ACTIVISION BLIZZARD: The deal that shook the industry

In a year that has seen GAME swoop for Gamestation, Activision snap up Bizarre and Warner acquire Traveller’s Tales, we’ve all had plenty to talk about.

But last week’s Activision Blizzard deal topped the lot in every respect. In a single flex of its financial muscle, Vivendi has created a new publishing superpower that has the potential to take on EA – and win.

But the shock emergence of Activision Blizzard has so many more implications. For both companies’ staff, there will inevitably be some nervous glances across at their new bedfellows and a brushing up of CVs – mergers of this scale can become a painful process.

The reverberations will be felt across the publishing community too. At the very highest level, publishers must surely be eyeing each other up in an attempt to keep pace with the big boys. Could it spur a flurry of reactionary deals? Will it pave the way for consolidation on a similar scale to what we’ve already seen in the music and movie industries?

We shall see. The story of Activision Blizzard has just begun – and will give us plenty to talk about for years to come.

A deal of this size doesn’t come about by coincidence – the benefits from both sides are plain to see, says senior analyst at Screen Digest Piers Harding-Rolls.

Although this transaction has come out of the blue, I believe the portfolio and capabilities of both companies dovetail well,” he tells MCV. Vivendi Games has a leading position in online strategy and massively multiplayer games and good exposure to the mobile games market, while Activision has yet to really develop these areas of the business.

Activision has made a notable success of its traditional console and PC game business and has established a number of leading franchises. While Vivendi has not been as successful in the console sector, for example, the executive team at Activision has a track record of success and I think that expertise will help take Vivendi-based game IP to the next level. Aside from the portfolio fit, Vivendi offers access to some key Asian markets through Blizzard, which allows Activision to expand its addressable market for its titles. Likewise, Vivendi can take advantage of Activision’s well-developed distribution in the West.”

While in terms of portfolio the deal looks highly promising, it is the logistics of the acquisition that will cause problems, says DFC Intelligence analyst David Cole.

The major issue is that mergers of this size can often make sense in theory, but, from an execution standpoint, be difficult to pull off. The track record for mergers between large publishers has not been good. Activision Blizzard will clearly have a strong game portfolio and I think the first priority should not be getting into the ‘who is number one?’ game but instead focusing on organising the internal organisation to take advantage of the many potential opportunities. Like I said, such mergers are a challenge and I think buying even more things to digest would be a mistake in the short term.”

The deal is also a reflection of a general trend in the market, says Screen Digest’s Harding-Rolls. The industry is currently operating with a back drop of general consolidation. Traditional publishers are having to acquire expertise to tap into high growth markets such as MMOGs, virtual worlds, and casual games and to compete with the many new market entrants from these sectors.

Consolidation is also being driven by major diversified media companies seeking to increase their exposure to the interactive markets. Publishers are looking to mitigate development risk by increasing their scale, industrialising the development process, re-using technology across a wide number of titles, and reducing adminstration costs.”

But this consolidation isn’t necessarily a bad thing, adds Harding-Rolls. Obviously a certain amount of competition at the top end is good for the consumer and the market as a whole. While EA has dominated the traditional publishing sector for a number of years, its dominance is not as clear cut now, so that’s generally a positive development. And there are plenty of other companies entering the market from these high growth sectors, which are providing competition to the traditional players.”

DFC Intelligence’s Cole agrees – and believes that it could very easily benefit smaller players. Historically consolidation creates more opportunity for smaller players. In the mid-1990s, the buzz was all about large companies investing in games, multimedia, virtual worlds, online services and the ‘information superhighway.’ Companies like Viacom New Media, Disney Interactive, Dreamworks Interactive, Fox Interactive, Paramount Interactive, Simon & Schuster Interactive, MGM Interactive, Hasbro Interactive, Mattel Interactive and of course Time Warner Interactive were all investing heavily in game divisions and their booths were always a major presence at the E3 shows of the 1990s.

This was a time when AOL and telecoms firms like AT&T were making investments in online game ventures. Meanwhile companies like Activision, THQ, Take-Two Interactive, Ubisoft, Eidos, Midway, GT Interactive and Infogrames were small players that most observers felt would either disappear or at best be swallowed by the larger, diversified players. Big companies tend to focus on big things and that leaves a lot of profitable niches for smaller, leaner players.”

This deal not only represents a huge step forward for Activision and Vivendi, it marks a paradigm shift for our industry. We have seen Warner Bros. emerge this year as a rising force to be reckoned with; and the much-rumoured return of Fox could be equally as dramatic.

Add this to existing colossus EA, new superpower Activision Blizzard and an increasingly ambitious Disney and you’ve got an industry that has an ever-increasing number of enourmous multimedia corporations battling over market share. The likes of THQ, Ubisoft, Take-Two and Sega are now under more pressure than ever.

Clearly gaming is already big business. But after the Activision Blizzard deal, it’s about to get a whole lot bigger.

INDUSTRY OPINION

I think that any competition to EA is good for the industry. There is a new number one publisher – that should create some pretty healthy competition. And they will be directly competing in a few areas – Guitar Hero Vs Rock Band, Call of Duty Vs Medal of Honour, Need for Speed Vs whatever Bizarre Creations does for Activision. It’s going to make for some fun watching. What they each do with movie licences will also be interesting to watch now that they both have so much leverage. Consolidation is no bad thing. It makes things tougher for the smaller guys, but one of the brilliant things about this industry is that innovation can come from anywhere – not just the market leaders. Probably not directly as a result, although Darwinism is getting bigger in the games business, and publishers are going to need to think bigger and smarter about growth. It is no longer enough to grow just by selling more games.”

Simon Jeffery, President and COO, Sega America

The merger really shows that the vibrancy of the video games industry is such that two companies of this stature can see the benefits of consolidation and ultimately future growth. Both companies are solid supporters of our platforms and the synergy that they will bring to our formats with their strong IPs will only enhance all of our mutual business. The consolidation of Vivendi and Activision should mean that any savings they make will give them the opportunity to invest in new IP and development, to share the risk in pushing the boundaries of supporting new talent to help them maintain a creative edge in an exciting and fun industry. Many people worry about these sorts of situations but with a stro