With music video games now resembling a group that hits the top of the charts and quickly flames out, Viacom Inc. is looking to sell off its Rock Band business.
The media conglomerate said Thursday that it was in talks with several potential buyers for Harmonix Music Systems, the Cambridge, Mass., video game developer that created Activision Blizzard Inc.'s Guitar Hero and then made Rock Band after Harmonix was bought by Viacom in 2006.
Sales of music video games, which enable players to simulate the experience of being a musician, have plunged almost 80% in the last two years. Reasons include an oversupply of sequels and spinoffs and consumers' unwillingness to pay upward of $200 for instrument controllers during an economic downturn.
Both Activision, which pumped out seven Guitar Hero versions in 2009, and Viacom believed that music games would remain one of the top genres in the business after sales hit a peak of $1.7 billion in 2008. As it turned out, however, Guitar Hero and Rock Band were more of a fad than a growing business, as many players bought a single title but eventually put their plastic guitars and drums away in the attic.
"The misjudgment by publishers was that they thought anyone who bought a music game would keep buying sequels," said analyst Michael Pachter of Wedbush Securities.
Viacom never managed to make a profit on Rock Band even when the business was strong, however. According to a regulatory filing, Harmonix had a loss of $24 million on $678 million in revenue in 2008 and lost $87 million on $362 million in revenue last year.
The company's MTV Games unit struggled to produce instrument controllers for 2007's Rock Band and 2008's Rock Band 2. In 2009, it paid tens of millions for the rights to make a Rock Band spinoff based on the Beatles that failed to meet sales expectations.
"Viacom didn't execute terribly well, but I don't think there's anything they could have done to prevent this final outcome given the path the music genre took," said Doug Creutz, a research analyst at Cowen & Co.
In October, Harmonix released Rock Band 3 and last week it put out its first non-branded game, Dance Central, a dancing title for Microsoft Corp.'s new motion-sensing system Kinect.
Viacom paid $175 million in 2006 to acquire Harmonix and two years later paid the development studio's shareholders a $150 million bonus as part of an "earn-out" provision in the purchase contract. However, the company acknowledged in regulatory filings Thursday that it is attempting toclaw back "a substantial portion" of the bonus because of Harmonix's continuing losses.
The company took a $230-million write-down on the value of Harmonix and a $30-million write-down on costs related to the Rock Band games.
Industry analysts said the most likely buyer for Harmonix will be Santa Monica-based Activision, which could combine Rock Band and Guitar Hero into one franchise that dominates the shrinking but not-yet-dead music games business.
"Activision has more to gain than anybody else from buying its biggest competitor and more to lose if Harmonix stays in business somewhere else," Pachter said.
Other possible buyers include Electronic Arts Inc., which distributed the Rock Band titles for MTV, and French publisher Ubisoft Entertainment, which has its own music and dancing titles.
Pachter estimates that Viacom could get slightly more than $100 million for a sale of Harmonix along with its intellectual property.
The studio will continue operating and producing downloadable content for Rock Band 3 and Dance Central while its corporate parent goes through the sales process expected to take as long as 12 months.
On a conference call with investors, Viacom Chief Executive Philippe Dauman said: "The console games business requires an expertise and scale that we don't have," indicating that the company will still produce games for the Web and mobile devices.
That decision could have implications for film producer Jerry Bruckheimer, who in late 2007 formed a new video game division and signed a deal with MTV to publish the titles he produces. Bruckheimer Games has several projects in the works and is considering whether it needs to find a new publisher, people familiar with the situation said.
Viacom on Thursday also reported its earnings for the quarter that ended Sept. 30. Overall revenue rose 5% to $3.3 billion and net income dropped 59% to $189 million, largely because of the Harmonix write-down.
Revenue for the MTV Networks group of cable channels, which includes MTV, Nickelodeon and Comedy Central, increased 8% to $2.1 billion as advertising income grew significantly. Filmed entertainment revenue from Paramount Pictures grew only 1% to $1.23 billion, due in large part to a continuing slump in the home entertainment market and fewer DVD releases.
MTV Networks' operating income grew 9% to $873 million, while filmed entertainment operating income dropped 29% to $52 million. Viacom shares rose $1.08, or 2.8%, to $39.18.