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The Rise and Fallout of Red Ant

A year on from its collapse, details are revealed of publisher debt and unexplained loans by the Australian distributor

They were one of Australia’s largest independent videogame distributors until the Australian dollar crashed and brought them down with it. A year on from the collapse of Red Ant Enterprises, documents have emerged that raise serious questions about unexplained loans made by the company, as well as the movements of its director and his wife.

The Titanic

Red Ant was on a high. The videogame and DVD distributor that had only been set up in 2001 by entrepreneur Julian White had, within the space of a year, transformed itself from being a speck in the vast gaming ocean into a force to be reckoned with. It was a small but rapidly growing business, securing contracts to distribute blockbuster gaming titles that were not only highly anticipated by the Australian market, but also guaranteed to bring in millions in profits.

"We were the Titanic," said a former product manager at Red Ant who wished to not be named.

"We had the biggest publishers, we had the biggest games, and everybody in this industry had all of a sudden changed their perception of Red Ant and people started to pay attention. People were ringing us and started hassling us instead of the other way around," he said.

Like the Titanic, Red Ant did appear to be unsinkable. The independent Australian distributor had just come off the back of the success of Fallout 3, a science-fiction epic that took numerous Game of the Year awards and became a serious seller for publisher Bethesda. It had just signed a series of lucrative contracts with some of the largest game publishers in the world and was preparing to distribute a range of high profile titles that everyone anticipated would bring it yet more critical and commercial success for the year to come.

With an energetic and passionate team working behind the scenes, an enormous rise in its game’s sales and the promise of many more on the horizon, Red Ant’s future looked watertight. However, in September of 2008, Red Ant sprung a leak that would ultimately lead to its downfall.

The fall

When the Australian dollar crashed at the beginning of the global financial crisis, it spelled trouble for the game and DVD distributor. As an importer of videogames and films from overseas, dealing mostly in Euros, the weakened Aussie dollar saw Red Ant lose money with every order it made. Being locked into contracts meant they had to go through with orders made prior to the dollar weakening and, even though the sales of its titles were up, the losses were far greater.

The receiver and manager of Red Ant, David Lombe from international accounting and consulting firm Deloitte, explained that the issue with foreign exchange led to the company becoming incapable of paying its debts.

"In Red Ant’s situation they didn’t react quickly enough to [the global financial crisis] – perhaps it wasn’t possible for them to react, but whatever the reason, they didn’t hedge those purchases, so in effect, they had significant foreign currency losses, which basically stripped out the working capital of the business. That was fundamentally the problem," he said.

Many staff members in product managing and sales positions began to feel the pinch in September as the value of the dollar plummeted. Product managers that once had the luxury of ordering stock when the Australian dollar was worth 60 Euro cents were suddenly faced with a dollar that was only worth 40 Euro cents. While it may be hard to fathom how a difference of 20 Euro cents could bring a company down, when large orders were made the losses were significant.

"The only thing that was really relevant to a lot of people was how strong or weak the currency was," said the former national sales manager at Red Ant, Roy Stanton.

"For us, or any other business that purchased in Euros, that meant the Australian dollar weakened by 20 per cent in a matter of a couple of days. That was the financial crisis for us," he said.

And while those in management were aware that they had a problem on their hands, it didn’t seem like anyone was aware of the full extent of the crisis. Business carried on as usual, with the company signing on to distribute games by another big player in the game publishing industry, Konami, in October 2008 – a month into the weakened dollar. When asked why Red Ant took on such a large client during such financially unstable times, Stanton said that the company believed that things would improve.

"You run a business to grow your business so until someone comes up to you and gives you the axe, you’ve got to pursue business as usual," he said.

"If something’s bad today it’s probably going to be good tomorrow. Things tend to go in swings and roundabouts. So was the decision bad? I don’t think so. Was the timing bad? Yeah, probably."

On top of a crippled Australian dollar, David Lombe also attributed the collapse of Red Ant to another significant problem that they faced: being both a retailer and a wholesaler.

"One of the other things that was interesting, and it seems to be a trend in this industry, is that distributors – that is the people who sell to the retailers – tend to take on the risk of being a wholesaler plus the risk of being a retailer. And what I mean by that is when they’re selling to a retailer, they will allow that retailer to return product to a certain level, and what that often means is the product that they’ve returned can’t be sold because it’s simply stuff that isn’t selling, so it’s got to be severely discounted before it gets to sale…and that affects profitability," he said.

"The primary reason [Red Ant] failed was because of foreign exchange issues, but they were losing money on both those limbs."

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Tracey Lien