the Nick-THQ venture.

Activision’s Vrabeck, for one, feels the current economics of the gaming biz will work against it. ‘I don’t think this is the wave of the future. Margins in any business are never what you want them to be, and if you’re going to give up points to someone, you want something in return. I think a lot of publishers will say ‘either I’m going to pay for an established brand that I know means something to my consumers, or I’m going to be successful by developing my own brands.”