Who says that Monday Morning Quarterback has to be tied to the NPD sales reports? Not us, not when there's news breaking of this magnitude. Yes, we know we haven't done an MMQB for the October sales numbers; our Thanksgiving travel schedule got in the way, so we're planning to fold it into the November sales analysis. But enough about us. When news came across the transom earlier today that Vivendi Games and Activision had announced their plans to merge, we quickly contacted our regular opposing QB, Game Head host, Geoff Keighley, to pit his BlackBerry-fueled insights against our Palm-enabled observations. Not only did he agree to do so on the holiest day of football lovers around the world, after winning the coin toss, he volunteered to go on offense first. We hope that you'll enjoy the discussion.

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To: N'Gai Croal
Fr: Geoff Keighley
Date: December 2, 2007
Re: Frequently Asked Questions

N’Gai,

When we first came up with the name Monday Morning Quarterback we weren’t expecting much game news to break on Sundays. But this turned out to be a weekend filled with big games. In the football arena USC defeated UCLA in a closely watched match, and yesterday the Washington Redskins returned to the field in the wake of Sean Taylor’s death. But the biggest of them all? The game one one-upsmanship on the part of Activision and Vivendi Universal, who jointly announced on Sunday that they were merging to create the largest independent software company in the world: Activision Blizzard, with $3.8 billion a year in revenue. (Just a hair above EA’s $3.7 billion).

What’s my initial reaction to this news? I’m probably about as surprised as EA CEO John Riccitiello, who told the Reuters Media Summit on Thursday that he didn’t expect many big mergers and acquisitions in the game industry in the near future. (“Is it ripe or has it already been picked? I would argue that it’s been largely picked.”) It’s no secret that Activision CEO Bobby Kotick has been shopping his company for years, talking to the likes of News Corp to see if there would be a synergistic way to combine forces and take on EA. The deal with Vivendi accomplishes that and comes at a time when Activision is firing on all cylinders, upping guidance and experiencing huge sales with both Guitar Hero III and Call of Duty 4. Activision actually posted more revenue than EA for the first six months of the year thanks to those pricy Guitar Hero II SKUs.

So in tribute to Blizzard’s “FAQ” on the merger on their website, I thought I’d answer a couple of the questions that have frequently popped into my mind this morning.

Q: Is this a smart move for Activision and Vivendi?

A: First, let’s talk about Activision. What do Kotick & Co. get in the deal? Blizzard’s PC MMO business is accretive and the crown jewel of the merger. (No wonder the company is being called Activision Blizzard). And let’s not forget Starcraft II, which will be a huge international hit on the PC. The PC market isn’t growing, but acquiring the Blizzard titles will more than make up losing id Software’s PC titles. Activision also picks up Vivendi’s console portfolio, which is diverse but not particularly strong. How many franchises can you name from Vivendi besides Crash and Spyro? Games like the forthcoming Brutal Legend, Prototype and Ghostbusters may do well inside the new company and widen the portfolio, but in terms of strategic assets Vivendi isn’t bringing a lot to the table. Radical Entertainment is a solid development studio, but it’s hard to point to any other triple-A development resources. Finally, the merger may also allow Activision to do more with Universal Music Group. It’s telling that UMG head Doug Morris is now on Activision’s board. This may lead to some big Guitar Hero expansions, and I wonder how long it is until UMG considers pulling music out of Rock Band.

For Vivendi the company gets a proven game publisher that has a good story to tell Wall Street this year and a strong international sales/marketing group. The highlights: Proven, repeatable franchises like Guitar Hero and Call of Duty. Good licenses like DreamWorks Animation and Spiderman. I wouldn’t include Tony Hawk because that series has been atrophying for years and I question its long term value. Also, Activision hasn’t shown much of an interest in creating new IP as of late--I think its last effort was Gun, which met with middling results. Still, Activision has the better development group (excluding Blizzard).

When you look at the deal I’m struck by how different these companies really are. Vivendi is about new IP and PC MMOs, and Activision is about repeatable franchises on the consoles. The companies overlap slightly when it comes to licensed and movie games. Perhaps this makes for the perfect merger, but I somewhat question how much synergy we’re really going to see. My big question: How long is it going to be until we see Activision Blizzard get into the sports business? If this new company ends up acquiring 2K Sports or Take-Two, EA will really have to worry.

Q: What are the open questions about the merger?

Here are the big questions I have about the merger and its benefits:

a. What’s Not Addressed: The Casual Market and Nintendo Wii

The merger does nothing to address the growing success of Nintendo’s Wii and the casual games market. Neither company has had any strong successes on the WIi, perhaps with the exception of Guitar Hero III. The problem? NO third party has been successful on Nintendo’s platforms, so in essence there is no one to buy/merge with to accomplish this. Still, companies like EA and Ubisoft have shown more of an interest than Activision or Viviendi in developing unique titles for the Wii and DS.

b. Wet, published by Activision-Blizzard? Really?

It’s pretty monumental that the new company will be Activision Blizzard, not Activision Sierra. But here’s my open question to Mike Morhaime and the guys at Blizzard: Are you really going to put your name on the box for a game like Scarface II? Or even a derivative third-person action game like Wet? Blizzard has been so protective of its brand for years that I find it hard to believe their name/logo will go on all the game boxes. Or will Blizzard now have a say in the games the joint company publishes? If so, the quality standards are going to have to go way up. In fact I am beginning to wonder just how many Vivendi games are really going to make it through the star chamber at the combined company. Stay tuned.

c. The Meeting of the Minds: What Development Philosophy?

When you look at the portfolios of the two companies, Activision is a lot more risk averse than Sierra/Vivendi (excluding Blizzard). What will this mean for the software portfolio of the combined companies? It’s important to note that Vivendi has the controlling stake in Activision, but how many Vivendi console games will disappear? Even in his early interviews Bobby Kotick spends a lot of time talking about Blizzard and almost no time discussing how excited he is about The Bourne Ultimatum or Prototype. Certainly Blizzard is the crown jewel with World of Warcraft, but I wonder what the release calendar will look like next holiday season. Could we really see next holiday season with a lineup like this from Activision/Blizzard: Starcraft II, Guitar Hero IV, Bond 22, Call of Duty V, Tony Hawk’s Skate Park, Prototype, Ghostbusters, Brutal Legend, Wet, and whatever else hasn’t been announced yet? Those are a lot of games to focus on in a go-big-or-go-home industry.

Q: What does this mean for EA?

A: No one is happy to give up the driver’s seat, so I’m sure the EA executives are none too pleased that Kotick is hyping up Activision Blizzard as the #1 independent software company. How long will that last? My prediction is not long. I expect both Ubisoft (which EA owns a 20% stake in) and Take-Two are the first two companies on John Riccitiello’s shopping list. Or maybe the Bioware/Pandemic acquisition indicates a different strategy of building from within? For a company that is always seen as the evil empire, one could argue that EA has shown more innovation and forward thinking as of late than Activision. Skate is better than Tony Hawk and Rock Band is better than Guitar Hero III. (Unfortunately the same can’t be said of Medal of Honor versus Call of Duty).

What stings EA the most is not getting a hold of Blizzard. That company has been the apple of EA’s eye for years, but EA was never able to figure out a way to acquire Blizzard/and-or Vivendi. Plus, Blizzard is not cheap: The top executives have rich profit sharing deals and controls to ensure that their developers don’t have to do anything they don’t want. Want proof? Check out the FAQ on Blizzard’s page about the merger where it basically says its business as usual. I don’t doubt it. Folks may imagine a Neversoft created Starcraft Ghost, Blizzard doing a Call of Duty RTS, or an annual Diablo game created by Treyarch, but I tend to doubt those things will ever happen.

Geoff 

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To: Geoff Keighley
Fr: N'Gai Croal
Date: December 2, 2007
Re: The Return of the Rich King

Geoff,

For purely selfish reasons, it's a good thing that this deal came along when it did. Not because I own any stock in Activision (damn, damn, damn), but because for the second month in a row, I've found it difficult to muster up the necessary motivation to kick off MMQB. Is it apathy? Ennui? Fear of achieving the standard of excellence that was set the month before? Whatever it is, I'm pretty sure that our readers don't care--they just want our exchanges. Fortunately for them, there's no "I" in team, and you've been kind enough to kick off this entry with a penetrating look at some of the implications of the Vivendi-Activision merger.

I just got off a briefing call with several of the deal's architects: Vivendi CEO Jean-Bernard Levy, Activision CEO Bobby Kotick, Blizzard CEO Mike Morhaime, Vivendi Games chairman René Penisson, and Activision CFO Thomas Tippl. Kotick said that the talks began a little over a year ago; first as conversations between himself and Vivendi Games CEO Bruce Hack, then with Vivendi CEO Levy. Everyone on the call stressed the strategic benefits of the deal; namely, Activision's strength in the console business and Blizzard's in PC and online gaming. Kotick repeatedly praised Blizzard's commitment to excellence, saying that as word spread throughout the company, Activision's own creative leaders were emailing him, expressing their excitement at being aligned with one of the most respected developers in the industry.

I asked Morhaime whether he felt as though Blizzard was going from being a big fish in a mid-sized pond to a big fish in a huge ocean, and whether he could truly protect his company’s creative control in the new structure. He argued that it was actually the other way around, that the big ocean was actually his parent conglomerate Vivendi, where it was difficult for Blizzard to be truly recognized. Now, he said, as a part of the new Vivendi Blizzard, this would no longer be a problem. So as you can see from the brief recap of my conversation with the key players in the deal, everyone's happy right now.

So, on to the analysis. I'm kicking myself for allowing you to go first, because you've already touched on the most salient points of the deal. I'll both respond to some of your observations and add some thoughts of my own.

Setting aside Blizzard for a moment, I'd single out Radical as a key component in the new Activision Blizzard. These guys have been making open world games for some time now; among them, The Simpsons: Hit & Run, The Incredible Hulk: Ultimate Destruction and Scarface: The World Is Yours. Activision has published its own trip open world games in True Crime: Streets of L.A. and True Crime: New York City (developed by Luxoflux) and Gun (made by Neversoft), the only one of these six titles that's colon-free. I think it's reasonable to say that Radical has been more successful at this, certainly creatively if not also commercially, and the demo I saw of Prototype at the GameStop conference in September was spectacular from a purely technical perspective.

It's conceivable that Radical's tech could be used to revive True Crime as a franchise capable of duking it out with Grand Theft Auto, Saints Row and The Godfather, though the new company would be better off letting it sleep with the fishes and letting Tony Montana and his little friend shoot it out with his f--king competitors. But where Radical could provide more assistance is in helping get the Spider-Man games back on track. You and I have repeatedly assailed EA for the plunging Metacritic ratings for its Medal of Honor series, but what about how Activision has allowed its Spider-Man license to deteriorate? The Metacritic score for Neversoft and Activision's first Spider-Man game on PS1 was 87. That dipped to 74 for Spider-Man 2 Enter Electro on PS1; rose slightly to 76 for Spider-Man: The Movie on PS2; rose slightly again for Spider-Man 2 on PS2; plunged to 63 for Spider-Man 3 on Xbox 360 nd stayed down for the count with a 61 for Spider-Man: Friend or Foe on Xbox 360. Just because this is a licensed game doesn't mean that it has to suck, especially given the enduring popularity of Spider-Man. So I'd say this is a prime candidate for Radical to resuscitate.

Speaking of tech, Universal should get a shot in the arm from Infinity Ward's Call of Duty 4 engine. Vivendi Games signed a licensing deal with Epic to use the Unreal engine; High Moon's forthcoming engine, for example, is being built on Unreal tech. It looked pretty far along when I saw it in September, and with the studio saying publicly that it's pretty much an Unreal shop, I can't imagine that they'll be pulled off it. But with all of the deservedly rapturous praise for Infinity Ward's superlative engine, running on PC, 360 and PS3 at 60 frames and still managing to be one of the best-looking games around, I've got to think that any future non-open world action games being developed internally at Activision Blizzard will strongly consider going with IW's tech, particularly given the well-publicized struggles developers have had with Unreal on PS3. And even though those troubles should subside somewhat now that Epic has gone gold with the PS3 version of Unreal Tournament III, the sheer scale of this new company suggests that it will take the obvious margin-boosting step of decreasing its reliance outside tech.

I don't think that Universal Music Group will pull out of Rock Band. It's possible, but then Harmonix-MTV-EA could retaliate by pulling its patent licensing agreement which allows Red Octane and Activision to publish Guitar Hero games, and who wins then? No, I think there's more than enough room in the market for both companies. While we're talking Guitar Hero, the winner here is Tim Schaefer and his currently in development game Brutal Legend, which stars Jack Black as a roadie transported to an alternate world where the mythology and iconography of rock is real. As you know, my betting days are over, but it's almost guaranteed that Brutal Legend will feature some sort of compatibility with Guitar Hero. I see all of the songs in the game being playable, and if they're smart, they should steal the co-star mode from Super Mario Galaxy and adapt it to Brutal Legend, where one person plays the game on a controller while two friends or parents assist them by rocking out on their faux guitars. Turn that up to 11 and I think Schaefer's got his first hit in a long time.

You're absolutely correct that this does nothing to improve either company's position on the Wii. Then again, what could, short of buying Nintendo? I don't see a single third party publisher who's put together a string of Wii hits; do you? We have to believe that Activision wants to up its share on the Wii in ways other than just Guitar Hero. Can they do that best organically, through a studio like Vicarious Visions, or will they need to acquire another studio? I wish I had an answer, but I don't.

As for the crown jewel in this merger--that would be you, Blizzard--it is the biggest win for developers around the world since Bungie escaped the Microsoft hive with its name intact. Blizzard has survived all sorts of acquisitions and management changes without ever compromising the quality of its games; in fact, they’ve done it so well that the name of the company is not Activendi or Actierra but Activision Blizzard. That's huge. It's also proof that you're only as good as your last game, because I'm not sure that Blizzard could have pulled this off before World of Warcraft. Similarly, would Activision have been valued at 48 percent of the combined company before this year, driven by Guitar Hero II and III and Call of Duty 4: Modern Combat? Obviously, the names Activision and Blizzard have more meaning to today's gamers than Vivendi or Sierra, but their recent fortunes all but guaranteed that when the smoke cleared, their names would be on top.

Last but not least, what does this mean for EA? I still like EA's fundamentals better, particularly its foundation of The Sims and EA Sports, each now its own division. But what this merger really says to me is that EA brought back CEO John Riccitiello later than it should have. Why? Because sometimes it's the deals you don't make that cause your downfall, and nowhere is that more true than in the videogame industry. Nintendo broke off its partnership with Sony to make a CD-ROM companion for its consoles; that led directly to the creation of the PlayStation and its corrosive effect on Nintendo's market share for a decade. Sony repeatedly rebuffed Bill Gates' personal entreaties to use a Microsoft operating system for its consoles; Ken Kutaragi said no. Now he's semi-retired while the Xbox 360 makes significant inroads on the young male gamers who were the PlayStation's bread and butter.

EA has direct experience with this phenomenon. When its deal to partner with the then-nascent Infinity Ward crumbled, resulting in IW and Activision joining forces to create a Call of Duty franchise that proceeded to gun down EA's own Medal of Honor like so many virtual Germans in a World War II shooter. When Vivendi was looking to sell its videogame unit back in 2003, the major publishers like EA all kicked the tires, but none of them wanted to pull the trigger on the reported $1 billion asking price when the only asset of any perceived value was a pre-World of Warcraft Blizzard. That's somewhat understandable, but how did EA let Red Octane and Harmonix slip through its fingers, long after it was clear that Guitar Hero was a phenomenon and with a former record label exec in worldwide music boss Steve Schnur in EA's own executive suite? I have to imagine that if Riccitiello had returned to EA sooner, there's no way that someone like him, who's been so aggressive on acquisitions, would have let both companies escape his grasp. Put all of this together, and it starts to look like a series of unfortunate events that has resulted in the creation of what could be EA's most formidable competitor yet.

We've talked about EA, but what does this deal mean for other publishers? Does Ubisoft have to worry about EA snapping it up tout de suite? Will Activision Blizzard's new French accent prompt it to set up shop in Montreal and take advantage of those tasty Quebec subsidies? Can Japanese publishers compete effectively in the West against publishers of this size? Let's take one more round to dig a little further into this deal.

Cheers,

N'Gai

P.S. In a feat of real-time reporting, I pinged Blizzard's Morhaime in the midst of this post to raise your points about the potential for Blizzard to be associated with sub-par games made by other developers in the Activision Blizzard empire. Here's the exchange:

How and why was the decision made to put the name Blizzard in the name of the company? How do you feel about the name Blizzard being so prominently displayed in the new company? Will there be a new logo?

Separately, Blizzard's reputation is that it doesn't publish bad games, whether that means delaying games until they're truly ready, as with World of Warcaft, or cancelling them, as with Starcraft: Ghost. The same cannot be said of Vivendi Games or Activision, who, as with many other larger publishers, put out games of varying degrees of quality: some excellent, some mediocre, and some poor. How concerned are you that the Blizzard name will now be associated with all of those titles, good or bad? Do you see a need for a sub-brand or label to let gamers know which titles come from the true Blizzard of old?

I think this description should answer both questions.

We are very proud to have the name Blizzard in the name of the listed company. The name "Activision Blizzard" is a reflection that the new company will have two main divisions: Activision Publishing and Blizzard Entertainment. This was done to avoid some confusion about the relationship between Activision and Blizzard Entertainment. The structure is like a merger of equals. The corporate name "Activision Blizzard" is not a replacement for the publishing labels Activision or Blizzard Entertainment. Individual products will continue to be developed and marketed under the appropriate Activision or Blizzard Entertainment brands. The name "Activision Blizzard" will also be used by centralized services within the organization like sales, distribution and finance, which would service both brands.

We have not decided whether there will be a new logo for the "Activision Blizzard" name.

P.P.S. In a brief call that arrived almost simultaneously with Morhaime's reply, he clarified that Blizzard Entertainment will publish the games that Blizzard currently publishes and had always intended to publish, while Activision Publishing will release everything else. And with that, the sound of ten million fanboys standing down could be heard faintly in the distance.

Next: How can we possibly know what's next--we're doing this one in real time!