The Biggest Video Game Publisher You've Never Heard of

Investors in the video game space understandably focus a lot of their attention on the larger publicly traded companies.

Source: Bethesda Softworks

Publishers like Activision, Electronic Arts and Take-Two Interactive, after all, have some of the biggest titles in gaming. Privately held publishers, on the other hand, tend to either be based outside of the U.S. or lack a major intellectual property.

But in Bethesda, Maryland, ZeniMax Media has slowly built an empire that has established a significant foothold in the gaming space—and while individual and corporate investors are shut out for now, venture capitalists are courting it aggressively.

Providence Equity Partners last week invested $150 million in ZeniMax. That follows a 2007 investment of $300 million by the firm.

The company’s board of directors, meanwhile, is a who’s who of media and entertainment executives—including CBS president and CEO Les Moonves, director Jerry Bruckheimer and baseball legend Cal Ripken Jr.

In the gaming world, Zenimax does business through its wholly owned subsidiary Bethesda Softworks. And for the past few years, the company has been on a tear.

2006’s “The Elder Scrolls: Oblivion”—the latest in the company’s flagship role-playing game saga—sold over three million copies within nine months. Then came 2008’s “Fallout 3,” which pocketed sales of $300 million in its first week.

"Probably their biggest weakness is they don’t release games frequently enough. They’re very like Take-Two in their development cycle. They’re super-talented, but the slow pace could hurt them." -Wedbush Securities, Michael Pachter

Last June, the company bought id Software, which single-handedly invented the first-person shooter genre in the early 1990s with games “Doom” and “Quake”—and acquired the rights for “Prey,” a well-known action game among core gamers.

On Tuesday, the company will release “Fallout: New Vegas,” and fan anticipation is running high—with pre-orders reportedly higher than what the company saw for “Fallout 3.” It has already announced a deal with Microsoft, which will make the first downloadable content for the game exclusive to the Xbox 360 later this year.

Through Bethesda, Zenimax owns all of its franchises, which means significantly higher margins on each copy it sells. And while some titles haven’t performed as well as others, it hasn’t had a true flop in years. (Even “Wet,” a third-person action shooter that came out last year and was quickly forgotten, sold over 1 million copies.)

That makes it an investor’s dream—but so far, Zenimax doesn’t seem to be in a hurry to go public. Analysts say it’s a likely exit strategy, given the significant investment from Providence. But given the state of video game stocks today, don’t look for that action anytime soon.

Beyond owning its franchises, the company has plenty of additional strengths. It creates its own graphics technology (which can be licensed to other developers, though it does not presently do so.) It has a talented roster of game makers. And it has a reputation as a fun place to work in the industry—something that’s critical as developer/publisher relations continue to deteriorate at many high-profile game makers.

Beyond the fundamentals, there are several unexplored genres that are natural extensions for the company’s titles, such as massively multiplayer online games. (The rumor mill frequently whispers about an “Elder Scrolls” persistent world under development at the company.) Plus, with Moonves and Bruckheimer on the board, that opens up several other entertainment avenues for the company’s titles, which could further enrich the coffers.

The weak spot, says analysts, is the company’s production pace.

“Probably their biggest weakness is they don’t release games frequently enough,” says Michael Pachter of Wedbush Securities. “They’re very like Take-Two in their development cycle. They’re super-talented, but the slow pace could hurt them.”

Zenimax may not be in a position to be a true threat to EA or Activision at present, but it’s on a growth curve. And for investors interested in the next big thing in gaming, it’s a company worth watching.

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