Viacom's Rock Band, Up for Sale, Hopes to Keep Rocking

NEW YORK ( TheStreet) -- After becoming one of the most successful music video franchises in history, Rock Band -- and the entrepreneurs who continue to build out the game -- are in need of a new home. Viacom ( VIA) announced last week that it will divest Harmonix, the game's parent company.

MTV Networks, a subsidiary of Viacom, purchased the Cambridge, Mass.-based Harmonix in 2006 for $175 million. Harmonix, which declined to comment on this story, added a unique gaming platform to the media giant's growing portfolio of digital businesses and increased exposure to Viacom's brand outside of television programming.

For Harmonix, the deal with MTV gave the founders resources to grow their next big venture: helping bands of all types get their music onto Rock Band Network, a service that allows musicians to make their music available as tracks for Harmonix video games.

But despite Rock Band's positive reviews and best-selling status, Harmonix inevitably proved too far outside Viacom's core area of focus.

The media conglomerate is in talks with several potential buyers for the business, CEO Philippe Dauman announced during the company's recent third-quarter earnings call. "Harmonix has and will continue to create terrific video games, but for us, it is about focus," Dauman told analysts. "The console games business requires an expertise and scale that we don't have."

The business was also a drag on Viacom's earnings.

In fiscal year 2009, Harmonix posted a loss of $87 million on $362 million in revenue. The previous year, it generated a loss of $24 million on $678 million in revenue.

Music Industry Slowdown

The difficult nature of the music genre business likely took a toll on Viacom, said David Cole, an analyst at video game research firm DFC Intel. "The music genre isn't a huge prize," said Cole. "It's one of those areas where you won't be able to get consumers to buy a new product every year. If you buy plastic guitars and drum sets once, why do you need to buy them again?"

Music games sales, which peaked in 2008 at $1.7 billion, are expected to drop to $500 million this year, according to Wedbush Securities.

But Harmonix' IP will probably find a good home: The company could fetch between $125 million $150 million in a sale, said Mathew Harrigan, an analyst at Wunderlich Securities. He cited Activision Blizzard ( ATVI) as the most likely buyer, as the company features the financial wherewithal and a portfolio of similar music titles -- including the rights to Guitar Hero, Harmonix' first commercially successful game.

However Activision, which couldn't be reached for comment, has recently said it plans to scale down the number its music titles going forward due to declines in the genre.

Other large video game publishers including Electronic Arts ( ERTS), which distributes Rock Band, are also likely candidates to buy, analysts said.

Media Giants' Gaming Troubles

With few exceptions, many media giants -- like Warner Communications years ago and more recently, Disney ( DIS) -- have entered the console gaming business with minimal success, said THQ ( THQI) CEO Brian Farrell in an interview.

Viacom, the owner of BET Networks, MTV and Paramount Pictures, likely saw the gaming market as similar to the movie industry, as releases in both sectors require large production and marketing costs. The problem, say analysts, is that to produce hits on a regular basis, video game publishers must possess a technical know-how and domain expertise -- too narrow a vision for large, non video game-minded companies.

"We've seen many large companies get in and out of the games business," Farrell said. "You need laser focus and a team that does video games 24/7."

Viacom made another unsuccessful foray into gaming in the mid-1990s, acquiring a majority stake in U.K.-based video game publisher Virgin Interactive Entertainment. By 1997, the company was overspending on key projects and marketing, which resulted in mounting losses for the business. Viacom sold Virgin Interactive Entertainment's U.S.-based assets to EA, while a U.K.-based buyout team took control of the rest of the company.

Today, a sale of Harmonix is likely a relief to Viacom's investors, said James Goss, an analyst at Barrington Research. "While Rock Band was a pretty big hit, its growth was choppy," he said. "The business just didn't hit the smooth growth that Viacom is trying to create."

Hopefully for Harmonix, which recently turned out Rock Band 3, it will get added soon to someone else's playlist.

--Written by Olivia Oran in New York.

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