THE bride and groom, a guitar-wielding rock vixen and a muscle-rippling dragon-slayer, make an odd couple—so it is hardly surprising that nobody expected their marriage. But on December 2nd 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 Vivendi's stake in the resulting firm to as much as 68%.
Activision's boss, Bobby Kotick, will remain at the helm of the new company, to be known as Activision Blizzard in recognition of Vivendi's main gaming asset: its subsidiary Blizzard Entertainment, the firm behind “World of Warcraft”, an online swords-and-sorcery game with 9.3m 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 Activision's talented management team to run it. As well as making sense for both parties, the $18.9 billion deal—the biggest ever in the video-games industry—says 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 world's most popular online subscription-based game and is hugely lucrative. Blizzard will have revenues of $1.1 billion this year and operating profits of $520m. “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 Blizzard's 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 industry's sales decline, it makes sense to move into gaming, a younger, faster-growing medium with plenty of cross-marketing opportunities. (Activision might raid Universal's 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 this 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 Microsoft's Xbox 360 console or Sony's PlayStation 3 (PS3), both of which have high-definition graphics, can cost as much as $30m, 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 Microsoft's entertainment and devices division. They can also make savings on distribution.
This week's deal shows how the software business is changing; and things are happening in hardware too. Microsoft's Xbox 360, Sony's PS3 and Nintendo's Wii are fighting for supremacy. In September the Xbox 360, which was 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. “It's not even a statistic I track all that closely,” he says. The Wii's 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, Mr Bach 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.
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