Geek Gestalt

In the newest version of the Guitar Hero franchise, Guitar Hero 5, as many as four players can all play guitar at the same time, instead of just two. Further, any combination of instruments is now possible.

(Credit: Activision Blizzard)

SAN FRANCISCO--The first couple of weeks of September are going to be a banner time for music video games. On September 9 (09/09/09), the much-anticipated The Beatles: Rock Band will hit store shelves, just eight days after Guitar Hero 5 gets its chance to rock living rooms everywhere.

With the Beatles game, it's easy to imagine long lines and huge sales figures. After all, this will be the first time that any of the recent slew of music-oriented video games will feature any Beatles songs, let alone dozens of them.

But with Guitar Hero 5 (see video below)--has so much time gone by already that there could even be five Guitar Hero releases?--one has to work just a little bit harder to envision the big bucks that its publisher, Activision Blizzard, surely is hoping to bring in.

Still, the guys at Neversoft, the game's developer, have proven time and again that they know what they're doing. The Guitar Hero franchise has produced hundreds upon hundreds of millions of dollars in revenue and created a dynamic in which people everywhere are now comfortable picking up and jamming away on a guitar, albeit a plastic one with buttons instead of strings.

And with that in mind, one has to give the Neversoft team the benefit of the doubt for their new game, which will be released for all the major video game platforms.

On Thursday, I stopped in at a Guitar Hero press event here and had the chance to speak with two of the executives most responsible for the new game: Brian Bright, the project director at Neversoft for Guitar Hero 5, and Tim Riley, who oversees the Guitar Hero franchise's music licensing.

Among the big-name rock stars who appear in Guitar Hero 5 as characters is Carlos Santana.

(Credit: Activision Blizzard)

One of the things I was most interested in was the rationale for a new Guitar Hero game. To be sure, game companies like Activision Blizzard, Electronic Arts, and Take-Two have a mandate to generate massive revenues, and so franchises like Guitar Hero are tried and true in that regard. But in spite of that, each new edition of a franchise game has to have something significant to offer to entice enough customers to earn its keep.

To hear Bright tell it, the best rationale for Guitar Hero--besides its 85 new songs by 83 artists--is its "Party Play" mode in which players can jump in or out of songs any time they please, all with the click of a single button.

What that means, Bright added, is that Guitar Hero 5 will offer a potentially broad new audience an entirely new level of "accessibility," in particular because in the previous versions, many people playing for the first time would have found themselves needing a little hand-holding to get started. Now, he said, that's no longer the case, and players new and old will be able to easily and quickly go right into rocking out.

Another important Guitar Hero 5 innovation, Bright said, is an "any instrument" selection that will, for the first time, allow more than two people to play guitar at the same time rather than someone in a foursome having to play drums and someone having to sing. And even if there isn't a mad rush to grab a guitar, this features means that any combination of instruments is, for the first time, possible, whether a group is playing cooperatively or competitively.

Downloadable content
Given that many players of the game's previous iteration--Guitar Hero: World Tour--likely paid to download songs, Activision is making it possible to port most of those songs to Guitar Hero 5. The company said 152 of the 158 downloadable songs from the earlier game will be compatible with the new one, though users will have to pay a "nominal re-licensing fee," the amount of which the company hasn't publicly spelled out yet.

Among the innovations in Guitar Hero 5 is the ability for Xbox players to use their Xbox Live avatars.

(Credit: Activision Blizzard)

And that means that with the 85 songs Guitar Hero 5 comes with, plus new downloadable songs, the new game's players can have set lists of potentially hundreds of songs, Bright said.

I wanted to know a little bit more about how Activision persuades musicians to allow their songs to be included in Guitar Hero, especially after learning how the Beatles were won over for the forthcoming Rock Band game.

Riley, the publisher's music licensing specialist, said that as the Guitar Hero franchise becomes better-known, he and his team have an easier time of it. In part, that's because "the larger the game gets, the more known it gets within the (music) industry (and) with the artists themselves."

And that means that Riley and his team have now had the chance to get musicians like Arctic Monkeys and Elliott Smith--whom they've never worked with before--to contribute songs to the game. Indeed, he said Guitar Hero 5 features songs from nearly 20 artists who have never allowed their music to be in a video game before.

Of course, it doesn't happen overnight. In the case of Arctic Monkeys, Riley explained, it took multiple visits with the band to show them demos and explain what the Guitar Hero franchise is all about to get permission.

One big factor, Riley added, was being able to assure artists that their music is "safe" in Guitar Hero, meaning that users won't be able to easily pirate the songs from the game.

At the same time, he explained that for a lot of musicians, games like this are now seen as an attractive way to get their music in front of large audiences, particularly because the record industry is becoming more and more notorious for doing a poor job of helping distribute new music.

"Just by having a song in the game," Riley said, "kids become familiar with the song, or the artist, and will go out and buy (it) or go out and purchase more music from that artist."

Electronic Arts is not alone in its interest in buying Grand Theft Auto publisher Take-Two, according to a report in The Wall Street Journal (subscription required to read entire article).

SEC filings show that Take-Two says it has received other offers, but has spurned those as well as the original $2 billion offer EA made last Friday and announced last Sunday, the Journal reports.

EA issued a public statement on Sunday saying it had made an earlier offer to Take-Two that was rejected and that it was boosting the per-share price it was willing to pay to make the deal worth $2 billion. But Take-Two quickly issued its own announcement, saying it thought EA's offer was too small and that it would prefer to wait to have any negotiations with anyone until after the April 29 release of Grand Theft Auto IV, which is expected to be a hit.

For its part, EA has said it wanted to get a deal done before the game's release. It is also evident that EA's interest in Take-Two is at least partly in response to the recent acquisition of Activision by Vivendi, a marriage that could potentially turn the resulting video game giant, to be known as Activision Blizzard, into the industry's largest company.

Imagine the game industry dominated by two giants.

That's what could happen if Electronic Arts succeeds in its $2 billion attempt to grab Grand Theft Auto publisher Take-Two Interactive and Activision's planned merger with Blizzard goes through.

As in so many other industries, an EA/Take-Two merger would indicate massive consolidation, especially in the wake of the December announcement that media giant Vivendi was buying Activision to become Activision Blizzard. But gamers probably shouldn't worry that an industry pyramid dominated by EA and Activision will mean less innovation.

(Credit: Electronic Arts)

After all, even with a wide gap between the No. 1 and No. 2 companies and everyone else, it's important to remember that there would still be plenty of important and respected publishers: Disney, Ubisoft, THQ, Midway, and Infogrames, to name a few, not to mention Microsoft, Sony, and Nintendo.

Still, a successful EA takeover of Take-Two would have far-reaching effects.

"I think we're seeing further consolidation of companies capable of publishing and marketing AAA, expensive-to-develop games, which is to say, those that can cost $20 million or more to create, and as much again to market," said Simon Carless, publisher of both Game Developer magazine and Gamasutra.com. "However, there's still plenty of opportunity for diversity for smaller companies."

One reason Carless thinks small developers can maintain a valuable presence in the industry is EA itself. He points to EA Partners, Electronic Arts' internal development partnership division, as a publishing resource for small developers that have good games in the pipeline.

Additionally, he said, "They can even distribute digitally, which may not require using a publisher at all....So I think this shows that the next-gen retail publishing giants are still consolidating, but I don't believe it is bad for the future of gaming, because there are so many ways to distribute and play games. And digital distribution is starting to create somewhat of a more level playing field."

At the time the Vivendi-Activision merger was announced, it seemed the company could become the world's largest video game publisher, possibly eclipsing EA, which had held that No. 1 position for many years. It also was clear EA would have to do something big if it wanted to keep the undisputed top spot.

Whether the proposed Take-Two acquisition is a direct result of that dynamic--EA said in a conference call Monday morning that it had been talking to Take-Two's management for nearly a year, though it hadn't made any formal moves until at least December--if it goes through, the industry will be a bit top-heavy.

Still, there's no doubt that EA reclaiming its top-dog position does pose some danger to the industry, at least in the minds of those who have watched the company's performance and behavior over the last few years.

"The biggest concern gamers probably have on their mind is that EA has this image of...taking a (title) or franchise and running it into the ground," said Brian Crescente, editor of the popular video game blog, Kotaku.com. "For a number of years, any property EA got its hand on would eventually be burnt out."

But Crescente added that he thinks EA's 2007 reorganization, in which the company split into four distinct labels--EA Sports, EA Games, The Sims, and EA Casual Games--has begun to erode that dynamic.

"I think the whole movement toward the labels initiative that they announced is turning things around for them," Crescente said. "It's probably too early to tell if it's anything more than them paying lip service."

From the standpoint of the overall video game marketplace, Crescente did allow that the current environment--especially if either EA or some other major player, like Microsoft, buys Take-Two--is scary for small developers worrying if they can compete with such behemoths.

"This is a concern, and it's the continuation of a trend that's been happening for at least a year, if not longer," he said. "When you saw companies like Bioware and Pandemic getting bought up, it's pretty frightening if you're a developer."

And even if neither EA nor anyone else buys Take-Two, Crescente said the big companies are still going to be pushing a consolidation agenda. But that's not necessarily a bad thing.

"I think it's inevitable that these smaller companies are going to get bought out," he said. "What makes me feel better about it is that companies like EA and Microsoft are going out of their way to try and get people to do independent game development. At least we're seeing that they understand the importance of not just being one big faceless company."

More EA takeovers ahead?
And to be sure, EA is trying to lay the groundwork for its own continued gobbling up of small competitors, as well as by other big names.

"There's a long history of companies in position 4, 5, 6, 7," EA CEO John Riccitiello said during his conference call Monday morning. "This includes Infogrames, Midway, Acclaim, Giant Interactive....Companies that have strong cash flow positive experience every couple of years and lean times in between have had a very hard time surviving in this business and making the investment in infrastructure that EA's been able to make. They'll be acquired by somebody."

And there's no reason to doubt that he's right, given that there continue to be bigger and bigger deals in the industry and that consolidation seems to be the way of just about every kind of business.

Indeed, The New York Times suggested Monday morning that another big deal to expect in the weeks ahead might be a Disney purchase of THQ Interactive--publisher of such games as the WWE: SmackDown vs. Raw! wrestling games.

In fact, THQ's stock was up 9.53 percent Monday on news of EA's Take-Two takeover bid.

Another company whose stock was way up Monday was Take-Two. Its stock actually rose above EA's $26 a share, closing at $26.89, up 54.9 percent on the day.

"I think (that) shows two things," Crescente said. "One, shareholders, think (the EA bid) is great news. And it also shows that they think it's going to happen."

Electronic Arts' conference call explained just a bit more about its takeover bid for Take-Two Interactive Software, maker of the Grand Theft Auto game franchise.

(Credit: Take-Two's Rockstar Games division)

I'm not usually one to get up for something happening at 5 a.m. PT, but in the case of this morning's Electronic Arts conference call to discuss its proposed $2 billion takeover bid of Take-Two Interactive Software, I made an exception.

That's because I assumed that EA might provide some new piece of information that would materially enhance details of the game maker's Sunday bid announcement.

My mistake.

In reality, the EA conference call, which lasted nearly an hour, was largely a rehashing of the information the company published in its Sunday press release, accentuated by some more detail on the financial aspects of the deal--in particular the $26 a share it is offering Take-Two shareholders--as well as some thoughts by EA's CEO, John Riccitiello, on timing.

Most notably, though, EA did not address the question I was most curious about: the necessity of making some big acquisition to maintain its top-dog spot in the video game-publishing industry after Vivendi's announced mammoth purchase of Activision in December.

And while all the questions asked on the call were by financial analysts interested more in the bottom-line reasoning for the takeover bid, I was a little surprised that none asked the Activision question. I would have asked it myself, but reporters are never allowed--in my experience--to ask questions on this kind of conference call.

Riccitiello did make one comment as to the timing of the acquisition offer that, on its face, would suggest that EA's interest in Take-Two, publishers of the hugely popular Grand Theft Auto franchise, was not strictly based on the need to maintain the No. 1 position.

He pointed out that he had been in discussions with Take-Two management last year and that he had been interested in making a deal like this happen as early as last spring but decided to wait to make any kind of offer until the completion of the EA reorganization it announced last June, in which it split the company into four distinct labels: The Sims, EA Sports, EA Games, and EA Casual Entertainment.

If true, that would be an interesting piece of information.

"The Activision-Vivendi transaction provides some competitive incentive for EA to add scale and bolster its product portfolio," Colin Sebastian, a video game industry analyst with Lazard Capital Markets, said in an e-mail to me shortly after the EA call, "though it also appears in this case that EA and Take-Two had discussions long before the Activision announcement."

Fair enough.

Riccitiello talked a little bit about the timing of the actual offer, saying he and Take-Two Chairman Strauss Zelnick had had discussions about a potential merger, but that in January, Take-Two rejected EA's interest.

The EA chief executive also said he wanted to make sure, in his company's timing of its Take-Two bid, that it didn't mess with the creative process surrounding Take-Two's most valuable asset, the forthcoming Grand Theft Auto IV, which is scheduled to ship April 29.

"We...wanted to give a wide berth to GTA," Riccitiello said. "We didn't want, in any way, shape, or form, to get in the way...We wanted to see it come out on time so we get our shot at it."

That certainly makes sense, since that game, the first major follow-up to Grand Theft Auto: San Andreas, one of the best-selling console games of all time, is very likely to be a huge financial success.

And in fact, one of the most interesting things Riccitiello said on the call had a lot to do with the specific tenor of the content in the GTA franchise.

Those games are rated "M" by the Entertainment Software Rating Board, meaning that they are limited to being sold to those ages 17 and older. Never mind the "Hot Coffee" scandal of 2005, in which Take-Two was accused of hiding sexual content in its code, which ultimately made the game "AO," or adults-only.

The deal would "advance us particularly in our (market) segment shares," Riccitiello said at one point in the call. "We're notably (unpositioned) in M-rated content. This (would) give us the best M-rated content" in the business.

EA's chief financial officer, Warren Jenson, also gave a little more specific insight into the timing of EA's actual acquisition bid.

He echoed Riccitiello in saying EA and Take-Two had had conversations for about a year, and that in January, Take-Two said it would decline to negotiate a deal.

Jenson added that on February 6, EA made a formal proposal of $25 a share, which Take-Two officially rejected on February 15.

On February 19, EA upped its bid to the current $26 a share.

"It is our intention to make this a friendly deal," Jenson said. "Our next step is to sit down with Take-Two's management and get a deal done."

But he also made it clear that the company's wallet will have only $2 billion in it to offer Take-Two for a short time.

"The longer we wait, the value will disappear," Jenson said.

Riccitiello expanded on that thought a little later in the call.

"We actually think this is a depreciating asset from this point forward," Riccitiello said, alluding to the theory that once GTA IV is published, Take-Two will have to get by on the sales of its weaker games and that EA won't be there to rescue it if Take-Two doesn't play ball.

The forthcoming 'Grand Theft Auto IV,' which is scheduled to be released on April 29, would be a feather in Electronic Arts' cap if it can successfully buy Take-Two.

(Credit: Rockstar Games)

In a startling bit of news, Electronic Arts announced Sunday morning that it has launched an uninvited bid to buy Grand Theft Auto video game franchise publisher Take-Two Interactive Software for $26 a share, or what could be a $2 billion deal.

And while EA, in its press release, did not make any reference to Vivendi's December agreement to purchase Activision, there can be no doubt that this is the response EA had to make to keep its spot as the undisputed heavyweight champion of the video games business.

The announcement comes on the heels of what appears to be a spurned attempt at a friendly takeover of Take-Two at $25 a share. The announcement release included the text of a letter sent to Take-Two Executive Chairman Strauss Zelnick by EA CEO John Riccitiello.

"Dear Strauss," Riccitiello wrote in the February 19 letter, "I am disappointed that you have rejected Electronic Arts' $25 per share cash offer to acquire Take-Two Interactive Software...and declined to engage in the friendly negotiations we proposed. We continue to believe that an acquisition of Take-Two by EA is in the best interests of your shareholders, employees and other constituents, and we remain interested in acquiring Take-Two. So to further demonstrate our seriousness and encourage you to move forward now, I am writing to increase EA's offer to acquire all of the outstanding shares of Take-Two to $26 per share in cash."

Riccitiello's offer asserted that it would expire on February 22, which was Friday. The announcement and the publication of the February 19 letter appears to be a strategic--and possibly a legally required--move aimed at putting shareholder pressure on Take-Two to accept the offer.

EA will hold a conference call Monday morning to discuss the Take-Two offer.

What seems certain is that EA's board felt that it had to do something to counter Vivendi's Activision purchase, a move that would have potentially made that combined company, known as Activision Blizzard--since Vivendi's biggest video game holdings was World of Warcraft publisher Blizzard Entertainment--the world's largest video game publisher.

For years, EA has held that top spot and has prided itself on being No. 1. So, if anyone is surprised that EA has now made a move that would likely re-establish its king-of-the-hill position, they haven't been paying attention.

Take-Two, of course, is an interesting choice as the potential acquisition to cement that position. The company is big, of course, and its flagship Grand Theft Auto franchise is worth huge money. And that's particularly true because the latest GTA title, Grand Theft Auto IV, is scheduled to be released on April 29 and will surely do gigantic business. EA would certainly like to get its hand on that revenue.

But Take-Two has also been the subject of numerous regulatory slaps-on-the-hand, most notably due to the sexual content hidden in its monstrously-popular Grand Theft Auto: San Andreas. The so-called "Hot Coffee" scandal in 2005 led to that game being removed from store shelves, and to oratorical chest thumping from the likes of Sen. Hillary Clinton about the destructive nature of video games.

Still, big bucks is what it's all about, and despite its problems, Take-Two is still around, and, as noted above, is about to reap the windfall of the forthcoming GTA IV release. Presumably, EA could temper any criticisms of buying a controversial company like Take-Two by promising more oversight and moral control, though one wonders how much control a Redwood Shores, Calif., company could really exercise over a fiercely independent New York company like the $1.29 billion Take-Two.

This sounds like a battle that will be played out in the press--hi, there, I'll be your messenger for this battle--and could force EA to raise its offer even more. Take-Two, unlike Yahoo in the case of Microsoft's bid to buy it, is in pretty good shape, with its stock, at about $17 a share, in the mid-range of a yearly range of $11.82 to $24.80.

Of course, these types of battles being what they are, EA's publication of its letter and its offer puts pressure on Take-Two to accept what is a premium over its share price. The alternative, EA hinted at, is shareholder lawsuits against Take-Two's management if they choose not to accept that premium.

"There can be no certainty that in the future EA or any other buyer would pay the same high premium we are offering today," Riccitiello wrote in his February 19 letter. "We want to work with you and your team to complete the transaction in time to begin realizing its significant marketplace benefits in advance of this year's holiday selling season."

One might think, as I do, that what EA is really saying with that statement is that it wants to be the owner when Grand Theft Auto IV is released, the green starts rolling in and Take-Two's stock skyrockets.

But Riccitiello suggested he thinks that Wall Street has already taken that revenue into account.

"We believe Take-Two's current share price already reflects investor expectations for a strong release of GTA IV as well as the longer-term issues that Take-Two faces," the EA CEO wrote. "Once GTA IV ships, Take-Two will again be dependent on less-popular titles and face increasing challenges to compete with larger and better-capitalized competitors."

Like, um, EA, for example.

And, to be sure, there can be no doubt that EA does offer Take-Two a massive distribution and marketing infrastructure that could certainly boost the performance of Grand Theft Auto and Take-Two's other titles.

So, this looks to be the big news in the video game industry for the next few days, at least. I can't claim to have enough insight into the management of either company to be able to predict what Take-Two will ultimately decide to do. That's in part because Take-Two is famously tight-lipped about its business decisions.

But you can be I'll be watching closely. So stay tuned.