Vivendi-Activision Merger: The Consolidation Race Has Begun

by: David Wolf

The great global consolidation of the video game industry has begun. Vivendi's (OTCPK:VIVEF) purchase of Activision (NASDAQ:ATVI) - announced over the weekend - was the opening lap in what is likely to become a global race on the part of large media companies to snap up game properties.

The Sixth Medium

Why? Because at some point between the introduction of networked games, online games, and the emergence of three game console companies, games stopped being just an application.

Games are now the sixth medium, after print, radio, film, television, and the Internet. Radio gave print a voice; film let us see what we were hearing on radio; television brought that into our homes; the Internet introduced interactivity; and games put us into a film/television experience, but then break down the "fourth wall," letting us interact (alone or in groups), with the story.

Games are going mainstream, the proof of which is the sheer size of the business. Games already make more money worldwide than film, attract loyal fans, can be delivered on a variety of platforms, can incorporate product placement and advertising, and - most important - can form the basis for properties that can be delivered in all of the other media.

Within the next 12 months (at the outside), the major media conglomerates are going to realize this, and they will reach the conclusion that:

  1. Games are not just a way to merchandise their big franchises, but to create new ones;
  2. Games belong in their own division;
  3. If they have a games division now, it needs to be upgraded to be on a par with music, film, and TV.

The Murdoch Gambit

Working on the assumption that the first move will be made by the company with the most adventurous leadership and the most gaping hole in its portfolio, it is pretty clear who will make the next move: News Corporation (NASDAQ:NWS)

I'd say that as soon as the news crossed the wires, Rupert Murdoch was on the phone to Peter Chernin kvetching about how Fox Interactive Media has a bucket of websites and no games whatsoever, and wondering aloud what the hell they are going to do about it.

And if Rupert's investment bankers weren't hustling their asses off all day Sunday putting together information on potential acquisition targets to quickly remedy this situation, they will be hearing about it from their bosses Monday morning.

The problem, of course, is that the logical purchase - Electronic Arts (ERTS) - has a market cap of something around $18 billion, a little over 1/4 the total market capitalization of News Corporation. In other words, I don't figure Rupert has the cash or the stock to buy EA outright, and getting him credit in a global credit market still assessing the damage of the sub-prime meltdown is going to be a bit difficult, to put it nicely.

He basically has two choices: Cobble together Fox Games by buying a pack of small but promising game studios; or go get money from the reservoirs of cash that remain undented by the sub-prime mess - sovereign funds. Specifically, I mean either the treasuries of the cash-rich Gulf States (the same folks who have bailed out AMD (NYSE:AMD) and Citigroup (NYSE:C) or that of the People's Republic of China.

(You were wondering when China was going to come up, weren't you?)

The China Connection

Of the two, I put the Chinese as the most likely player, and if NewsCorp doesn't tap them, Viacom (NYSE:VIA) (who is number two on my list of potential game buyers, with Time Warner (NYSE:TWX) third) certainly could.

There are many reasons for that, but the most important is that the Chinese understand the growing importance of games as a medium - they just have to look around. Conservatively 60 million Chinese play games on a regular basis, usually online or on the PC, but with increasing regularity on their mobile handsets as well. As a whole Chinese spend far less time watching movies, and a falling chunk of their time in front of the tube. And if all of that isn't enough, the financial success of The9 (NASDAQ:NCTY), Shanda (NASDAQ:SNDA), and other game companies in China demonstrate that this is a real industry with real dollars to be made.

From a policy standpoint, a Chinese stake in the global game market - even an indirect one - would appeal to the nation's senior leadership. Clearly the Chinese want to exercise greater control over the games kids play here, but they do that already. The real policy appeal is global: if you want potential soft power with the next generation around the world, turn to the world of gaming.

The troubling question, of course, is what (if any) special conditions the Chinese might attach to that money.

No More Shopping Days?

All of which raises a far more compelling question: Is it too late for the big media companies?

When a company like Electronic Arts or the new Activision Blizzard are valued in the neighborhood of $18-20 billion dollars, they have become far too large to be acquired like little baubles. Once you add in the premium over current share price that any bidder would have to pay, the purchase of a major game company would be more like a merger than an acquisition. I'm not sure any Hollywood company is quite ready to stomach that.

The safe move is to start hoovering up studios and smaller companies, creating a holding framework that will finance better games while leaving the creative core intact. Which we can expect soon.

The China Mandate

As they build their Game divisions, the media conglomerates need to look at China, and do so early in the process. There are studios here with interesting talent that could be used to create games not only for China, but for players worldwide. One of the painful truths about the gaming business is that there is a limited pool of talented game designers, coders, and artists worldwide, and the Chinese part of that pool is going to be a strategic asset in the global industry.

The big media combines will also find distribution challenging in China: they can't. There are plenty of local companies who could serve as distribution partners, but few who could handle more than a single blockbuster game at a time - or be trusted not to use their access to take advantage of their international partner.

The smart strategy, then, would be to line up as many good local distribution partners as quickly as possible, all while assembling the bouquet of studios and franchises that could form the basis of a solid game division.

Of course, it has been a very long time since we've been able to attach the words "global media company" and "smart China strategy" in the same thought. But I'm optimistic this time. Maybe - just maybe - one or two of them have learned their lessons, and News, Viacom, and Time-Warner have the best shots.