“The decision to exit the console gaming business reflects our strategy of focusing entirely on what we do best: Make great branded entertainment content and deliver it through a variety of platforms,” said the rep.

The news is yet another ominous sign for the music-game business, which exploded seemingly overnight in 2005 with the release of Guitar Hero. The genre boomed from niche market to multibillion-dollar industry, with Activision controlling the Guitar Hero brand and Harmonix providing competition and innovation in the form of Rock Band series, which over the years introduced drums, vocals, keyboards and a realistic Pro guitar mode.

But sales have been in free fall since the dizzying heights of 2008, with Guitar Hero: Warriors of Rock moving only 86,000 copies in its first week of sales and analysts like Bill Harris, who blogs at Dubious Quality, dubious about the potential of Rock Band 3.

“I think (Viacom’s planned sale of Harmonix) means the plastic instrument business is dead,” said Harris, who predicted we will never see another major Guitar Hero or Rock Band release. “When the NPD numbers get announced (Nov. 16), Rock Band 3 will have been terrible versus expectations.”

Harris said the incompatibility of new Rock Band downloadable songs with previous games has painted Harmonix into a corner. “Unless a shitload of people buy Rock Band 3, making DLC is going to lose money,” he said. “It’s like they’ve pushed all their chips in without seeing their cards or the flop.”

Analyst Michael Pachter of Wedbush Morgan Securities said Viacom’s decision was probably driven by flagging sales.

“It’s likely that Viacom saw a lot lower sales level than they expected when they bought Harmonix,” said
Pachter. He said videogame megapublishers Activision and Electronic Arts, which distributes Rock Band titles, might be up to purchase Harmonix. Activision, maker of Guitar Hero, “has more to gain by acquiring a direct competitor,” Pachter said.

Viacom acquired Harmonix for $175 million in 2006, placing it under its MTV Games publishing label.

It said Thursday that it is in discussions with “several potential buyers” and that it will continue to support the music-game business until Harmonix is sold off.

“This morning’s announcement does not affect the ongoing work at the studio as we continue to support our existing franchises, Rock Band and Dance Central,” said Harmonix developer John Drake in a statement on the company’s official forums.

The financial results released by Viacom don’t paint a rosy picture of the Rock Band business.

To use the popular Internet acronym: IANAA (I am not an accountant) but there does seem to be some telling info in the financial statement linked above. Viacom mentioned that Harmonix has been shifted to the “discontinued operations” section of its balance sheet. That section shows a $37 million loss for the first nine months of 2009, and a $321 million loss for the first nine months of 2010.

We don’t know what other operations are in that category. But if you go back to last quarter’s financial statement, you can see that the “discontinued operations” segment sans Harmonix was nonexistent in 2009 and turning a tiny, single-digit profit in 2010.

Thus far in calendar year 2010, the balance sheet seems to show that Harmonix has been a $300 million liability for Viacom. And it doesn’t look like Viacom believes in the long-term future of music games. With any luck, the company will find a buyer that can help Harmonix grow, but it’s hard to imagine a better partner in the music biz than MTV.

Image courtesy Harmonix. This story has been updated since its original publication with analyst quotes.

See Also:

• As Sales Collapse, Music Games Gamble on Real Instruments
• Music Games Aren't Dead, Just Waiting to Be Reborn
• Harmonix Teases Keyboards in Rock Band 3

Authors: Chris Kohler

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