Viacom to Sell Company That Created 'Rock Band'

CEO Philippe Dauman predicts further TV advertising improvements, eyes digital dollars and doesn't worry about cord cutting

NEW YORK - Viacom Inc. said Thursday it plans to sell Harmonix, the developer of the Rock Band music video game franchise it acquired in 2006, which has been a drag on its financials due to continuing losses and slumping sales for music games.

In a regulatory filing, the company detailed that Harmonix wrote a loss of $87 million in 2009 - on revenue of $362 million - after a $24 million loss in 2008 - on revenue of $678 million.

Meanwhile, president and CEO Philippe Dauman on the company's earnings conference call predicted continuing advertising improvements on the back of ratings successes driven in the latest quarter by such shows as Jersey Shore, MTV's biggest ratings hit ever. In Viacom's networks unit, year-over-year U.S. advertising revenue growth improved to 8%, compared with 4% in the second quarter and the third quarter-over-quarter improvement in a row. With scatter ad prices up in the mid-20% range in the third quarter, Dauman said his team is seeing continuing strength in the current quarter, which will lead to another sequential improvement in the TV ad growth rate.

"We are seeing the economy beginning to turn," executive chairman Sumner Redstone told analysts on the call. And Dauman predicted that "the pace of economic recovery will accelerate" barring a disrupting event.

In addition to continued ad momentum, Viacom's film business is off to a "great start" in the current quarter thanks to Jackass 3D, Paranormal Activity 2 and Megamind, management said. Dauman's conclusion: it looks like "a very happy Viacom new year" for his organization.

The entertainment company reported third-quarter adjusted profit from continuing operations rose 7% to $461 million when excluding Harmonix as a discontinuing operation. When including discontinued operations, quarterly profit amounted to $189 million, compared with $463 million in the year-ago period. The company reported a $299 million loss for Harmonix, with most of that coming from writedowns for the gaming arm.

Viacom's quarterly revenue rose 5% to $3.33 billion thanks to growth in both its networks and film units. Film profit declined though "due to the timing and mix of theatrical releases, particularly the difficult year-over-year comparison with the theatrical success of the 2009 hit tentpole Transformers: Revenge of the Fallen," the company said. It also highlighted a reduction in the number of home entertainment releases.

Viacom's third quarter wrapped up a shortened fiscal year as the company is changing to a fiscal year that starts in October.

"We continue to benefit from the improving economy and look forward to even brighter days ahead," said Redstone.

Dauman lauded his company's continuing creative success.
"As a result, many of our cable networks today are achieving new ratings highs and producing hit shows that feed the cultural dialogue in the U.S. and abroad," he said. "This creative success coupled with the improving economy has fueled our advertising revenues."

Viacom's MTV Networks unit bought Harmonix in 2006 for $175 million plus earnouts based on its performance in 2007 and 2008. Viacom previously reported a payment of $150 million to the Harmonix shareholders related to 2007 performance, but argued it feels it was entitled to a refund of "a substantial portion" of that.

The decision to sell the business "reflects our strategy of focusing on what we do best - make great content for television, motion picture, online and other screens," a spokeswoman said. "The console games business requires a scale and expertise that we don't have."

Dauman reiterated those arguments on Thursday's call. While developer Harmonix will continue to make great games, the business is simply not in Viacom's focus areas, he said, adding that the company is talking to several potential buyers without identifying them.

Analysts mentioned the company's former publisher Activision, which owns the Guitar Hero franchise created by the developer, and Electronic Arts as best positioned to bid for Harmonix, which just released its first game outside its core franchise - dancing game Dance Central. Wedbush Securities analyst Michael Pachter estimated that Harmonix could attract a price tag of $50 million-$100 million. "They are supremely talented folks, and they have a very hot game in Dance Central, so it likely won't be a shutdown situation," he said. Activision is the more likely acquiror "as they have a lot to gain by absorbing a key competitor," he argued.

Asked about the much-discussed question of whether consumers are cutting the cable cord and instead looking to watch more TV content online, dauman said he doesn't believe that is the case. He predicted that TV subscriber trends will improve again as the economy strengthens. "We don't see cord cutting as affecting our business," he said. "I think there has been much ado about very little in terms of all the talk about cord cutting."

Management also touched on the 3D trend, saying its TV networks are looking at the selective use of 3D for such things as musical performances, some sports and certain kids programs. The company didn't provide specifics.

Dauman also once again touted the big $1 billion a year content deal with Netflix that premium TV joint venture Epix, in which Viacom is a partner with MGM and Lionsgate, struck earlier this year, calling it an inflection point, because a non-traditional distributor for the first time paid up for content. He called it an incremental revenue opportunity. Viacom is expecting to add "incremental digital dollars, not dimes," Dauman said in reference to the digital dimes that many industry executives have said can typically be made for every analog dollar. He also said Netflix isn't positioning itself as a substitute for pay TV services, but as a complementary service.