Activision lands next game from Halo development studio

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Activision Blizzard Inc. may have lost key talent at its prized Infinity Ward studio, but it scored a few points Thursday with the surprising announcement of a 10-year agreement to be the exclusive publisher of the next game series from Bungie, developer of the blockbuster Halo video games.

The agreement calls for Activision to market and distribute Bungie’s unannounced game franchise, which is expected, like Halo, to be an action game with a significant online component and multiple sequels. However, in a rare move for Activision, which has been adamant about controlling intellectual property in the past, Bungie will have full ownership of the new game. Activision will finance its development.

Neither Bungie nor Activision would say when the first title would be released, BMO Capital Markets game analyst Edward Williams wrote in a note to investors that he expected a game to come out sometime in 2012.

Analyst Evan Wilson of Pacific Crest Securities said that Activision expects the Bungie deal to be accretive to the operating margins of its Activision Publishing division, but not the overall company.

Thomas Tippl, chief operating officer of Activision Blizzard, noted the positive effect on his company’s bottom line and added that Bungie’s upcoming games will not replace any scheduled to be produced internally by Activision.

‘This is part of what we love about this partnership,’ he said. ‘There are no trade-offs we are making.’

The deal is a coup for Activision, which has been struggling to keep Infinity Ward, producer of the hugely successful Call of Duty: Modern Warfare series, from disintegrating. The two former heads of the studio, Jason West and Vince Zampella, were fired in March and immediately sued the publisher, after which it countersued. On Tuesday, 38 current and former employees of of Infinity Ward also sued Activision, alleging that they have not been paid full royalties for November’s Call of Duty: Modern Warfare 2, which generated an estimated $1.3 billion in worldwide retail sales. Asked whether the conflict affected Bungie’s decision to partner with Activision, Ryan replied: ‘You always consider the [public relations] impact with fans and community. But as far as Activision as a partner goes, aside from the fan and community impact, the Infinity Ward situation doesn’t really come into play.’

The two companies signed a binding term-sheet, essentially sealing their partnership save for final details, in March. West and Zampella were fired, which began the imbroglio at Infinity Ward, on March 1.

The deal takes some pressure off Activision, which has been trying to reassure its investors that its Call of Duty franchise was not jeopardized by the dispute with developers.

‘We believe this agreement alleviates some of the concern surrounding Activision’s publishing business and its increasing dependence on Call of Duty by adding another potentially strong [property] to the portfolio,’ Williams wrote.

According to people familiar with the situation, the publicly released terms of the Bungie deal are similar to the one that former Infinity Ward heads Jason West and Vincent Zampella were seeking before talks broke down and they were fired for alleged breach of contract in attempting to form their own company. They have since signed a deal with Activision’s chief rival, Electronic Arts Inc.

“It’s astonishing how much money Activision had to pay to cover up its horns and pitchforks with a halo,” quipped Bobby Schwartz, West and Zampella’s attorney.

Activision countered that the new deal proves its attractiveness as a creative partner. “If you look at the big picture, it’s undisputable that we’re the best destination for top talent in the industry,” Tippl said.

Bungie, which Microsoft Corp. purchased in 2000 for an estimated $20 million to $40 million, separated in 2007 from its parent company. In the amicable divorce, Microsoft retained ownership of the Halo property, while Bungie agreed to develop several sequels, including the upcoming Halo Reach, exclusively for Microsoft’s Xbox 360 game console. Ryan said Halo Reach will be the last game in the franchise developed by Bungie, with all future Halo games handled by Microsoft.

He added that over the last year he has held discussions about a possible partnership not only with every large game publisher, but with the major media conglomerates as well.

-- Alex Pham and Ben Fritz

[This post was updated at 11:23 a.m. to include comments from analyst Edward Williams and a clarification of the impact on Activision’s bottom line from analyst Evan Wilson. It was updated at 3:23 p.m. with analysis of the similarity of the Bungie deal to the one West and Zampella were seeking and comments from Schwartz and Tippl.]