Viacom looks to sell Rock Band developer after years of losses

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Viacom is breaking up the band.

The media conglomerate announced Thursday that it will sell Harmonix Music Systems, the Cambridge, Mass., video game developer behind the pioneering Rock Band video game series. The move comes after four years of losses.

Sales of music video games such as Rock Band, which allows players to simulate the experience of being a musician, have fallen precipitously in the last two years. Major factors have included an overabundance of sequels and spinoffs related to Viacom’s game and Activision Blizzard Inc.’s Guitar Hero and the cost of the products, which can reach more than $200 including instrument controllers.

Viacom never managed to make a profit on Rock Band even when sales were better in 2008 and 2009. One key reason was that the media giant, whose other holdings include Paramount Pictures and MTV Networks, did not have the same efficiencies as other companies that focus primarily on developing games. Harmonix has been a drag on its parent company’s earnings through the release of 2007’s Rock Band, 2008’s Rock Band 2 and October’s Rock Band 3.

[Update, 11:57 a.m.: Viacom revealed in a regulatory filing that Harmonix had a net loss of $87 million on $362 million in revenue in 2009 and a net loss of $24 million on $678 million in revenue in 2008.]

The news comes just a week after Harmonix released its first non-Rock Band title, Dance Central, a dancing game for Microsoft’s motion-sensing Kinect peripheral for the Xbox 360 console. Dance Central was well-received by critics and generally regarded as the best launch title for Kinect.

Viacom paid $175 million in 2006 to acquire Harmonix, which created Guitar Hero the previous year. The studio then created Rock Band for Viacom, the first game to include the ability to play drums and sing, as the Guitar Hero intellectual property stayed at Activision.

In 2008, Viacom paid Harmonix’s shareholders a $150 million bonus as part of an ‘earn-out’ clause in the studio’s contract. However, in February, Viacom said it was attempting to take back ‘a substantial portion’ of that amount due to Harmonix’s ongoing losses. [Update, 11:52 a.m.: That effort has yet to be resolved.]

In its financial results released Thursday, Viacom classified Harmonix as a ‘discontinued operation,’ a category in which it reported a $299-million loss for the quarter ended Sept. 30. [Update, 11:37 a.m.: Viacom said in a regulatory filing that it took a write-down of $260 million on its video game business for the fiscal year ended Sept. 30.]

Potential suitors for Harmonix could include Activision, which could look to consolidate its hold on the shrinking music game genre, or Electronic Arts Inc., which has distributed the Rock Band games on behalf of Viacom in the past.

The news was released as part of Viacom’s third-quarter earnings. The company reported a 5% rise in its revenue for the quarter to $3.3 billion. Revenue for the media networks group, which consists primarily of MTV Networks, the unit comprised of several cable channels including MTV, Nickelodeon and Comedy Central, increased 8% to $2.1 billion as advertising income grew significantly. Filmed entertainment revenue from Paramount Pictures grew only 1%, to $1.23 billion, due in large part to an ongoing slump in the home entertainment market and fewer DVD releases.

Media networks operating income grew 9% to $873 million, while filmed entertainment operating income dropped 29% to $52 million. Viacom shares were up 4% in midday trading to $39.59.

-- Ben Fritz

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