National Post article
Friday, June 02, 2000
Hip Interactive targets growing gaming market
This upstart Canadian outfit is predicting $140-million in annual sales
Kim Hanson
Financial Post
John Hryniuk, National Post
Serial entrepreneur Morey Chaplick burned out at his last company, but he's back building Hip Interactive into a big player in the Canadian video games sales and distribution business.
Alex Paylan is your typical hard core gamer. Powered by a steady diet of pop and chips, the 13-year-old video game aficianado has been glued to the joystick since he was four.
The Grade 9 student from Toronto French School is such a die-hard fan of video games that he hopes one day to write on the subject. Mr. Paylan, with the help of his parents, has also sunk hundreds of dollars into feeding his hobby. He is the proud owner of nine video consoles, and in the past year alone he has purchased more than 100 games.
Welcome to the "remag" generation, a demographic of mostly males aged 12 to 34 who spent an estimated US$8.7-billion ($12.96-billion) on video games last year. At least that's how one newly-formed Toronto company has sized up a North American market it now plans to aggressively target.
In just six months, Hip Interactive Corp. has raised $26-million, acquired seven companies and is projecting yearend sales of more than $140-million, with EBITDA of $4-million.
Started by serial entrepreneur Morey Chaplick, the company plans to become the leading seller of PC and video games.
"We've taken over the Canadian video games market overnight and still nobody knows who we are," said Mr. Chaplick, who hosted his company's first annual meeting in Toronto yesterday. "We've come out of the gate very fast and now we're just literally coming up for air."
Through recent acquisitions, namely that of SJS Group Ltd., the firm claims to be the country's leading distributor of video game systems including Sony's popular Playstation console. The company's fast manoeuvring comes just in time for the much anticipated fall release of Playstation2, one of a list of next-generation systems due out within the next year.
Hip is also set to embark on a $1-million advertising campaign, complete with print, radio and 30-minute infomercials to revitalize Microplay Entertainment & Video Centres Inc., a national video store chain run so poorly by a slew of previous owners it teetered on bankruptcy more than once.
Principals of Hip said the fact that the ill-managed franchise, founded 12 years ago, still found a way to keep customers coming back was reason to claim ownership of the 85-store chain. It's also the same reason the company wants to expand Microplay to more than 300 outlets across North America over the next three years.
In addition, Hip has signed deals with Famous Players Inc. and AMC Entertainment Inc. to brand Microplayground video arcade centres in big-box theatres. Lastly, the company hopes to see Microplay.com take off as the company's seller of video games on the Internet, where many predict the future of video games lies.
Hip principals are convinced its efforts will pay off in a big way. It figures Canada is home to three million "remags," (gamers spelled backwards)-- a phrase coined by the company to describe its ideal customer.
Optimistic figures predict video games -- or the interactive entertainment market as industry types prefer to call it -- will grow by 20% next year. By 2002, analysts believe the market could be worth in excess of US$12-billion, potentially surpassing the Hollywood movie industry.
But it's still too early to tell just how well a small Canadian outfit like Hip will do, according to industry analysts.
The company, which has just reported its first full operating quarter, closed yesterday on the Toronto Stock Exchange at $2.50, up 25½.
By and large the Canadian gaming market, made up of three distinct segments -- video games, PC games, and other online-related services -- is considered small and highly fragmented.
The retail side of the industry is also thought to be a tough nut to crack, and given Microplay's rocky history, some analysts view this as the company's hardest challenge. The jury may also still be out on management's ability to execute the business plan.
Prior to starting Hip, Mr. Chaplick was co-founder and president of Beamscope Canada Inc., a distributor of consumer software and video games where he helped build sales to more than $600-million before resigning in 1998.
Since his departure, which Mr. Chaplick attributes to burnout, the publicly-traded Beamscope faced heavy debt, largely due to poor inventory management.
"Institutions in Hip don't seem to think Morey's past experience with Beamscope is a problem," said one analyst who requested anonymity.
"I don't think his abilities are in doubt. Let's not forget Morey helped build Beamscope from zero into $600-million and that's an accomplishment."
Investor Peter Winnell, vice-chairman of Octagon Capital Corp., also put his support behind Hip's high-energy chief executive.
"When we decided to back [Hip] we were backing Morey and his vision," Mr. Winnell said. "The company ended up with a very strong institutional shareholder group. People tend not to look at the past, they tend to look at the future with a guy like that."
Other major investors include Altamira and Trimark.
Other analysts have placed their attention on GTR Group Inc., whose services include supplying accessories and previously played video games for Nintendo, Sega and Sony video systems.
"GTR is a company that we feel is best positioned to benefit from the growth of the video game industry. The more consoles there are, the more likely you are to sell more accessories which is a market this company is focused on," said Adam Adamou, Taurus Capital Markets Ltd.'s vice-president and director of institutional equities. Taurus, which was involved in GTR's $21-million financing last year, recently reduced its target on the company to $3.90 a share from $8.50. The reduction was largely due to the underperformance of GTR's previously played division and general market conditions.
"But looking at their operations as a whole, we still think they're the best company out there," Mr. Adamou said.
One thing most analysts seem to agree on is that the industry is about to undergo a major transition. They're hoping investors will respond warmly to a new generation of gaming platforms including Nintendo's Dolphin, Sony's Playstation2 and Microsoft's X Box.
Gaming fan Alex Paylan, however, who has already turned thumbs down on summer camp to play video games, says he won't be rushing to buy anything new anytime soon.
"From what I've heard and read, I'm not that impressed with Playstation2. But don't get me wrong, there are a lot of games I'm impressed with. I'm still probably going to buy a new system, but I guess what I'm trying to say is I haven't bought into the hype." |
