The album cover for Eric B. & Rakim's 1987 classic "Paid In Full"

The eagle-eyed sleuths over at Gamasutra dug into the latest SEC filing from entertainment conglomerate Viacom and unearthed an interesting tidbit. Former shareholders in Rock Band creators Harmonix, which Viacom acquired in October 2006 for $175 million in cash, have recently received a $208.7 million bonus from parent company Viacom for results that "exceed[ed] specific contractual targets." Here's how it was described in the SEC documents:

In October 2006, we acquired Harmonix, the developer of Guitar Hero and Rock Band and other music gaming titles, for initial cash consideration of $175.0 million. To the extent financial results exceed specific contractual targets against a defined gross profit metric through 2008, former Harmonix shareholders will be eligible for incremental earn-out payments with respect to the years ended December 31, 2007 and December 31, 2008. At December 31, 2007, a liability of $208.7 million has been recorded in Other liabilities on the Consolidated Balance Sheet for the expected earn-out payment. We expect to have a final payment with respect to the year ended December 31, 2008 done in 2009.

We proceeded to do some back of the envelope calculations to put this in perspective. The filing states that as of its submission to the SEC, 1.1 million units of Rock Band had been sold at retail (at roughly $170 a pop for the Rock Band bundle, that totals $187 million); as of mid-January, MTV Games said it had also sold 2.5 million units of downloadable songs (at around $1.99 apiece, that comes to just about $5 million). That adds up to total gross revenues thus far of $192 million dollars. But Viacom spent $175 million to buy Harmonix and just shelled out another $208.7 million in bonuses, for a combined $383 million.

Keeping in mind that those expenses don't include licensing fees paid to artists and record labels; Electronic Arts' distribution fee; or marketing and promotion--to say nothing of the remaining and presumably similar bonus that Harmonix will be owed next year--and a couple of things become clear. One, Harmonix and its representatives have negotiated an extremely lucrative deal for themselves, matched only by the exceptional quality of the game that the studio delivered last fall. Two, Viacom and MTV Games are going to have to sell a lot more copies of Rock Band before this deal hits the break even point. So what's the bottom line? Cash rules--still don't nothin' move but the money.

CORRECTION: If we were to dredge up our SAT scores and publish them for your perusal, the record would show that our math skills outpaced our reading comprehension. That's still the case some eighteen years later, as evidenced by our quick-draw analysis of the bonus arrangement between Viacom and Harmonix.

We previously stated that Viacom had paid a bonus of $208.7 million to Harmonix. That was incorrect. As the section of Viacom's 10-K filing that we quoted in italics above makes clear, Viacom has not yet paid a bonus to Harmonix. Instead, Viacom has merely recorded a liability of $208.7 for Harmonix's predicted payment. In order for Harmonix to receive the aforementioned bonus of $208.7 million, the Boston-based game developer must hit its previously specified performance targets and gross profits, not just for calendar year 2007, but also for the year 2008. Therefore, if Harmonix hits all of its targets through the end of this year, its former shareholders will at some point in the future receive roughly $208.7 million in bonus payments for the studio's performance in 2007, as well as an unspecified bonus for its performance in 2008.

So while our back of the envelope calculations still stand, the actual bonus schedule definitely affects our analysis. Rock Band sales in North America remain strong; the game has yet to be released in Europe, Asia or on the Wii; and if the trajectory of Guitar Hero is any indication, Rock Band's second North American holiday results should be even stronger than its first. So Viacom and MTV Games could very well recoup on their overall outlay by the end of 2008, even with Harmonix's first bonus payment factored in, and will almost certainly do so by the date in 2009 at which they must pay Harmonix's former shareholders their final earn-out bonuses.

Level Up regrets the error.