Hollywood Rethinks Owning Video Game Divisions

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Warner Interactive is the latest unit on the block as studio conglomerates favor licensing and revenue-sharing deals.

It may soon be "game over" for video game studios owned by big entertainment companies. With the M&A market picking up again after a pandemic-spurred lull, AT&T is looking to offload Warner Bros. Interactive Entertainment, the gaming division owned by the entertainment studio, as first reported by CNBC on June 12. 

Warner Interactive, which owns the best-selling Mortal Kombat franchise and develops games based on Warner IP, was the last gaming division standing amid Hollywood giants. Disney closed its interactive studio in 2016 to focus on licensing its IP. NBCUniversal shut down its game studio last year, and, in January, Disney sold the FoxNext game studio, which it acquired in the 21st Century Fox merger.

The decision for these companies to shutter or sell their studios was multifaceted, analysts say. While games fall within the storytelling scope in which most of these companies operate, they require substantial investment, and with studios focusing efforts on streaming video, games became less of a priority.

Based on the purported $4 billion price tag, Warner Interactive is doing more than $1 billion in annual revenue and is profitable, Jefferies analyst Alex Giaimo writes. However, it would be a small business for WarnerMedia, which had $33.5 billion in revenue last year.

"We get the sense that AT&T management views their gaming asset as subscale," LightShed TMT analysts Richard Greenfield, Brandon Ross and Walter Piecyk wrote in a research note.

AT&T, Disney and Comcast also share another trait: high debt loads that they're publicly committed to paying down. All three companies have refinanced loans in the past few months, but with lower future cash flow, they will have to turn elsewhere to relieve their debt burdens.

"While the proceeds from a sale of Warner Bros. Interactive may appear insignificant relative to AT&T's $160bn+ debt load, a transaction would be in line with the communicated asset-monetization strategy," wrote MKM Partners analyst Eric Handler in a June 15 report, referencing AT&T sales of some of its real estate holdings and cell tower sites over the past year as well as larger divestitures like its European media holdings. In April, AT&T's CFO John Stephens told analysts "you should expect us to continue exploring other opportunities."

For big entertainment companies, licensing IP is simply a more reliable and profitable business, with lower risks (albeit limited upside). While gaming requires substantial upfront investment and time to develop new games and properties, an IP-based strategy leaves that hard work to developers, with the entertainment company taking a piece of every unit sold. 

That was the impetus for Disney and NBCUniversal, and will be core to a Warner Interactive sale. Giaimo notes that Warner Interactive's popular titles are tied to IP from Warner Bros., including Harry Potter and Game of Thrones, "and any deal would likely include some form of licensing/rev share agreement."

A sale would also mark the end of an era for interactive gaming from the big entertainment giants, if AT&T decides to pull the trigger at all.

"WBIE is really the only success story out of many failed attempts by traditional media companies to build viable video game businesses," Cowen analyst Doug Creutz wrote in a research note June 16. "Ultimately, given the success WBIE has had, and the attractiveness of video gaming as a media asset, we think AT&T might be best served hanging on to the asset."

This story first appeared in the June 10 issue of The Hollywood Reporter magazine. Click here to subscribe.