Back to the Future: Part Three

November 30, 2007

A key point DFC Intelligence emphasizes on a regular basis is that the interactive entertainment business has a long and colorful history. Often the topics that are covered by the media, and have investors all in a lather, are cases of the old being new again. With the success of Nintendo and the explosion of PC entertainment on a worldwide basis, video games and interactive entertainment content are ‘hot.’ All of a sudden, everyone wants a piece of the action. Large media companies like Time Warner, Viacom and Disney are once again investing heavily in interactive entertainment. As large amounts of capital become available to game related companies it is worth looking at history to understand the potential impact this level of investment could have on the industry.

In the new DFC Intelligence report, Media Companies in the Video Game and Interactive Entertainment Industry, we take a look at the game-related history, licenses, strategy and investments of leading media companies like Viacom, Time Warner, Disney, News Corp, Sony and others. When discussing these large players, the first thing to note is that video games are one of the only mass market media forms that have not been dominated by conglomerates and large media companies. However, this is definitely not for lack of trying.

When DFC Intelligence started covering interactive entertainment back in the mid-1990s, the buzz was all about large companies investing in games, multimedia, virtual worlds, online services and the “information superhighway.” Companies like Viacom New Media, Disney Interactive, Dreamworks Interactive, Fox Interactive, Paramount Interactive, Simon & Schuster Interactive, MGM Interactive, Hasbro Interactive, Mattel Interactive and of course Time Warner Interactive, were all investing heavily in game divisions and their booths were always a major presence at the annual E3 shows of the 1990s. This was a time when AOL and telecoms like AT&T were making investments in online game ventures. Meanwhile companies like Activision, THQ, Take-Two Interactive, Ubisoft, Eidos, Midway, GT Interactive and Infogrames were small players that most observers felt would either disappear or at best be swallowed by the larger, diversified players. Even Electronic Arts was still a fairly small player. In 1994, EA almost merged with educational publisher Broderbund, in what, at the time, was designed pretty much as a merger of equals.

The 1990s was a time when billion dollar acquisitions were fairly routine. In February 1996, conglomerate CUC International bought educational/games publisher Davidson & Associates and PC game publisher Sierra On-Line for over a billion dollars each. The Learning Company bought up numerous game and educational software publishers before being acquired in 1998 by Mattel for a whopping $3.8 billion.

Despite all this investment activity, by the turn of the century the larger media companies had made almost a complete retreat from the game space, in most cases after losing substantial sums of money. Meanwhile, it was the small, non-diversified game companies that became the publishing giants of the early 21st century. Mattel ended up all but giving away The Learning Company after it nearly brought the company down. After mergers and a name change to Cendant, CUC International, ended up selling off Davidson and Sierra On-Line for $800 million (a fraction of the $2 billion+ originally paid) to what became Vivendi Universal. In the 2002-2003 timeframe, Vivendi Universal tried to sell off its game holdings to help pay-off debt, but could not find a buyer, even at bargain basement prices (a minor acquisition Davidson & Associates had made of small developer Blizzard Entertainment has proven to be the crown jewel value for VU Games). Viacom New Media, Dreamworks Interactive, Paramount Interactive, and almost all the other media company studios were either shut down or sold off. The media companies embarked on a safer strategy of licensing their intellectual property to dedicated game publishers like EA, Activision, THQ and others.

Clearly, this raises the question of why large media companies, with their vast resources and potential content synergies, have not been more successful at, not only in games, but interactive content in general. Of course, one reason media companies abandoned games in the late 1990s was their rush to the Internet. However, they by and large missed the boat in that arena as well. Google, Yahoo, Amazon, YouTube, MySpace, Facebook and others have become the new media powerhouses of the 21st century.

The track record of established media companies is to buy startups at the peak of their success for exorbitant prices and then watch the established user base collapse. Obviously, the best example is the 2000 merger of AOL and Time Warner (with AOL shareholders getting 55%). Historically when a company like Time Warner or Viacom says they plan to invest $1 billion in the video game market, investors should expect that they are planning a way to lose $1 billion.


In 2007 content has once again become king and for the third time in its thirty or so year history, large conglomerates are actively investing (or talking about investing) in video games. Of course, when looking at valuations of companies like Nintendo and Electronic Arts, it is clear why media companies feel a fairly urgent need to get into the game and interactive entertainment space (of course, this doesn’t include the valuations for Google, Yahoo etc). The question is have times changed in the last ten years so that a large media company could become a major force in terms of sales and market share?

DFC Intelligence believes that in today’s climate it will be a challenge for large companies to build a major leadership position in the interactive entertainment market . At least not without substantial heartache, blood shed and a willingness to do more than just write big checks to the hot startup of the moment. Most importantly, the larger media companies do not have as many advantages as one would think just from cursory glance at their sheer size and diversity. The key to success in the game industry has been about control of the distribution channel and the keen eye to buy small developers, distributors, tool providers etc at bargain prices. Furthermore, the game industry business model requires a strong international presence. Large media companies can be surprisingly focused on their own domestic market. For example, Viacom and Time Warner make about 75-85% of revenue from the U.S./Canada.

The large media company that has been very successful in the game business is of course, Sony. It is not often discussed, but one of Sony’s biggest advantages is one of the world’s best distribution networks that can push Sony products into retailers around the world. Many of the successful game publishers come from a distribution background. Take-Two Interactive and the now defunct GT Interactive (who helped open PC game distribution to Wal-mart and others) started as pure distributors. Ubisoft, Eidos and Infogrames were strong in European distribution. Electronic Arts has always focused on international distribution and Activision grew a major distribution business by snapping up several European distributors.

At this point in the game it becomes an expensive proposition to buy into the distribution business. However, building a distribution network is starting to look cheap compared to the cost of acquiring content developers. Acquisition prices are starting to soar to 1990s levels. In large part this is because established publishers once again have competition from well-capitalized players. The October 2007 announcement that Electronic Arts would buy VG Holdings (parent company of game developers Bioware and Pandemic Studios) for as much as $800 million is a sign of the new world. In the game space this is a whole lot of money to pay for a company with an established track record of releasing products that actually make money. Of course, EA is now bidding against the likes of Viacom, Time Warner, Disney and others so the days of bargain hunting may be over.

The most important point is that while large media companies may not capture a great deal of market share, their entry puts a great deal of pressure on the medium size publishers, that don’t have the capital of an Electronic Arts. However, for most small companies and developers the media companies will represent a welcome cash infusion that can provide investors with a clear exit strategy. If the media companies are serious about being in the game business they will need all kinds of help from developers, publishers, distributors, technology providers and other established members of the interactive entertainment food chain.

Even as bidding on developers soars, and companies like Time Warner threaten to take away licenses to valuable IP like Harry Potter, Electronic Arts is one company already trying to figure out how to work with big media. In late 2006, Viacom’s MTV Networks paid about $175 million for Harmonix, a developer of music games, most notably Activision’s Guitar Hero. Much of this purchase price was for Harmonix’s big new product Rock Band. However, instead of going it alone Viacom is partnering with Electronic Arts to bring Rock Band to market.

In the late 1990s, a common question in the investment banking community was: when is Time Warner going to buy Electronic Arts. Right now the way valuations are going in the interactive entertainment space it can be hard to distinguish between the potential acquirer and acquiree.


Key Viacom Game Acquisitions: 2005-2007
Figures for purchase prices are estimates from publicly reported information that may include stock options, debt assumption, bonuses and incentives and other factors that may result in significant differences in the actual price. This list only includes select acquisitions and is not comprehensive.

Key Electronic Arts Acquisitions: 1997-2007
Figures for purchase prices are estimates from publicly reported information that may include stock options, debt assumption, bonuses and incentives and other factors that may result in significant differences in the actual price. This list only includes select acquisitions and is not comprehensive.

There is a great deal of excitement around the video game market, however in many ways the current market conditions favor lean startups and established players. It has become a business about international markets, distribution channels, both physical and digital, niche game genres, technology and partnership opportunities. Even established market leaders are having to run at a constant pace just to keep up. Microsoft is one company that has spent well over a decade and billions of dollars to try and become a leader in video games. It is hard to imagine other large companies that will have that fortitude.

In addition to the new report on media companies and the video game space, the monthly DFC Dossier reports provide more detailed continuing coverage of investment in the interactive entertainment space. In the November 2007 DFC Dossier there is a profile of Disney Interactive and a look at investing in virtual worlds. If you would like to see a copy of the latest DFC Dossier contact Ozzie Monge at

DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry.

A sample of reports on the video game and PC game market include:

DFC Dossier The DFC Dossier is published ten times a year and provides subscribers with regular updates and analysis of the latest market trends.

The Online Game Market This 800 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles.

The Market for Portable Video Games This 185 contains complete five-year forecasts by platform, a look at portable game software, portable game online trends, and business models and revenue expectations for game publishers.

Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Complete five-year forecasts for all individual console and portable game platforms by region (Asia, Europe, North America, rest of world)) through 2012. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as portable game systems.

The Business of Computer and Video Games This report includes an historical analysis, overview of individual hardware system, top-selling games, game genres, consumer demographics, business models, retailer profiles, marketing elements and case studies, industry trends.

Market Leaders in the Video Game and Interactive Entertainment Industry This 750+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 25-50 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company.

Overview of the Video Game and Interactive Entertainment Industry This report is designed to provide an overview of some of the key trends in the video game and interactive entertainment. The focus is on highlights from the forecasts and analysis of trends, game genres and business issues found in DFC reports.

The Game Market in China This 350 page report contains a complete look at the rapidly growing Chinese game market, including forecasts to 2010, government regulations, market entry strategies, business models, distribution options, game genres and numerous company profiles and case studies.



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