Videogames raise coin, conflict for music biz

With new versions of “Guitar Hero” and “Rock Band” hitting store shelves in the next month and numerous new competitors launching by the end of the year, the music biz has to decide whether it’s time for celebration or panic.

The franchises, featuring hundreds of rock songs from the last four decades, are responsible for an estimated 35% of the jump in videogame sales so far this year, which are on track to top $10 billion by the end of 2008.

Past editions of the musical-simulation games have provided a ripple effect for the ailing music industry, as some CD sales and downloads of songs have briefly skyrocketed thanks to the exposure.

But music execs see games as more than a promo opportunity. To them, it’s a megabusiness from which they expect to make substantial amounts of money rather than the modest percentages they are currently receiving. (Right now, total income from a hit rarely reaches into six figures, according to diskery sources).

So the two industries are waiting for the other side to blink. Music mavens know that with album sales continuing to fall and digital downloads not quite picking up the slack, they need videogames. On the other hand, they know that a company like Activision, which has staked much of its future growth on “Guitar Hero,” needs a broad variety of well-known artists to make the games work.

If one of the four major labels decides to withhold its songs — or make its songs prohibitively expensive — the move would significantly alter the playing field for the gamers.

On an earnings call last month, Warner Music CEO Edgar Bronfman had harsh words.

“The amount being paid to the music industry, even though their games are entirely dependent on the content we own and control, is far too small,” he told Wall Street analysts.

Insiders say Warner is the only diskery complaining so far and that its ire seems mainly targeted at Activision (publisher of “Guitar Hero”), not at MTV (“Rock Band”).

Music mavens fear this phenomenon could be a fad and that income from the music licensing and the bonus sales could plummet as quickly as it rose.

Aside from “Rock Band 2,” which bows Sept. 14, there’s a fourth “Guitar Hero” (subtitled “On Tour”) in October, followed by new music games from Disney, Konami and Microsoft, among others.

Activision is also working on multiple “Guitar Hero” spinoffs, including versions for the handheld Nintendo DS and band-specific titles like June’s “Guitar Hero: Aerosmith” and an upcoming “Metallica” edition.

These games range from four-piece band simulations to karaoke to pretend instruments played with the Wii’s motion-sensing controller, but they all have one thing in common: soundtracks with dozens of licensed songs, everything from the Who to Guns ‘N’ Roses to Weezer to the White Stripes.

Landing those songs has become an increasingly delicate and carefully negotiated balance for vidgame makers. With the massive success of the franchises, it’s a much more complex negotiation involving royalties, marketing cycles, content diversity and gameplay needs.

“It ends up being a very closely integrated creative and marketing exercise to get the right tracks,” says Paul DeGooyer, senior VP for games at “Rock Band” publisher MTV. “We have a ton of ideas flowing our way and we try to pick up on the ones fans will like and that have meaty, substantive parts for each instrument in our game.”

When it debuted in 2005, “Guitar Hero” was a quirky game from a little-known publisher, RedOctane. Three years and five sequels/spinoffs later, “Hero” has generated almost $1.7 billion in worldwide retail revenue for Activision, which bought RedOctane for what now looks like the bargain-basement price of $100 million in 2006.

MTV late last year came out with competing game “Rock Band,” made by Harmonix (the original “Guitar Hero” developers), which has sold more than 3 million units in North America so far.

The original “Hero” featured just 47 songs, most of which were covers. “Rock Band 2,” by contrast, features 84, all of them master tracks.

Since December, additional downloadable tracks have been released weekly for “Rock Band,” ranging from a three-song punk collection to the new Judas Priest album to a 12-song package of classic songs by the Who. Players of both games have downloaded more than 21 million tracks online.

As Bronfman indicated, such sales mean real money for the music industry. Like ringtones, videogames are a new line of business that most music execs didn’t expect, but are rushing to take full advantage of.

A few years ago, when music was used for only background soundtracks in games, most songs were licensed for a low flat fee, or even for free if it was a breaking band in need of promotion. RedOctane followed that model for the first “Guitar Hero,” paying relatively small amounts to diskeries that didn’t know what to make of the first game to let players simulate being in a band.

Now, vidgame publishers typically pay a four- or five-figure advance against a standard royalty rate for use of a song, with music publishers and labels getting a direct cut of the numbers of downloads or a tiny percentage of game sales if they are included on the disc.

That’s significantly less than the licensing fees music companies are used to from movies, TV and commercials.

The upside in some cases, however, has been the sales of individual tracks after an appearance on a game. Aerosmith’s catalog, according to insiders, has seen sales rise 40% since the release of its branded “Guitar Hero” edition.

Muse’s “Knights of Cydonia” sold 186,000 copies post-release of “Rock Band.” Since the release of “Guitar Hero 3″ on Oct. 1, “Cliffs of Dover,” a 1990 track by guitarist Eric Johnson, has sold 180,000 downloads. Prior to the game, it had sold only 20,000. Since the release of “Rock Band,” Foghat’s “Slow Ride” has sold 210,000 downloads, a spike of 160% since the pre-release.

A recent report by investment bank UBS found that the “Hero” and “Band” franchises accounted for almost 16% of videogame sales so far this year, compared with just 7.5% last year.

Dave Johnson, chairman-CEO of the music publisher Warner/Chappell, says the games have already become significant income producers, especially in the U.S.

“The percent growth from year to year is at an extraordinary pace,” he tells Variety.

“Getting on a game is great because kids will be exposed to music they otherwise might not listen to and they will hear it several times,” says Bob McLynn, who manages several bands, including Fall Out Boy and Panic at the Disco, that have had their music in games.

There are opportunities to make more coin, however, particularly for the handful of bands like Aerosmith and Metallica that can support their own games. In those cases, the vidgame companies pays sums that run into the millions to get extensive access to the band and exclusive rights to its songs.

Activision or MTV would also likely pay exorbitant sums to get their hands on the few high-profile bands that so far have refused to license their songs to videogames, like Led Zeppelin or the Beatles.

Activision’s big advantage: Its recent merger with Vivendi-owned Blizzard Entertainment has made Universal Music a sibling and led to the label’s topper, Doug Morris, taking a seat on the Activision board.

Two execs who work in catalog departments at labels echoed the positives of the music game phenomenon. Both say the games are revitalizing the musical interests of people in their 30s and 40s who play them, and are exposing a new young audience to rock music. “My 10-year-old is really excited to see Def Leppard,” says one.

As videogames become an increasingly important promo platform, publishers have become part of the music industry ecosystem, working with labels to time releases for mutual benefit.

“That’s a large part of what we do now,” says Tim Riley, VP of music affairs for “Guitar Hero” publisher Activision Blizzard. “They’re willing to work with our timelines and we’re willing to work with theirs because we have become a large platform to launch bands against.”

As music games increasingly become brands in their own right, they’re also being used for other purposes. There’s a “Rock Band Live” package concert tour this fall featuring Panic at the Disco, Dashboard Confessional, Plain White Ts and the Cab that will play 29 cities. Music by the acts on the tour will be featured in a downloadable pack after the release of the game.

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