by Andrea Orr
[Posted on December 5, 2007 - 5:28 PM]
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DiggNatural companions or strange bedfellows?
That debate has been percolating since Sunday's $9.9 billion merger between video game maker Activision Inc. and media conglomerate Vivendi SA.
The deal amounts to an uncharacteristically bold step by a traditional media company to align itself with a major gaming business, and it led to the usual speculation about who would be next.
That talk quickly focused on Redwood City, Calif.-based Electronic Arts Inc., the largest independent game software developer, which pundits said could attract media giants such as Time Warner Inc., News Corp. or Viacom Inc., each of which might benefit from plunging deeper into one of the fastest-growing entertainment sectors.
Yet analysts now dismiss such a deal as too big and too complex to work. "All the big media companies are getting into gaming, but that doesn't mean they have to buy a major game publisher," said Evan Wilson, an analyst with Pacific Crest Securities Inc., adding that big media firms are more likely to continue their strategy of dabbling in gaming with smaller acquisitions and in-house game development, or just ignoring the gaming sector altogether.
Wilson said Electronic Arts' $17.2 billion market capitalization alone would make it hard to buy. Would-be buyers also might be deterred by the challenge of integrating a large, established game developer. "What produces a hit in the gaming sector is very different from what produces a hit movie," he said.
Vivendi and Activision are trying to ease the difficulty of melding a media and a gaming company by structuring the deal to let Activision management retain significant control over the company's operations while enjoying a cash infusion from Paris-based Vivendi. Wilson characterized the transaction as one in which Vivendi will finance Activision's purchase of Blizzard, Vivendi's games division.
Despite the integration issues, the video game business, whose sales surpassed music industry revenues last year and are expected to exceed total movie revenues in the near future, may be too lucrative for older media companies to ignore.
Mike Hickey, an analyst with Janco Partners, called the Vivendi-Activision deal a "wake-up call" to other media conglomerates, and he predicted that 2008 would see an accelerated pace of consolidation in the gaming sector. News Corp. is the media company most likely to make a major purchase, the analyst said.
Still, the merger may have skewed expectations for future deals. Indeed, dealmaking in the gaming business has been brisk for some time but has tended to focus on smaller players. Earlier this year, EA paid $860 million for Silicon Valley games developer VG Holding Corp., while large media companies have paid generously for some much smaller businesses. New York-based Time Warner, for instance, paid $200 million for Travelers Tales, a privately held 200-person game development studio.
The biggest media companies are also working on building games operations in-house, with varying degrees of success. Walt Disney Co. earlier this year bought children's social networking site Club Penguin for a reported $350 million in order to jumps start its in-house game development efforts.
Bryan Intihar, editor of Electronic Games Monthly, said that while Burbank, Calif.-based Disney has done well branching into games, most media companies have been "average to poor" in operating in the segment.
"They often say, 'If these much smaller companies can do it, we can,' " said Intihar. "But there are more fine layers in developing games than they often understand." And, while making video games and movies looks increasingly similar, with long production schedules and big budgets, there remains a disconnect in how the two industries promote their products, a key reason that many games developed in conjunction with new movies have fared poorly.
Another hurdle in the way of outright acquisitions could be the exclusive licensing deals many game developers hold. Agoura Hills, Calif.-based THQ Inc., for instance, has an exclusive relationship with Disney unit Pixar Animation Studios, which would likely keep it off limits to any Disney competitor.
