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Viacom To Seek 'Substantial' Refund On Harmonix Rock Band Bonus Dollars
by Leigh Alexander [PC, Console/PC]
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February 12, 2010
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Viacom paid Harmonix some $150 million for its performance on Rock Band in 2007 when music games were booming. Now that they're not, it looks like Viacom wants its money back.
Target-based compensation was part of the deal when Viacom's MTV acquired Harmonix late in 2006. The music game studio's stakeholders were promised incremental earn-outs for exceeding certain financial targets, and apparently received them.
For example, in 2008, SEC filings revealed that Viacom had set aside more than $200 million in target-based compensation for Harmonix based on Rock Band's performance -- in the original game's first month on sale it sold more than 1 million units.
Ultimately, "in 2008, we paid $150 million, subject to adjustment, under this earn-out agreement related to 2007 performance," says Viacom in a new SEC filing.
"At December 31, 2009, we believe that we are entitled to a refund of a substantial portion of amounts previously paid, but the final amount of the earn-out has not yet been determined," the filing continues.
The Rock Band franchise -- comprised of two console editions, the special The Beatles game, and the broad digital store of downloadable content -- has generated over $1 billion dollars in sales to date. But the music game category in general saw sales contract by as much as half throughout 2009, as high-priced, peripheral-equipped bundles failed to sell as well as in earlier years.
Proponents of the genre say that the music game business is transitioning, not declining -- with peripherals at market saturation and controller interoperability at a high, the genre's revenue now comes from software sales and downloadable content, like track packs.
But fewer hardware bundles sold means big year-over-year sales declines for companies like Viacom, which yesterday blamed lower Rock Band sales for a decline in revenues, claiming the franchise had a "challenging" year.
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None of which is to say that the music-game genre is dead: it's just become established (or saturated). Time to focus on the DLC and song-packs, guys...
This is the shadow of M&A/consolidation in the game industry, isn't it? We don't get noticed until we're already hot, at which point we may be past peak if we don't innovate that next cool thang -- but big companies are less likely to let their acquisitions innovate...
I really cringe every time someone says the phrase "liquidation event..."
@Jamie: I don't know, but I don't think it's as simple as "everyone's got a kit and so bundles will tank". The genre doesn't seem to be innovating and one wonders how long folk can milk the song-pack model for so long. Do you really see yourself buying the latest song pack for Rock Band 2 in 5 years? And where the industry had a go at innovating (DJ Hero), results havent lived up to expectations.
I sort of wish this news article came with a side-bar *explaining* the news.. because the facts as given don't actually make any sense.
My experience with hardware for these games has been that the controllers wear out with sustained use, and "everybody's got one" might be an oversimplification - although it's a decent first-order approximation of current sales.
As for DJ Hero being disappointing: I'm not at all surprised. I think the idea behind it was flawed and the expectations were optimistic to the point of unrealism. Such games need to have mainstream appeal, so they should stick to the basics - singing, dancing, playing an instrument, or a combination thereof. Just Dance seems to be selling better than expected...
returns = consumer returns to store, then store returns to Viacom.
price protection = store gets to reduce price point, and publisher eats the difference.
reserve = % of revenue held by the publisher to cover returns and price protection.
Poor writing.
There is the argument that "if that's what they agreed to in the contract, then it's fair" - but courts will sometimes nullify sections of contracts that are deemed unreasonable. I'm wondering if provisions of this type might fall into that category, because of the problem noted above.
You can't view Target Based Compensation as a bonus, it's just a structured way of involving a developer in the profits of a title. The short term profit = what the publisher sells into the store, while the long term profit = what the publisher sells into the store minus the returns. As a developer, if you're sharing in the profits of a title, the deal usually involves you taking some accountability for returns of the product.
It's easy to imagine Rock Band as a case of a high priced, hot ticket item which makes a ton of money initially, and then loses a lot of that money as stores return it en-masse to clear up shelf space. Rock Band is a huge package, and it's harder to keep something like that on the shelf as opposed to a DVD case. You also have no idea how much of a reserve Viacom held to protect against this.