Viacom: Video Game 'Softness' May Affect Harmonix Value

Weak sales in disc-based video games could lead MTV parent Viacom to write down the value of Rock Band subsidiary Harmonix, the media giant said in its Thursday earnings release. "The Media Networks segment continues to be affected by softness in the disc-based video game industry," the company said in its quarterly regulatory filing. "If such conditions persist and impact the sales projections for our existing and future product, this could result in an impairment loss on Harmonix goodwill," the statement added. "At June 30, 2010 the carrying amount of goodwill associated with the Harmonix acquisition was approximately $300 million." Goodwill is the amount paid above the fair net book value for an acquisition. When goodwill is overstated, the acquiring company writes down the value to a fair value. And a lower-than-expected forecast for cash flow due to weak software sales at Harmonix could be enough to cause a write-down. Viacom subsidiary MTV said in September 2006 that it would acquire Cambridge, MA-based Harmonix for $175 million as instrument-based music games like Guitar Hero were becoming increasingly popular. Since then, music game sales and overall industry sales have experienced softness at retail. Separately from unit sales, the contraction in the music genre is particularly pronounced. Expensive instrument-software bundles drove high dollar sales volumes when the genre was new to most consumers. And users who bought a band set that included controllers typically would not purchase a bundle again, instead buying lower-cost standalone software. The genre strategy of releasing track packs as add-on content prolongs the life of existing discs for many consumers who may buy songs instead of a full new iteration. Harmonix is currently readying Rock Band 3 for the 2010 holiday season. Part of the acquisition deal included an opportunity for Harmonix's owners to receive $300 million in earnouts, based on sales performance of Rock Band video games. In February this year, Viacom sought a "substantial" refund of a portion of the $150 million in performance-based bonuses that it had already paid to Harmonix stakeholders. Viacom said that even paid bonuses were subject to adjustment. For the quarter ended June 30, Viacom reported worldwide ancillary revenues (including video game sales) of $179 million, flat year-on-year. The company said that growth in online content licensing fees and consumer products revenues were offest by lower music game royalties. Viacom pointed to a "difficult" comparison to the previous year, when the company received a settlement from a dispute. Overall Viacom revenues were $3.3 billion for the quarter, flat year-on-year, as total profits rose 40 percent to $418 million.