Michael Pachter, Wedbush Morgan Securities

General thoughts on mergers in the industry:

I don't see an urge to merge.

I think that Vivendi had legitimate concerns about its own ability to manage the tremendous profits generated by Blizzard, and recognized that Activision was in a better position to re-deploy these profits productively.

Thus, the Activision/Vivendi deal came about in order to maximize profitability of the Vivendi assets - not much more to it than that.

As far as EA/Take-Two are concerned, Take-Two has progressively weakened over the last seven years, in spite of the phenomenal success of the Grand Theft Auto franchise. The company has had six CEOs in seven years, and the frequent change at the top has cost it a lot of continuity.

It made several bad decisions (several failed licenses: 24, The Da Vinci Code) made a disastrous foray into sports, and has continued to chase cool new franchises (BioShock, Borderlands, LA Noire) while letting older franchises (Max Payne, Red Dead Revolver) fade into oblivion.

The company also made really poor choices on sequels (Manhunt and Bully), instead of focusing resources on properties that had worked in the past. So EA sees a company in trouble, and is seizing the opportunity to capture GTA.

Other companies ripe for acquisition:

I don't see anyone particularly well positioned to be acquired, except perhaps Codemasters or Atari/Infogrames. The others are too costly, and a chunk of revenues could go away in an acquisition - THQ has a lot of licenses that likely terminate upon change of control.

Codemasters/InXile's Hei$t

It's possible that someone will value Ubisoft, but that would cost a ton. And if it's not a friendly deal, Ubisoft management could start a competing company across the street and likely would attract much of the key talent.

If a company wants to buy the ability to develop games, they can buy a lot of talent for $1 billion. Most quality studios cost [under] $200 million (e.g., Traveler's Tales, Bizarre Creations).

Even Pandemic Studios and BioWare were far cheaper [than it would be to buy] THQ or Ubisoft. There are still great developers out there (Insomniac Games, Bungie, Media Molecule, Epic Games, id Software) that would make a company immediately competitive in games.

Effects on developers and gamers:

Ultimately, I think that the cost of developers will rise, as it should. These guys are the real "stars" of the industry. Although the publishers add a lot of value, their business model is similar to the movie studio model of the 1940s, where the studio had the stars under contract, and the studios kept all of the "upside-from-film" profits.

That model migrated to a model whereby the stars are paid a percentage of both the gross and profits from-film, and the studios keep only a modest percentage of the profits.

While I don't see this happening in the video game industry for several years, maybe decades, I do see the developers getting a bigger slice of the pie in the future. That should serve to attract even more talent to the development community, and make games even better in the future.

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