Merger mania has invaded the videogame industry, with companies gobbling up each other like Pac-Man.
Videogame publishers have spent the past year swallowing rivals or shutting down entirely after being hit hard by rising costs for production, development and marketing as well as price cuts that have taken a bite out of profits.
For example, SCi Entertainment is in the midst of buying U.K.-based Eidos, which publishes the “Tomb Raider” games. Activision, Midway Games and Take-Two Interactive Software have also snatched up small developers in the past year.
While consolidation has raised some red flags for a biz that generated $9.9 billion last year — more than Hollywood collected at the domestic box office — it’s providing some good news for the major media congloms looking to go on a videogame shopping spree.
In January, News Corp. revealed that it was looking to buy its way into the game sector and was eyeing Activision as a pickup. Activision published 2004 hits “Spider-Man 2,” and “Tony Hawk’s Underground 2,” and has a license to produce games based on DreamWorks’ toon titles. It will release a game based on Fox’s Marvel superhero pic “Fantastic Four” this summer.
“We see videogames as a big business and would like to get into it,” News Corp. chief operating officer Peter Chernin said at a U.S. investment conference.
He added that the conglom was “kicking the tires of pretty much all videogame companies.”
Time Warner has upped its activity in the gaming space, launching unit Warner Bros. Interactive Entertainment to create and publish titles based on the conglom’s films and TV shows. Warners last year became the first studio to open an inhouse games division. “The Matrix Online,” with a budget nearing $20 million, was the first vidgame it funded, developed and published.
Last year, Viacom chairman-CEO Sumner Redstone privately acquired an 80% stake in Midway Games, which produces such titles as “SpyHunter” and recently released sci-fi shooter “Area 51.” Viacom is considering acquiring the company from Redstone.
Disney is bolstering its gaming efforts as well, laying out $40 million to grow its Buena Vista Games division. It recently acquired Salt Lake City-based Avalanche Software and opened a new studio in Vancouver, Canada, as part of that effort.
It also will begin publishing and distributing its games in Europe, eliminating the need for any third-party distribution, and will release titles for all demos, not just the family and children’s markets.
Buena Vista Games will pub-lish game adaptations of Disney releases “The Chronicles of Narnia: The Lion, the Witch and the Wardrobe” and “Chicken Little.”
THQ still retains the licensing rights to Pixar’s pics, while
Square Enix has “Kingdom Hearts II.”
Investments in publishers now could put congloms in a good position. Sony, Microsoft and Nintendo are readying to roll out new consoles beginning in late 2005 that will replace the PlayStation 2, Xbox and GameCube. New hardware will enable publishers to produce games with more sophisticated graphics. As a result, the game biz should enjoy a surge in hardware and software sales over the next several years as gamers clamor for the latest and greatest.
But there are drawbacks to the consolidation game. The results of the buying spree have yet to be felt, but industryites fear creativity and innovation might take a back seat to a renewed focus on the bottom line. The vidgame biz is already playing it safe, with EA, for example, heavily relying on sequels or updates of franchises as well as licenses to generate revenues instead of investing in original titles.
Studio interest in games has grown lately because many of the top-selling titles are based on movies, TV shows or comicbooks. Last summer’s “The Chronicles of Riddick” was a hit for Vivendi Universal Games even though the Universal pic flopped; a sequel is expected to keep the franchise alive in the game world. Adaptations of “Shrek 2,” “The Incredibles” and “The SpongeBob SquarePants Movie” were the third, fourth and fifth bestselling movie-based games, respectively, in 2004, according to market tracker NPD.
The number of such titles is unlikely to change any time soon now that Hollywood’s congloms are buying up more publishers. The only difference is the new owners will be able to retain a bigger percentage of the profits by owning the games instead of simply collecting royalties from them. Most studios license all their properties for games to publishers.
The cost to develop a typical game approaches the pricetag to produce a small feature film — somewhere between $10 million and $15 million. Costs can reach much higher depending on the research and development needed to push the technological envelope, or the need for voice talent and music rights. For example, Atari’s “Enter the Matrix” cost $50 million to develop and market.
While Hollywood’s majors are increasingly becoming players in the game biz, powerhouses like Electronic Arts, the industry’s largest vidgame publisher, are expected to retain much of the control. EA, alone, overpowers its rivals, controlling 21% of the market in March, an $18 billion market cap and $2.5 billion in cash in its coffers.
Late last year, EA acquired a 20 percent stake in French developer Ubisoft, behind the popular “Myst” and “Tom Clancy’s Splinter Cell” franchises. EA also produces games based on “Harry Potter,” “The Lord of the Rings” and James Bond, as well as the exclusive licenses to the National Football League, Arena Football League, NASCAR, the PGA Tour and FIFA soccer.