EPTIn Pixar's coming movie "Toy Story 3," Woody the cowboy and his toy-box friends are dumped in a day-care center after their owner, Andy, leaves for college.
+ Show Spoiler +
n Pixar's coming movie "Toy Story 3," Woody the cowboy and his toy-box friends are dumped in a day-care center after their owner, Andy, leaves for college.
Behind the scenes, Pixar's longtime videogame partner THQ Inc., which made the games based on the Walt Disney Co. studio's "Ratatouille" and "Cars" movies, has been having abandonment issues of its own. Disney and its Pixar animation studio recently turned down a pitch from the Agoura Hills, Calif.-based publisher to create the game version of "Toy Story 3," opting instead to make it in-house.
With renewed zeal, traditional media companies have begun building their own videogame businesses again. For years, they outsourced development of games based on their television shows and movies in licensing deals with big games publishers. Now, the media companies want a bigger piece of the fast-expanding games business for themselves.
They see the videogame business as an opportunity for significant growth, especially compared to their more mature, traditional businesses such as television and movies. Box office revenue inched 4.0% higher last year, in large part because of ticket price increases, while home-video sales declined 3.2%, according to Adams Media Research. In contrast, videogames are the fastest growing sector of entertainment, with sales in the U.S. rising 34% last year to $8.64 billion, according to NPD Group Inc.
"The only growth business now and for the foreseeable future is interactive entertainment," says Strauss Zelnick, chairman of Take-Two Interactive Software Inc., the New York-based publisher of the Grand Theft Auto series of games, and a former movie-studio executive.
Disney is stepping up its budget for game development this year to more than $180 million and plans to increase it to $350 million annually within five years. Viacom Inc., which had a big holiday hit with its Rock Band music game, has earmarked $500 million to building its games business over two years. And Time Warner Inc. recently joined forces with a state-controlled company in Abu Dhabi to create a $500 million pool for games development -- a funding technique the industry may see more of.
It isn't clear yet whether the media companies have the stamina to become serious competitors to heavyweight game publishers, which have broad distribution networks for getting games on store shelves and employ the top game-making talent, much of which will be assembled in San Francisco this week for a big game industry conference.
Media companies have stumbled in past efforts to do their own game-development. And like all hit-driven businesses, making games is risky, especially those that aren't based on movies and TV shows -- a category the media companies are also pushing into.
"We just started a marathon here," says Mika Salmi, president of global digital media at Viacom's MTV Networks.
Media companies including Viacom, Disney and Time Warner invested heavily in making games throughout the 1990s, only to retrench because their games sold poorly. It turned out the creative skills involved in making movies weren't nearly as useful as the technical know-how and single-minded focus of games companies. So the media companies began to license their movie properties to game companies such as Electronic Arts Inc, Activision Inc. and THQ.
Then the media companies were irked when some games based on movies gained a reputation for poor quality. Publishers, for their part, complained about time pressures caused by the need to complete games in time to coincide with theatrical releases of movies. Studios watched with discomfort as game makers reaped big profits from titles like EA's "Harry Potter" and "Lord of the Rings," based on the Time Warner movies.
Resolved to take another shot at building their own games businesses, the media companies have more recently considered acquiring big publishers such as EA or Activision to kick-start their ambitions, but the price/earnings multiples these standalone companies have traded at has been too high.
One particular ghost haunts their thinking: In the 1970s, Warner Communications Inc. made an early venture into videogames with the acquisition of Atari, a deal that nearly bankrupted the company. More recently, Viacom Chairman Sumner Redstone made a series of personal investments that gave him control of Midway Games Inc. and later turned sour.
It could be tough for the media companies to prosper as mid-level players, particularly given Vivendi SA's recent deal to merge its games division with Activision. If the deal goes through later this year, as expected, it will create a new powerhouse with a combined market value of more than $19 billion. Even as they do more games in-house, media companies are still likely to continue licensing some movie properties to big outside developers , especially when they need games in local languages and playable on a broad array of devices.
So far, the media companies have focused on building their games businesses in-house and making smaller acquisitions, such as the recent Warner Bros. deal to buy TT Games, maker of the popular Lego Star Wars games. Kevin Tsujihara, president of Time Warner's Warner Bros. Home Entertainment Group, says media companies have one big advantage: expertise in battling for shelf space in their home-video distribution operations, which they can call on to sell games.
Despite their modest size, acquisitions have succeeded in boosting media companies' gaming credibility. Viacom's $175 million acquisition of Harmonix Music Systems Inc., the developer behind Rock Band, which went head-to-head with Activision's Guitar Hero franchise over the holidays. Viacom Chief Executive Philippe Dauman says Viacom plans to spin out Rock Band into a "multi-year franchise." Still, Rock Band's success is due in part to the muscle of EA, which distributed the game.
Disney Interactive Studios, which employs 800, has acquired and launched five small studios in the past three years, including the Austin, Texas-based Junction Point Studios last summer. Within two years, Disney aims to self-publish 80% to 90% of its games.
"Our ambition is not to be the largest videogame publisher, but to be a leading publisher of high-quality games, which we feel we've made great strides in achieving over the last few years," said Disney Interactive Studios chief Graham Hopper. He says there is still a place for outsourcing. For instance, Disney tapped a studio in Canada that had better technology to develop a sing-along game based on its "High School Musical" movies. Disney still took a bigger slice of the revenue than it would have done under an old-style licensing deal because it published the title itself.
When THQ made its pitch for "Toy Story 3," it was widely expected to get the contract because it has made games based on Pixar's last four movies, and is making games for some of its other coming movies. But at Pixar's campus in Emeryville, Calif., it found itself competing with teams from Disney Interactive Studios, bolstered by recently acquired games developers.
Pixar co-founder John Lasseter, now Disney's head of animation, opted for the in-house pitch. Brian Farrell, the chief executive of THQ, said, "We would have loved to keep the business, but when you see a company like Disney scaling up we weren't surprised they went internal with it."
Still, Mr. Farrell says media companies have tried game development many times over the course of his nearly two-decade career in the industry, with minimal success. "I've seen this before and the jury is still out," he says.
