Activision comes to the bargaining table

The videogame battle of the bands has gone to court and quickly left.

Viacom-owned Harmonix Music Systems, the developer of the first two “Guitar Hero” games and “Rock Band,” on Monday filed a lawsuit alleging that Activision owes it royalties of more than $14.5 million for “Guitar Hero III” and other spinoff products from the hit franchise.

But Viacom said Tuesday night that it is withdrawing the suit. The threat of a protracted, public legal fight was apparently enough to bring Activision to the bargaining table. Companies are expected to continue discussions out of court.

Harmonix created the first “Guitar Hero” game for publisher RedOctane, which was bought by Activision in 2006. Harmonix then made “Guitar Hero II” for Activision before it was acquired by Viacom’s MTV Networks later that year.

Last year, MTV published “Rock Band,” Harmonix’s new game that adds drums and vocals to the “Guitar Hero” formula. Activision, meanwhile, published “Guitar Hero III,” which was made by a new developer, Neversoft.

“Rock Band” was a solid hit, selling more than 1.5 million units in the U.S. “Guitar Hero III” sold a boffo 6.5 million units. Overall, the “Guitar Hero” franchise was the industry’s biggest, generating more than $820 million in domestic revenue last year according to the NPD Group.

Lawsuit, which was filed at California Superior Court in Los Angeles, alleges that Activision owes Harmonix approximately $14.5 million in royalties because it used the developer’s technology to create “Guitar Hero III,” which is similar to the first two installments.

Suit claims that under Harmonix’s original agreement with RedOctane, it should be paid the higher of two royalty rates if any sequel it doesn’t build “incorporates, uses, or is derived from Harmonix property.” But Harmonix asserts that Activision paid it the lower royalty rate – half that of the higher rate – which is supposed to apply only if a new developer builds a “Guitar Hero” sequel essentially from scratch.

“(Activision) has failed to pay Harmonix its full share of royalties earned in connection with Harmonix’s essential and undisputed contributions of its intellectual property and technology to the bestselling video game `Guitar Hero III,”‘ the lawsuit asserts.

Harmonix estimates the unpaid royalties at $14.5 million. It also claims that it has not been paid any money it is owed for “Guitar Hero” song downloads, in-game advertising, and other ancillary products. Royalties on those products only apply, under the agreement with RedOctane, if Harmonix’s technology is used in sequels and spinoffs.

Activision countered that it has paid Harmonix all of the royalties that the developer is owed for “Guitar Hero.”

“Activision believes it has made sufficient payments to Harmonix and the claims otherwise do not have merit,” said General Counsel George Rose.

Lawsuit was clearly intended in large part to establish a precedent for future royalties, as Activision plans to regularly produce new “Guitar Hero” games. It has already announced three follow-ups, including one based on music from Aerosmith, that will come out later this year.

Harmonix says in the suit that if Activision continues to pay royalties at the current rate, its losses “will mount at the rate of tens of millions of dollars per year.”

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