Kathryn Harris
The interactive video-game industry thrives on fantasy, so we understand why game software publishers dream and talk about a wave of consolidation that will fill their pockets with gold.
Game software is a fast-growing business. Retail sales rose 24 percent to $6.3 billion in the U.S. last year. Outsiders like Mattel Inc., the world’s largest toy maker, Hasbro Inc., the No. 2 manufacturer, and Havas SA, the Paris-based media company, have recently invested in the business.
Industry executives expect other deep-pocketed companies to follow, while cable television concerns and Internet giants looking for “content” may also buy in.
All that sounds plausible, until talk turns to Hollywood companies as potential acquirers of game publishers.
Freeze that frame. Stay that joystick. It’s time for a reality check. The studios were burned by their earlier forays in the video-game business; will they plunge into the flames again?
I think not, but there are beguiling arguments to the contrary from Silicon Valley and Wall Street.
Hollywood will “probably be a little more cautious, but in the long run I can’t think of any other industry that has managed creative talent more effectively,” said Bryan Neider, vice president of business development at Electronic Arts Inc., the No. 1 maker of video-game software.
“It’s the perfect thing for (Hollywood) to be buying,” said Curt Alexander, an analyst at Media Group Research, a Sudbury, Mass.-based research and money management firm.
Alexander contends that large entertainment companies will have to defend why they’re not going into an industry such as this that will afford them the fast growth opportunities they need to sustain their lofty stock prices.
Here’s the thesis. Americans spent almost as much on video games last year as they did at movie theaters. Video-game sales are robust this year, with some analysts putting the growth rate at 25 percent far ahead of other entertainment businesses.
Meanwhile, there’s been a sufficient shakeout among game console makers to identify Sony Corp.’s PlayStation as the clear leader, followed by the products of Nintendo Co. and Sega Enterprises Ltd. For game publishers and investors that means some of the risk has been removed in deciding which systems to support.
Yet one analyst quips that the game sector is the “Rodney Dangerfield” of the entertainment industry because it gets little respect. That’s because the game business is highly cyclical, with a history of rocky transitions to next-generation consoles. And many game publishers are still too small to capture the attention of Wall Street.
For these reasons, and the usual quest for market share, game publishers are in the midst of a consolidation wave. Last year there were more than 50 transactions with a total value of almost $6 billion, said Neider.
Toy companies have joined the hunt. El Segundo-based Mattel completed a $3.6 billion stock swap for Learning Co., the publisher of “Myst,” “Where in the World is Carmen Sandiego?” and “Print Shop.”
Rhode Island-based Hasbro has made a smaller investment, with its acquisition of MicroProse Inc., a maker of 3-D video games for personal computers, and the purchase of rights to 75 classic Atari game titles.
So, are the Hollywood tycoons buying?
“No,” said Barry Diller, chairman of USA Networks Inc., the most acquisitive company of the moment. USA Networks has acquired everything from TV stations to cable networks to small movie companies, and only reluctantly dropped a bid for Lycos Inc., the No. 3 Internet search service.
Diller, who ran Paramount Pictures and then Fox Inc. in the 1980s, said his lack of interest isn’t based on a bad experience with interactive games, but is “based on my incompetence.”
Game publishing is simply an alien, indecipherable business to many of Hollywood’s finest. There is no official tally of how much money Hollywood poured into interactive games earlier this decade, but collectively, the investments were dubbed “dumb money” and “Sillywood.”
Almost all of the studios have retreated to the more familiar business of licensing rights to outsiders.
There was “too much technological anticipation” required, said Charles “Skip” Paul, who was an Atari executive before joining MCA and steering its investments in 3DO Co. and other video-game ventures. Paul now heads Sega GameWorks in Los Angeles, a unit of Tokyo-based Sega Enterprises, which runs urban entertainment centers. Filmed entertainment companies are “not equipped to make the (technological) decisions to be ahead of the curve,” he said.
Just ask Michael Fuchs, the former Time Warner Inc. executive who scaled back much of that company’s interactive software business in 1995.
“How do you green-light a game? How do you ‘read’ it? Hollywood is used to reading scripts,” Fuchs said. “It’s a different kind of aptitude; probably a much more spatial, abstract kind of thing I don’t think the two worlds touch.”
There’s certainly a generation divide. In Hollywood, big decisions are made by middle-aged or older men. By contrast, at the recent Electronic Entertainment Expo in L.A., which showcased the latest video games, I saw only a handful of people with graying hair, even though the home video business is two decades old.
Remember Atari? The pioneer video-game company was purchased by Warner Communications Inc. for $28 million in 1976. Atari generated about $650 million in operating profit for Warner before a product glut triggered about $875 million in losses during an 18-month period in 1983-84.
A decade later, after Warner merged with Time Inc., the company invested anew in interactive games, both internally and with stakes in game publishers such as 3DO and Accolade Inc. (“Test Drive,” “HardBall”).
Although Time Warner never disclosed the magnitude of its losses, former Accolade Executive Vice President Stan Roach told an audience at the Electronic Entertainment Expo that Time Warner may have lost between $200 million and $300 million in the game business over a six-year period in the 1990s. As part of its exit strategy, Time Warner encouraged Accolade’s sale last month to France’s Infogrames Entertainment SA, said Roach, who now holds a senior post with the acquiring company.
Walt Disney Co. after boasting in 1995 that it would build its computer software division into a billion-dollar business within five years began firings in its interactive division in 1997 and has turned to licensing and marketing, rather than developing games internally.
Viacom Inc., owner of Paramount Pictures, sampled the game publishing business after its 1994 acquisition of Blockbuster Entertainment Corp. Blockbuster owned a controlling stake in Spelling Entertainment Group, parent of Virgin Interactive Entertainment. Viacom soon wanted out.
In 1996, Spelling set aside almost $140 million for the estimated losses in disposing of the business. Buyers were found in 1998.
Fox and Sony approached the video-game industry differently and claim the happiest results.
A late entrant in 1995, Fox missed some of the chaos accompanying the transition from earlier game technologies. Now Fox is the lone studio among the majors that can truly claim to be a game publisher, says Fox Interactive President Jon Richmond. The venture has been profitable almost since inception, mining Fox properties such as “Die Hard” and “The X-Files” for games. Still, Richmond says he has no interest in acquiring other game publishers.
Sony, of course, approached the video-game business as largely a hardware maker. Since introducing PlayStation in 1994, Sony has taken the industry by storm. In the process, Sony became a large publisher of game software. In fiscal 1998, the game business including software publishing had $886 million in operating income, almost three times the operating income of its filmed entertainment division. But the shots were called by Tokyo, not Hollywood.
Sony’s success underscores Hollywood’s problem with the game industry. “Right now the platform owners control too much of the destiny,” says Frank Biondi, a former chief executive of Universal Studios Inc. and Viacom.
With Sillywood so fresh in their memory, Hollywood executives aren’t likely to go shopping for game publishers. As Biondi says, “It ain’t even on the radar screen.”
Kathryn Harris is a columnist for Bloomberg News.
