Harry Potter firm hit by Microsoft exit

The Harry Potter game has brought Argonaut profitability

Computer games firm Argonaut has had its new-found grip on profitability tested by a break-up with software giant Microsoft.

Microsoft has withdrawn from a joint project to develop a title for its Xbox console, over concerns about a "lack of design clarity", Argonaut said.

"The key problem with this project was the lack of a shared vision," an Argonaut statement said.

An Argonaut spokeswoman added: "When you get creative teams working together conflict often happens."

The collapse of the deal, aimed to produce a game ready for release early next year, will have a "moderate impact" on Argonaut's results for the year to the end of July, Thursday's briefing said.

Discount boost

But the games company, which entered profitability in the six months to January, denied it had plunged back into the red.

"It's been a profitable year, and the balance sheet remains strong," chairman Julian Paul said.

The firm has been boosted by the price war among console games makers, which has accelerated sales of the units, and of the games designed for them.

Some 30 million Sony PlayStation 2 consoles and 4 million Xbox units have been sold so far.

"This sizeable market is expected to grow further over Christmas and throughout the next two years," the company said.

Games pipeline

Products under development and poised to benefit from the growth include a second Harry Potter game, the Xbox title Kung Fu Chaos, and Malice, which is to be marketed through a tie-up with rock group No Doubt.

Argonaut's Harry Potter and the Philosopher's stone video game has already proved a bestseller, and was credited for bringing the firm its first profit.

But earnings for the year to July 2003 will be held back by the takeover of mobile phone games specialist Morpheme, Thursday's statement said.

Morpheme, which has a portfolio of 40 games, is developing six new titles for a wireless gaming market forecast by Datamonitor to be worth $6bn in Europe and the US by the end of 2005.

The business is expected to make a positive contribution to profits from Argonaut's 2003-04 financial year.

"Morpheme is a very experienced, highly regarded studio... and will widen Argonaut's product range into the broad-based market of mobile entertainment," Mr Paul said.

City reaction

Thursday's statement sent Argonaut shares down 3.5p, or 13.5%, to 22.5p, their lowest ever closing level.

But analyst Peter Read of Beeson Gregory said the stock remained a "buy".

"Despite the relative ease of entry into the mobile gaming market, the industry is already being dominated by a handful of players," he said.

"Morpheme is one such player and so gives Argonaut a good foothold."