Vidgame merger in ‘World’ of its own

Vivendi's investment in 'Warcraft' pays off

Asked to describe the significance of Vivendi Games’ merger with Activision last week, competing publisher Ubisoft’s CEO Yves Guillemot had a very succinct response: “One game, ‘World of Warcraft,’ bought Activision.”

That’s not much of an exaggeration.

The creation of Activision Blizzard on July 10 spotlights everything from Vivendi’s renewed interest in the interactive entertainment biz to Activision’s rapid rise to the increasing importance of scale as the videogame biz goes global. It’s also proof of how one product can transform an entire industry.

In early 2004, after spinning off its other entertainment assets into NBC Universal, Vivendi tried to sell its cash-hemorrhaging videogames unit. But it couldn’t find any takers. So it brought on Bruce Hack, the former U exec who had overseen the NBC U merger, as CEO, slashed a big chunk of its overhead and decided to invest in a few key products.

Luckily for Vivendi, one of those products was “World of Warcraft.”

The game cost more than $100 million to produce, market and maintain, but the conglom was betting that the sterling reputation of subsid Blizzard Entertainment and the potential of online gaming, where users pay a monthly fee to play every month, would pay off.

“Blizzard has unparalleled quality, brand, online expertise and connection with its fans, so when it came to make a choice about investing our time and money in 2004, it really was an easy choice,” recalls Hack, now vice chairman and chief corporate officer of Activision Blizzard.

To say that decision paid off would be an understatement. “World of Warcraft” has since amassed 10.7 million subs, rocketing past Sony Online’s “Everquest” to become not just the most popular online game ever but the most profitable videogame in history.

Insiders say it has profit margins exceeding 50%, whereas the typical console game’s margin is about 20%. Based almost entirely on that one game, Blizzard had an operating profit of more than $500 million last year.

The decision was also fortuitous since Vivendi Games’ record outside Blizzard has been undistinguished. Company’s console business under the Sierra label failed to create any big franchises, and its online and mobile businesses remained tiny. While Blizzard made over $500 million last year, the rest of Vivendi Games lost more than $100 million.

Not too coincidentally, console gaming is exactly the area where Activision excels. It has several of the top console franchises, particularly “Guitar Hero” and “Call of Duty,” which drove it to 90%-plus revenue growth in its last fiscal year. Though execs have talked about potential synergies, such as Vivendi’s Universal Music helping with “Guitar Hero” or the “Warcraft” developers helping to take other franchises online, integration of Blizzard with Activision is expected to be minimal.

“This is a unique situation where two very successful and complementary businesses are combining to create something that really isn’t trying to fix any problems on either side,” says Blizzard CEO Mike Morhaime. “I anticipate us picking each others’ brains, but I wouldn’t foresee us working on each others’ games.”

Blizzard will remain almost completely independent in the new structure, with Morhaime reporting directly to Activision CEO Bobby Kotick and managing his own products. But the rest of the company will, not surprisingly given Vivendi Games’ problems, be run primarily by Activision execs led by Kotick.

A portion of Sierra’s projects and development staff will likely make Activision Blizzard’s slate, but a large chunk is expected to get the axe in the coming months.

Essentially, Activision wanted “Warcraft.”

Kotick admits he initially approached Vivendi’s management about buying Blizzard. But Vivendi was looking for a way to build on “Warcraft” and expand its stake in the videogame biz, rather than pull back. So it gave Kotick Blizzard, along with the rest of its underperforming game assets and $1.7 billion cash, to get a majority share in a new company that he and his team would run.

“They were adamant that they loved this business and didn’t want to sell Blizzard,” explains Kotick. “But they were struggling on the console side and needed to diversify into other parts of the business and recognized how difficult that would be independently, which is how we ultimately settled on this structure.”

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