Why two big companies are teaming up

LIKE the instruction manuals that used to accompany the industry’s wares, the deal looks a little complicated. On Sunday December 2nd Vivendi, a French entertainment conglomerate, announced that it will merge its video-games division with a subsidiary of Activision, an American counterpart. At the same time it will buy $1.7 billion of new shares in the combined group—Activision Blizzard—implying a value of $18.9 billion for the new company. Shortly after the deal closes, Activision Blizzard will launch a $4 billion buyback of its shares. The upshot will be, if the buyback is fully taken up, that Vivendi gets a 68% controlling stake in the new firm.
Game producers now eschew long manuals, preferring to make games easier to play but harder to master. Vivendi expects that mastering the games industry will be possible, once the complications of the deal’s structure are out of the way. That is a reasonable assumption.



Blizzard Entertainment is the part of Vivendi Games that is responsible for World of Warcraft, a “massive multi-player online role-playing game” to give it the game-speak description. Some 9.3m players subscribe to the biggest web-based game around the world. It accounted for a big chunk of Vivendi’s €804m ($1.1 billion) of games revenues last year. Nearly half that sum was profit. All in all it is an impressive number.
Activision will also be pleased that it has teamed up with Vivendi. It too has done well out of gaming, but of the console variety. Unlike Warcraft, which is played exclusively online, Activision develops games that can be played on the consoles built by Microsoft, Sony and Nintendo. Bringing the two companies together will create a force with a foot in both markets and a firm that will leapfrog EA Games, the world’s current leading games-software company, to become the industry number one, at least in terms of revenue.
The tie-up makes sense because both console gaming and its online counterpart are booming businesses that are set to keep on growing. In 2004 the industry saw its revenues overtake those generated by film box-office receipts. This year it is expected to outstrip the music business with revenues of $37.5 billion, according to PricewaterhouseCoopers (PWC), a consultancy. And the games industry is forecast to expand by over 9% annually over the next few years to become worth $48.9 billion by 2011.
Fancy new consoles—Microsoft’s Xbox 360, Sony’s PlayStation 3 and the Nintendo Wii—require more sophisticated games. Moreover, the rising expectations of gamers for better graphics and gameplay has pushed up the cost of developing new games. Activision Blizzard will be in a better position to finance these and to attract talented developers. Vivendi’s other media businesses could also come in handy. Guitar Hero, one Activision’s biggest hits, may benefit from access to the back catalogue of Vivendi’s Universal Music.
Activision would have found it hard to break into the online gaming world alone. And this is the part of the market that is likely to grow the quickest. In America PWC reckons that revenue from online gaming will increase from $1.1 billion last year to $2.7 billion by 2011 and that on wireless gaming earnings will double to around $1 billion, driven by an increase of in-game advertising.
Vivendi’s gamble is that this segment of the entertainment industry will provide it with the rapid growth that it has found hard to come by at its other old-fashioned media assets. Universal, while faring better than many music companies, is still struggling. Vivendi’s mobile-phone operations and Canal+, its cable-TV business, are growing, if somewhat slowly. At the moment games account for just 5% of Vivendi’s revenues. This deal with Activision should allow the French firm to add considerably to that score.