Harmonix, Put on the Block by Viacom, Looks for Better Owner—But Who Might That Be?
OK, it sounds like the press has this “Harmonix for sale” thing mostly wrong. At least in terms of what it means for the Cambridge, MA-based company, and the future of its business. Earlier this month, New York-based Viacom (NYSE: VIA) announced it has put Harmonix up for sale after losing money on the business for the past few quarters. Viacom said it is in discussions with several potential buyers and will keep supporting the business until a sale is completed.
Harmonix was quick to post on its gaming forums that the news doesn’t affect the ongoing support of its Rock Band and Dance Central franchises in any way. Reached by e-mail, Alex Rigopulos, the co-founder and CEO of Harmonix, declined to comment on Viacom’s announcement or its significance to the company. Rigopulos had granted me an interview back in September in which he talked about the future of the business more generally. (He didn’t say anything about it being for sale.)
But people outside the company are talking, and an interesting picture has emerged. Several sources, who asked not to be named, say Harmonix and Viacom were a poor match in terms of their business models and capabilities. More specifically, it’s well established that Viacom did not have the expertise to make money from Harmonix’s games. So, while most of the press has harped on the fact that sales of music games have slumped in the past two years—definitely part of what’s behind Viacom’s decision—it’s clear that Harmonix should be able to find an owner that’s a much better fit. What that means for any future success remains to be seen, however.
“There are very few [game] developers that can consistently generate 90-plus Metacritic-scored games. That is incredibly rare, and that means they’re very valuable,” says Nabeel Hyatt, founder of Cambridge, MA-based Conduit Labs, now part of gaming giant Zynga. “Those developers will always have a buyer.”
Some quick background: Harmonix was founded in 1995 by Rigopulos and Eran Egozy, both MIT Media Lab alums. The music gaming company toiled in relative obscurity until its breakout hits Guitar Hero, Guitar Hero II, and Rock Band. In 2006, MTV Networks, part of Viacom, paid $175 million to acquire Harmonix. At the time, it seemed like a good fit; MTV is all about music, and so is Harmonix. [Disclosure: I'm in a band with one current employee and one former employee of Harmonix. The band, Honest Bob & the Factory-to-Dealer Incentives, has songs in Harmonix games.]
At its core, though, this is an acquisition that didn’t work out. Philippe Dauman, CEO of Viacom, spelled out the problem in his remarks last week. “For us, it is about focus,” he said. “The console games business requires an expertise and scale that we don’t have.” In other words, Viacom is a media and entertainment company, not an established game publisher. It bought its way into the games business by acquiring Harmonix, but ultimately it didn’t have the infrastructure—and wasn’t willing to invest more—to support a top-tier game developer.
Even when Rock Band was doing hundreds of millions of dollars in top-line sales, sources say, Viacom was losing money. That’s in part because, lacking a means to distribute games widely, Viacom had to form a partnership with Electronic Arts, which took a big cut of the proceeds. The Chinese manufacturers of Rock Band game controllers took a big cut as well. And then the record labels took their cut. After enough of that, sources say, Viacom realized it couldn’t distribute the games in an efficient way, so it wanted out. (For example, Viacom didn’t have a retail sales force, and was not well-equipped to manage warehouses and ship products around the world.)
So the question is, who might buy Harmonix now? The list of potential acquirers is long. Big game publishers like Electronic Arts, Activision, Take-Two Interactive, Ubisoft, and THQ are all possibilities. Activision, which published the subsequent Guitar Hero games that compete with Rock Band (via Activision’s 2006 purchase of RedOctane, the publisher that owned the rights to the GH name), would be interesting because it could consolidate the category—which might actually improve the economics of selling these games. Or EA might make sense, since it has been Viacom’s distribution partner and knows the Rock Band franchise well.
Another possibility would be a big studio/publisher like Microsoft, Sony, or Nintendo. (Microsoft has released Harmonix’s Dance Central for the Xbox with Kinect.) And then there are other media and entertainment conglomerates besides Viacom, like Warner Bros. (which seems committed to sticking it out in the games business, from what I hear) and Disney, which also has been losing money with its games business. Lastly, private equity firms are rumored to be in talks with Viacom as well. One that might make sense as a potential buyer is Providence Equity Partners, which has invested in game maker and publisher ZeniMax Media in the past few years.
Even if Harmonix finds the right owner, of course, its future will depend on the market for music games and interactive content. If Rock Band and Guitar Hero are just a gaming fad, then it could all be over soon. But Harmonix is betting on the fact that these games are part of a bigger trend, one that will have its ups and downs, to be sure. Selling games that depend on hardware can be a risky business, but the future of Harmonix might be tied more to selling music content to the millions of households that already have the hardware.