Activision pays $42 million to Call of Duty plaintiffs

Days before it is expected to go to trial for a $1-billion lawsuit on its Call of Duty franchise, Activision Blizzard Inc. cut a $42-million check to several dozen game developers who are suing the company.

The 40 developers, led by Todd Alderman, alleged that Activision failed to pay them royalties for their work on Call of Duty: Modern Warfare 2, which launched in November 2009 and has garnered more than $1 billion in revenue for the Santa Monica game publisher.

The payment, intended to compensate the developers for royalties accumulated through the first three months of the game's launch, is in addition to the $22-million "launch bonus" that the company has paid the plaintiffs, bringing the total to $64 million. The payments do not constitute a settlement of the lawsuit.

Attorneys for the developers said Activision's payment doesn't begin to cover what the developers are owed under contracts.

"This is a fraction of the damages and bonuses that they have earned," said Alan Rader, who represents the 40 developers. He said his clients are unmoved by the last-minute payment. "It changes nothing."

Activision declined to comment on the matter.

Activision also faces a separate lawsuit from two lead developers of Modern Warfare 2, Jason West and Vincent Zampella, who claim that the company improperly fired them in 2010 and withheld hundreds of millions of dollars in royalties for the blockbuster Call of Duty franchise that they helped create.

"Forty-two million dollars doesn't buy you a time machine that lets you go back and erase all your bad conduct," said Robert Schwartz, who represents West and Zampella.

The trial is set to open May 29, but Activision is expected to request a 30-day postponement Tuesday so its new trial lawyer, Beth Wilkinson, can get up to speed on the case. Activision hired Wilkinson last week. She is known for delivering the closing arguments that led to the death sentence for Oklahoma bomber Timothy McVeigh.

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Screenshot of Call of Duty: Modern Warfare 2 courtesy of Infinity Ward / Activision Blizzard. 

Activision calls in legal heavy artillery for Call of Duty trial

Activision Blizzard Inc. has called in the legal equivalent of a Special Ops agent -- Beth Wilkinson, a former assistant U.S. attorney who delivered the closing arguments that led to the death sentence for Timothy McVeigh.

The Santa Monica games publisher, in gearing up for its lawsuit against the original developers of the multibillion-dollar Call of Duty franchise, selected Wilkinson as its trial attorney just weeks before the case is set to go before a jury on May 29.

Activision's lead counsel on the case, Steven Marenberg with Irell & Manella in Century City, will remain on the legal team. Activision and Marenberg declined to comment.

Wilkinson, who is known for her skills as a formidable prosecutor and orator, is a partner at Paul, Weiss, Rifkind, Wharton & Garrison in Washington, D.C.

According to her biography on the firm's website, Wilkinson began her legal career in the U.S. Army, rising to the rank of captain. She was appointed as a special assistant U.S. attorney in the Southern District of Florida in 1990 to assist with the U.S. prosecution of Manuel Noriega, the former Panamanian dictator, on drug trafficking and money laundering.

In 1995, she was tapped to be a special attorney to the U.S. attorney general in the federal government's case against Timothy McVeigh and Terry Nichols, who were convicted of the Oklahoma City bombing that killed 168 people and injured hundreds more.

Her appointment in the Activision case shows how critical the outcome is for the company, which has generated more than $6.75 billion in revenue since its launch in 2003. The company's relationship with the original developers of the franchise, Jason West and Vincent Zampella, soured over the years, and Activision fired the duo in 2009.

West, Zampella and several dozen other developers in their studio sued Activision for withholding royalties totaling several hundred million dollars. Activision countersued, alleging the developers had violated their employment contract.

The case was set to go to trial on May 29. But with Activision switching to a new trial attorney so late in the game, it will likely ask the court for a 30-day postponement to allow Wilkinson time to get up to speed on the details.

Why the last-minute switcheroo? Activision won't say, but it could be related to how potential jurors are likely to react. Weeks before a jury trial, litigants often present their cases before mock juries. The procedure is akin to focus-testing a product to see if average people are likely to buy what you're selling. And with Wilkinson as the salesman, Activision is hoping that she can minimize the potential for jurors to regard the trial as a case of David versus Goliath.

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Photo: Steven Marenberg (left) remains on Activision's legal team, but Beth Wilkinson (right) is slated to become its trial attorney. Credit: Irell & Manella and Paul, Weiss, Rifkind, Wharton & Garrison.

 

Video game sales plunge 42% in April

Video game sales took a nose dive in April, plunging a stomach-churning 42% compared with a year earlier as companies cranked out fewer releases than in April 2011.

Retailers rang up just $292.1 million in game sales last month, down from $503.2 million a year earlier, according to the NPD Group, a market research firm.

With fewer new games to drive people into stores, sales of game consoles also took a hit, down 32% to $189.7 million.

"Simply stated, there were notably fewer" new game releases, said NPD analyst Anita Frazier. "I think it’s a simple as that, because when we see compelling content come into the market, the games are still selling as well as ever. We just saw a lot less of this in April as compared to last year.”

Sales of accessories such as extra controllers held steady at $148.6 million in April, while sales of used games, digital game downloads and online game subscriptions contributed an additional $370 million, kicking the industry's monthly total to $1 billion. NPD, which recently began tracking digital game sales, does not have a comparable figure for 2011.

Analysts speculate that the soft sales figures will lead companies to cut the price of games and consoles in order to encourage buyers.

"April industry sales remain soft, and declining ... volumes will likely necessitate price cuts," Colin Sebastian, an analyst with Robert W. Baird & Co., wrote in a note to investors.

Sebastian said there are bright spots on the horizon as game publishers prepare to unleash some of this year's most anticipated games -- among them Max Payne 3, from Take-Two Interactive Software Inc., and Diablo III, from Activision Blizzard Inc.

"We still expect overall product momentum to improve beginning in May with launches of Diablo III and Max Payne," he said.

For a list of the top 10 games sold in April, click the link below to continue reading.

Activision Blizzard halted slide in World of Warcraft subscribers

Activision Blizzard Inc. said Wednesday it was able to halt a precipitous slide in the number of subscribers to its massively profitable online game, World of Warcraft, maintaining the number at 10.2 million as of March 31 -- roughly the same as it was on Dec. 31. 

The game, developed by Blizzard Entertainment in Irvine, had been steadily losing players since it peaked at 12 million in September 2010. The fact that World of Warcraft, now approaching its eighth year, was able to hold its ground was no small feat, given the stiff competition it faced from the December release of rival online title, Star Wars: The Old Republic.

Activision disclosed World of Warcraft subscriber numbers as part of its first-quarter earnings report. The Santa Monica games company posted $1.17 billion in revenue for the quarter ended March 31, a 19% decline from a year earlier. Net income of $384 million, or 33 cents a share, was also down from $503 million, or 42 cents a share a year earlier.

Still, the results, when adjusted for special charges and deferred income, handily beat Wall Street's expectations. Among the titles that bolstered Activision's performance was Skylanders, a hugely popular kids' game that ties into a suite of collectible physical toys. Many stores have reported temporary shortages of Skylanders action figures as Activision struggles to keep up with demand. Activision said it has sold more than 30 million Skylanders toys as of Mrach 31.

Other titles that contributed to Activision's results include its Call of Duty military shooter franchise, which continues to sell well and has garnered more than 2 million players who pay about $50 a year for access to additional online content.

While the company is surfing a wave of bona fide hits, analysts point out that Activision has yet to make a major dent in the growing market for tablet, mobile and social games.

“While Activision to date has chosen the best path to weather the console storms, they are potentially at risk of missing a large and profitable segment of the market without more investment in social and mobile,” said Colin Sebastian, analyst with Robert W. Baird & Co. “When tablets become a core gamer platform, will Call of Duty be there?”

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Photo: Skylanders products courtesy of Activision Blizzard Inc.

DrawSomething players drop 30% since Zynga purchase

It's not a pretty picture.

The number of daily players for DrawSomething, a game developed by OMGPOP, has plunged 30% in the last 30 days on Facebook. The count has dropped to just over 10 million on Thursday from a little more than 14.5 million daily players at the beginning of April, according to AppData.

This likely is not welcome news for Zynga Inc., which paid $180 million, plus an additional $30 million if certain milestones are reached, for OMGPOP in March. The high price comes largely on the strength of DrawSomething, though OMGPOP has created more than 30 other games, none of which have drawn as many players.

Zynga declined to comment on the decline.

Stock analysts have expressed reservations about OMGPOP's ability to deliver on its princely acquisition price. "Zynga must improve monetization and retain gamers as the initial 'buzz' of the game wears off over the coming months in order to justify the ... price tag," Doug Creutz, an analyst with Cowen & Co., wrote in a note to investors in April.

Though traffic is not a perfect indicator of how much money a game is generating, a decline in players does mean that the pool of potential customers is shrinking. As a result, Wall Street investors like to keep close tabs on the "daily active users" charted above.

But the chart shows only part of the picture for DrawSomething, specifically the Facebook part. It does not count the game's performance on mobile devices, where DrawSomething is equally if not more popular.

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Gree buys mobile game developer Funzio for $210 million

Gree International Inc., a Japanese mobile game company, announced Tuesday that it had purchased San Francisco mobile game developer Funzio Inc. for $210 million.

The deal represents the second major acquisition of a U.S. company for Gree, which a year ago bought OpenFeint, a mobile social game platform company, for $104 million.

Gree and rival Japanese mobile game company DeNA Co. have been speculating in the U.S., where the market for mobile social games has exploded in the last three years thanks to Apple Inc.'s iOS devices and a proliferation of tablets and smartphones powered by Google Inc.'s Android operating system.

Both Gree and DeNA are betting that the U.S. market will mirror the surge in Japan's mobile games industry over the last decade and evolve into a multibillion-dollar business. DeNA placed its bet in 2010, when it paid up to $400 million for Ngmoco Inc., a Bay Area mobile game company. DeNA and Gree are profitable, largely owing to the lucrative mobile market in Japan.

With Funzio, Gree has kicked up its rivalry with DeNA a notch. The purchase gives Gree a development studio that created Modern War, Crime City and Kingdom Age -- titles that were among iTunes' top 25 grossing apps as of Tuesday.

The games are free to download, but Funzio makes money by selling bundles of in-game currencies for as much as $79.99 that let players advance more rapidly. Funzio estimates that more than 20 million players have downloaded its games.

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Nintendo posts first annual loss in at least three decades

Nintendo on Thursday posted losses of more than $500 million for its fiscal year -- its first annual loss since the Japanese gaming company began publicly reporting its financial results in 1981.

The maker of Mario and Zelda games in January telegraphed that it would post steep declines in sales and a substantial loss for the year ended March 31. Thursday's results were roughly in line with its grim forecasts, as both sales and losses came in slightly lower than expected.

The Kyoto company, which manufactures the Wii and DS game consoles, recorded a $534.6-million loss on $8 billion in revenue, compared with a $960.5-million profit on $12.6 billion in sales the year before. On Jan. 26, Nintendo warned investors that it would likely post a $804.3-million loss on $8.2 billion in sales.

While sales came in lower than expected, losses narrowed as a result of a weaker Japanese yen. 

Still, the rapid rise of inexpensive smartphone applications for mobile devices such as the iPhone, iPad and Android phones have weakened Nintendo's once-dominant grip on the portable games market. In addition, sales of its Wii console have slipped precipitously as players gravitate to the Xbox 360 and the PlayStation 3, both of which have higher graphical processing power and a more robust online entertainment offering than the Wii.

The 123-year-old company, which started in 1889 selling playing cards, is pinning its hopes on its upcoming Wii U, its next-generation console that is scheduled for launch later this year in time for Christmas.

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Photo: Super Mario Galaxy 2. Credit: Smithsonian American Art Museum

Saints Row, UFC push THQ stock higher

THQ Inc.'s shares jumped 33% after the Agoura Hills game publisher disclosed that its fourth-quarter financials would be less bleak than expected.

Bolstered by stronger sales of Saints Row: The Third and UFC: Undisputed 3, THQ estimated that revenue for the quarter ended March 31 will likely come in between $160 million and $170 million, up from the company's previous outlook of $130 million to $150 million.

In addition, the company expected smaller losses, between 10 cents and 20 cents a share, compared with earlier expectations for 35 cents to 50 cents.

The news sent THQ's shares rocketing 46% to 66 cents immediately following the announcement before leveling off at 60 cents, up 33% by mid-afternoon in New York.

Analysts noted that the stronger results help give THQ a longer lifeline by fortifying its cash pool. The company now expects to have $76 million in cash, three times higher than previously expected, said Edward Williams, an analyst with BMO Capital Markets.

"While the company still has many hurdles to clear before it is out of the dark, it's clearly beginning the ... year in a better position than we had anticipated," Williams wrote in a note to investors.

Wednesday's news was a rare spot of sunshine for an otherwise dark chapter in THQ's 23-year history.  

THQ hit a particularly rough patch last year after several big bets failed to pan out, including uDraw, Red Faction and several licensed kids games. As the company's cash reserves drained to dangerously low levels, THQ has laid off more than 550 people — about a third of its workforce — since August. 

The company has also canceled multiple projects and shuttered six of its 11 development studios to conserve money, according to Gaming Business Review.

THQ credited the recent uptick to Saints Row: The Third, a mobster shooter franchise which shipped 4 million copies and raked in higher-than-expected revenue from sales of additional digital game content. It also said UFC: Undisputed 3, released in February, is selling better than expected, although it did not disclose sales figures for the title.

It's expected to do so on May 15, when the company has scheduled its fourth-quarter earnings announcement.

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Video game sales continue slide in March

March was another brutal month for sales of video game discs and consoles as total revenue dropped 25% in the U.S. from the same month last year, according to research firm NPD Group.

It was the fourth straight month that video game industry sales have dropped and comes after revenue fell 8% in 2011. However, the data include only sales of physical games and consoles and excludes the fast-growing but still smaller market for digital downloads, social and mobile video games.

It was the devices themselves that suffered the most, with revenue down 35% to $323.5 million. NPD analyst Anita Frazier said in an email that while sales of all video game devices were down, "high definition consoles" — meaning Microsoft's Xbox 360 and Sony's Playstation 3 — fared best. That meant Nintendo's Wii and handheld 3DS and Sony's new handheld Playstation Vita, which debuted in February, appear to have sold poorly.

Sales of software — the games themselves — dropped 25% to $553.1 million. Electronic Arts' highly anticipated science-fiction sequel Mass Effect 3 was the month's best-selling game, while Capcom's newest installment in its Resident Evil horror series, Operation Raccoon City, came in at No. 2.

Activision Blizzard's kids' game series Skylanders: Spyro's Adventure continued to be popular, NPD said. The game itself, released in October, was still the No. 15 title in March. More significantly, three Skylander "character packs" — toys that can be integrated into the game — were among the top-10-selling video game accessories for the month. "The [Skylanders] accessory items are selling phenomenally well," said Frazier.

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Photo: An image from Mass Effect 3. Credit: Associated Press.

THQ market value, once $2 billion, dips below $35 million

THQ Inc., once one of the top five video game publishers in the world, has seen its market value plunge from $2 billion in 2007 to just $35 million.

THQ's shares, which traded above $34 a share when the company was riding high, closed at 51 cents on Thursday.

The Aguora Hills company's fortunes have soured after a series of big bets stumbled in the market -- the latest being uDraw, a drawing game that came with its own tablet controller. Last year, THQ said that disappointing sales of uDraw would take a 25% bite out of the company's projected end-of-year revenue.

THQ then announced in January that it would quit making licensed console games for kids -- once a staple of the company -- leading to several rounds of layoffs. In addition, THQ dropped its licenses with Walt Disney Co.'s Pixar Animation Studios, Viacom Inc.'s Nickelodeon and Mattel Inc.

Wanda Meloni, principal analyst with M2Research, noted in a blog post on Gaming Business Review that the market for kids' games hasn't evaporated. It's just that kids are no longer confining their game sessions to consoles, where THQ focused its development.

"To be clear, there is a market for kids' games, only it is becoming more and more platform agnostic," Meloni noted, citing Activision Blizzard Inc.’s success with Skylanders Spyro’s Adventure, Angry Birds and Minecraft -- all of which either can be played on devices other than consoles or, in the case of Skylanders, have ties to physical toys.

Meloni also wrote that THQ has closed six development studios in the past year, leaving five remaining studios -- three in the U.S. in San Diego, Austin, Texas, and Champaign, Ill., and two in Canada in Vancouver and Montreal.

THQ spokeswoman Angela Emery declined to comment on the company's stock performance, saying, “We look forward to addressing our overall business in our earnings report coming up."

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Photo: THQ Chief Executive Brian Farrell. Credit: Anne Cusack / Los Angeles Times