Local company big player in electronic games InterAct a top maker of accessories for Sega, Nintendo, other games; Toys

THE BALTIMORE SUN

Video games have evolved to become a staple in the entertainment industry, and the success of Sony and Nintendo has created a feeding frenzy among peripheral producers. InterAct Accessories Inc., a Hunt Valley company that describes itself as parasitic, is taking the biggest bites.

Run by its founder and president, Todd S. Hays, the 7-year-old company makes accessories such as joysticks and controllers for Playstation, Nintendo 64 and Sega game consoles. The company describes its products with such phrases as "infinite health and endless ammo" and "giant fire buttons you can pound on!"

"One of the good things about InterAct is it's always pushing the industry and looking for new things to put out," said David Ward, executive editor of Game Intelligence, a San Diego trade magazine with a circulation of 35,000. "This is not a game, especially for Todd, this is business. I assume he loves what he does, but it's a cutthroat battle."

If noticed by the over-30 set at all, InterAct's products may seem like nebulous gadgets. But with $138 million in sales last year, the company is a major player in the competitive world of gaming manufacturing.

Combined retail sales of hardware and software in the United States reached nearly $7 billion last year, $730 million of which was in the accessory market.

Sales of gaming software alone were $5.1 billion, up 38 percent from 1996. In comparison, movie box office receipts in the U.S. were $6.3 billion last year, and the retail value of music shipped to stores was $10.8 billion.

InterAct has captured more than 70 percent of its market, but the subsidiary of a Florida company is looking for another host on which to feed.

Hays hopes to double InterAct's sales with a new product that will allow players access to the Internet through Nintendo or Playstation consoles, despite others' failures in similar attempts.

In December he'll launch NetShark, as it's tentatively named. About the size of a portable compact disc player and retailing for approximately $95 with a monthly access fee of $9.95, NetShark will include a modem, mouse, keyboard, e-mail account and unlimited time on the Web.

Every time users log on they'll be greeted with InterAct's Web site, which will feature ads, links to other entertainment and gaming sites, as well as links to major retailers where game orders can be played.

Untapped consumers

Hays says about 14 million U.S. households own Playstations and 11 million own Nintendo 64s. About 16 million of those households don't own personal computers, and Hays sees these people as untapped consumers.

"You've already bought this video game machine and you love it. And 75 percent of the time I would like you to use it to play games because that's what you do," he said. "But the other 25 percent of the time, instead of it sitting and not being used for anything, I would like you, instead of investing a couple thousand bucks in a PC and getting you out of the living room and getting you involved in other company purchases, I would like you to buy this."

The product has some potential pitfalls. With its 14.4 kilobyte-per-second modem, NetShark won't be able to support online gaming, a relatively new but increasingly popular way of playing in which participants battle each other over the Web instead of together in a living room.

Sega of America Inc. introduced a similar product, NetLink, two years ago and failed. WebTV, recently purchased by Microsoft, also has had lackluster sales.

Hays argues that Sega's NetLink was a good idea but that the company's lagging popularity -- it's now a distant third in the console market -- doomed it from the start. And the fact that WebTV has sold just 400,000 units since its introduction in 1996 doesn't deter Hays.

"The focus is entirely different. Everything that we're going to do, from the advertising and packaging and marketing perspective, will be focused toward the core gaming demographic," he said.

Nintendo and Sony are rumored to be coming out with their own consoles that will offer Web access, which could cut into NetShark's audience, although officially both companies say nothing is imminent.

Sega to try again

Sega has announced that it is giving Internet access another go with its next console, called Dreamcast, which will make its debut in the fall of 1999.

"Hays is out there in front, a pioneer of sorts," said Ward of Game Intelligence.

"Obviously, people are looking to add the Internet to anything they can, and this is sort of a logical next step."

In the industry, Ward said, Hays has the "grudging respect" of Nintendo of America Inc. and Sony Computer Entertainment of America Inc., companies he competes with but needs for survival.

InterAct's products are considered "third-party" items, meaning they weren't made by either of the gaming giants. Many are licensed by Sony and Nintedo, even as the three compete for shelf space.

Cornering the market

InterAct -- which has 35 employees at its headquarters, 40 more throughout the country and more than 5,000 in its Hong Kong factory -- has cornered the third-party market. San Diego's Mad Catz is No. 2 with about 16 percent market share and about one-fourth the number of products.

"Mad Catz is a good company, but it's like Avis to InterAct's Hertz," Ward said. "Their key account is Toys R Us. The industry is InterAct, Mad Catz and a bunch of minor players."

As a former InterAct employee, Michael Rothman, now vice president for marketing at Mad Catz, knows what he's up against.

"My mission at InterAct was to make life miserable for other third-party companies, and I was not alone in that mission," he said. "It's extremely competitive. If you get your foot in the door, great. If you can get a single item on the shelf, great. If you get that item on the shelf at the expense of kicking others off, that's the price of doing business."

The price was $350,000 last year when InterAct won an exclusive two-year contract at Target by agreeing to purchase all of Mad Catz' merchandise from the retailer's warehouse. Hays said he doesn't like to do that frequently because of the expense.

"I have run away from deals," he said. "I did one buyback with Kmart, and it's been a blood bath."

InterAct has a stronghold on many retailers even without exclusive contracts.

Dave Marburger, a Sears, Roebuck & Co. electronics buyer, doesn't stock other third-party brands, even without an exclusive agreement with InterAct. The InterAct team won him over when it created and delivered plastic shelves that made the products easier to sell.

"Those kinds of quality ideas are real important to us, and not many vendors understand that or are prepared to do those things," he said. "It takes a little more work than to just say, 'I like your store, put our products in them.' "

InterAct, founded as a subsidiary of Hong Kong's STD Holdings in 1991, is able to make aggressive deals in part because of the support of parent company Recoton, which had 1997 revenue of $502 million. The electronics manufacturer purchased STD Holdings in September 1995 for $30 million.

Hays said he made about $1.5 million on the sale and now takes home about $1 million a year. He and his wife, Whitney, live in a 10,000-square-foot home in Hunt Valley and spend weekends at their Ocean City beach house.

InterAct's factory in Hong Kong also gives it an edge. While other accessory companies are paying intermediaries for their goods, InterAct has as many as 6,000 workers -- mainly women -- making about $3.50 a day, who live in factory dormitories.

Cheaper supplies

"The Asian crisis has helped us a great deal," Hays said. "We're getting supplies cheaper and cheaper and cheaper because we're paying in U.S. dollars."

William F. Jelin, an analyst at Stifel Nicolaus in St. Louis, said InterAct's success is easily explained.

"It grew up with the industry. As video games were being developed, the management of InterAct worked with software developers and they just had a good engineering staff," he said, noting that InterAct is the fastest growing section of Recoton, InterAct's Florida parent.

"I've been an analyst for over 25 years and a lot of these things boil down to if a company has a good management team, and the cash to exploit the good strategy they've developed."

Pub Date: 11/01/98

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