World of dealcraft

Updated: Dec 12 2007, 06:14am hrs
The bride and groom, a guitar-wielding rock vixen and a muscle-rippling dragon-slayer, make an odd coupleso it is hardly surprising that nobody expected their marriage. But on December 2 the video-game companies behind Guitar Hero and World of Warcraft, Activision and Vivendi Games respectively, announced plans for an elaborate merger. Vivendi, a French media group, will pool its games unit, plus $1.7 billion in cash, with Activision; the combined entity will then offer to buy back shares from Activision shareholders, raising Vivendis stake in the resulting firm to as much as 68%.

Activisions boss, Bobby Kotick, will remain at the helm of the new company, to be known as Activision Blizzard in recognition of Vivendis main gaming asset: its subsidiary Blizzard Entertainment, the firm behind World of Warcraft, an online swords-and-sorcery game with 9.3 million subscribers. The deal was unexpected, but makes excellent strategic sense, says Piers Harding-Rolls of Screen Digest, a consultancy. Activision has long coveted World of Warcraft, and Vivendi gets a bigger games division and Activisions talented management team to run it. As well as making sense for both parties, the $18.9 billion dealthe biggest ever in the video-games industrysays a lot about the trends now shaping the business.

The first is a push into new markets, especially online multiplayer games, which are particularly popular in Asia, and casual games that appeal to people who do not regard themselves as gamers. World of Warcraft is the worlds most popular online subscription-based game and is hugely lucrative. Blizzard will have revenues of $1.1 billion this year and operating profits of $520 million. World of Warcraft is really a social network with many entertainment components, says Mr Kotick.

Similarly, he argues, Guitar Hero and other games that use new kinds of controller, rather than the usual buttons and joysticks, are broadening the appeal of gaming by emphasising its social aspects, since they are easy to pick up and can be played with friends. Social gaming, says Mr Kotick, is the most powerful trend building new audiences for the industry. He is clearly excited at the prospect of using Blizzards expertise to launch an online version of Guitar Hero for Asian markets. Online music games such as Audition Online, which started in South Korea, are massive in Asia, says Mr Harding-Rolls.

A second trend is media groups increasing interest in gaming. Vivendi owns Universal Music, one of the big four record labels. As the record industrys sales decline, it makes sense to move into gaming, a younger, faster-growing medium with plenty of cross-marketing opportunities. (Activision might raid Universals back catalogue for material for its music games, for example, which might in turn boost music sales.) Other media groups are going the same way. Last year Viacom, an American media giant, acquired Harmonix, the company that originally created Guitar Hero. It has been promoting its new game, Rock Band, using its MTV music channel. Viacom has also created online virtual worlds that tie in with several of its television programmes, such as Laguna Beach and Pimp My Ride. Disney bought Club Penguin, a virtual world for children, in August. And Time Warner is involved in gaming via its Warner Bros Home Entertainment division, which publishes its own titles and last month bought TT Games, the British firm behind the Lego Star Wars games.

Time to level up

The third trend is consolidation, to plug gaps, address new markets and achieve economies of scale. Electronic Arts, for example, until last week the largest independent games-publisher (Activision Blizzard will be bigger), recently bought two studios, BioWare and Pandemic, to strengthen its position in role-playing and action games. Greater scale can help to spread costs and risk as new games become costlier to develop. A new title for Microsofts Xbox 360 console or Sonys PlayStation 3 (PS3) can cost as much as $30 million, says Mr Harding-Rolls. Bigger firms can afford to develop tools that make it easy to produce different versions of the same game for different platforms, says Robbie Bach, the head of Microsofts entertainment and devices division. They can also make savings on distribution.

Last weeks deal shows how the software business is changing; and things are happening in hardware too. Microsofts Xbox 360, Sonys PS3 and Nintendos Wii are fighting for supremacy. In September the Xbox 360, launched in late 2005, a year ahead of its two rivals, was overtaken by the Wii as the most popular of the present generation of consoles (see chart). Mr Bach says he is unfazed. Its not even a statistic I track all that closely, he says. The Wiis popularity stems from its low price and its innovative motion-sensitive controller, which can be pointed and waved to control the on-screen action and encourages novices to give gaming a try. But the Wii lacks the high-definition graphics of its two rivals, so it could soon start to look dated. The real battle is between the Xbox 360 and the PS3, he suggests.

Sales of the PS3, which have been sluggish, seem to have taken off after Sony removed some features and dropped the price. In Japan the PS3 even outsold the Wii in November, according to Enterbrain, a market-research firm. As more games become available for the PS3 next year, sales are expected to rise even further, says Mr Harding-Rolls, so that by 2011 the PS3 will have caught up with the Wii. In short, each of the consoles will be in front at various points in the console cycle.

In the previous cycle, dominated by Sony, programmers could address most of the market simply by writing games for the PlayStation 2. But if all the consoles matter, games companies have to produce games that run on all of them. That strengthens the case for consolidation. In other words, expect more deals.

The Economist Newspaper Limited 2007