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Viacom To Seek 'Substantial' Refund On Harmonix  Rock Band  Bonus Dollars
Viacom To Seek 'Substantial' Refund On Harmonix Rock Band Bonus Dollars
February 12, 2010 | By Leigh Alexander

February 12, 2010 | By Leigh Alexander
More: Console/PC

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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Jamie Mann
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I probably shouldn't be surprised at this one: it was fairly obvious that (even without the enforced hardware cross-compatibility forced onto the game developers) once the hardware market was saturated, the dollar value of the music-game genre would drop dramatically: one "band in a box" setup is worth around 3 disk-only games. There's also the fact that there's now a healthy amount of hardware floating around the second-hand market.

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...

Reid Kimball
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I can't believe they're asking for the money back. That's like giving someone a piece of cake for doing a great job and then months later asking for it back. I guess it was a lie?

Shava Nerad
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David and Goliath -- except in this kind of case, David probably loses regardless of virtue or merit.

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..."

Kim Pallister
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@Reid: I agree that on the surface this sounds pretty sleazy, but we should wait to hear the details and see how it plays out. There are some scenarios where it might make sense (e.g. if it was based on sell-in vs sell-thru and a bunch of those bundles got returned to viacom, then they might have paid the bonuses on games that weren't sold after all).

@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.

raigan burns
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I really don't understand this.. if the payment was for performance in 2007, and performance in 2007 was good, then how is the current performance (or lack thereof) at all relevant?!

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.

Tim Randall
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@Kim: We certainly need to see what basis Viacom has for this claim; on the face of it, it doesn't seem to be justified, but we surely don't have all the information.

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...

Kale Menges
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This feels like very strong evidence that the bubble may be finally bursting on the music/rhythm game genre for this hardware generation.

Joe Tringali
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Well, adjustment could mean Viacom had something in the agreement that entitled them to get money back if the returns exceeded the reserve held.

Joe Tringali
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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.

Ian Fisch
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I wish the article would either explain what's going on or admit that the writer doesn't have a clue. I had to read the article 3 times before I realized there was no explanation as to WHY viacom thought they had a right to the money. Kindof an important detail wouldn't you say?

Poor writing.

Robert Grant Stanton Sr
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No actual rationale is required. It's Viacom. Sumner Redstone.

John Gordon
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I think expectations for the music genre were too high last year to begin with. Rock Band: The Beatles was compared to Guitar Hero 5. Is that a fair comparison for a game featuring one band? If you compare The Beatles game to the music games for Aerosmith or Metallica it did extremely well. I think the hype surronding the game was more disappointing than the actual sales of the game itself.

Douglas Gregory
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I'm wondering about the kind of precedent this would set for similar incentives in the future. Imagine you receive a bonus of $X for good performance one year. Now you can't spend or invest that money because at any time your patron might demand a portion of it back - so, have you really received a bonus? All you have obtained for certain is the privilege of paying a portion of your patron's income tax for that year. O_o

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.

Joe Tringali
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>I'm wondering about the kind of precedent this would set for similar incentives in the future. Imagine >you receive a bonus of $X for good performance one year...

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.

gstarr W
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The Beatles' license is bankrupting, correction, ruining the profitability of RB. EA made no money off of it, hence they are abandoning it. And apparently, Viacom didn't either. So, they are going to pass the pain onto Harmonix. No wonder Activision said "No" to the Beatles.

Robert Schmidt
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As great as the Beatles music was I don't think the instrumental components were as hard driving as you would want for Rock Band. Now if they were to come out with a Who Rock Band/Guitar Hero, I'd buy it.

Terry Matthes
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The install base has reached is maximum market dispersion. You would have to be silly to think that the hardware would continue to sell at the same rate.

Maurício Gomes
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What kind of shitty article is that here on Gamasutra? I read, re-read, and don't got it. I mean, why Viacom wants the money back?