Activision-Vivendi's Game-Changing Deal

The new Activision Blizzard will give EA a heavyweight to contend with in the increasingly important market of massive multiplayer online games

by Reena Jana and Matt Vella

Game Daily

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The $18.9 billion tieup between Activision (ATVI) and Vivendi (VIV.PA) is numbingly complex in its structure, but the motivations behind it are simple: Video game publishers want to bulk up to cover the rising costs of developing games, which can easily soar to tens of millions of dollars. And increasingly, game companies are tying their fortunes to trendy online, multiplayer games such as the popular fantasy title World of Warcraft—developed by Vivendi's Blizzard Entertainment—which has 9.3 million subscribers and will be owned and operated by the new venture.

If approved, the deal could effectively realign the industry landscape, creating two massive gaming heavyweights with similarly matched creative clout and global distribution. During a Dec. 3 conference call, executives said the new company, called Activision Blizzard, would start with 15% of the worldwide games market, including PC and console games. In 2006, the total video game market was worth some $28 billion, according to research firm NPD Group. Activision Blizzard's revenues for 2007 are expected to be about $3.8 billion.

All Sights Are on the MMO Market

But rival Electronic Arts (ERTS), with expected 2007 revenues of $3.2 billion, has been on its own spending spree. It is retooling its portfolio of games to include more online multiplayer games and original content. In October EA announced the $860 million acquisition (BusinessWeek.com, 10/29/07) of two independent games studios, in part because one is developing a massively multiplayer online game, or MMO, which analysts and industry insiders say could challenge World of Warcraft. In 2006, EA spent $76 million to acquire Mythic Entertainment, an independent developer of online games.

"Both companies are formidable and, now, going in the same direction," says David Cole, president of DFC Intelligence, a research firm specializing in the video game market. According to Cole, the newly created Activision Blizzard and EA, bolstered by recent acquisitions, are positioned to achieve greater economies of scale for increasingly costly development budgets for all types of games. Analysts think that Blizzard's expertise in providing support services critical to maintaining subscriptions to online games can help Activision develop online offerings—perhaps even sequels to its popular console titles, such as Guitar Hero and the Tony Hawk skateboarding games. These could be turned into lucrative multiplayer online franchises, for instance. Blizzard's titles are undoubtedly the most successful Western-developed online games in booming Asian markets such as China and Korea, and the company's expertise in marketing to these audiences could help open new revenue streams for Activision titles, too.

Recent venture capital activity confirms the increasing investor interest in socially oriented multiplayer online titles. "The atmosphere is very positive, very excited over these types of products right now," says Cole. In October, for example, VC firm Mayfield Fund, which previously focused on biotech and tech companies like Amgen (AMGN), announced its first multimillion-dollar investment in online multiplayer games. The firm is investing in Beverly Hills-based Acclaim Games, a privately held maker of MMO titles such as Bots, a robot-fighting game released last year; Acclaim's CEO is Howard Marks, a co-founder of Activision. "The social aspect of these games is addictive," says Raj Kapoor, a managing director at Mayfield. "Your friends are playing, and you want to keep playing with them. The space is wide open for new revenue models."