Deal of the Year

It's not over-reaching to say that this weekend's announcement that Activision and Vivendi Games are to merge changes the landscape of the games industry. Negotiations between the two firms have been one of the industry's most closely guarded secrets, the announcement itself one of the most surprising in recent years. It's only natural that there are plenty of questions over what this will actually mean for the shape of things to come.

As the dust starts to settle and more information emerges to fill the gaps in our knowledge about the deal, we can start to answer those questions. Unsurprisingly, the early answers I'm encountering are that the deal will actually have far less impact on the day to day trading of the videogames industry than some reports would suggest - but there are tantalising hints that suggest less obvious, but perhaps more important, knock-on effects could come into play.

The Perfect Storm

Firstly, of course, there is the matter of Blizzard - the Vivendi studio so absolutely central to the success of the publisher in recent years that it is the studio's name, not the publisher's, which will join Activision's in the title of the new, merged company. The question of what happens to Blizzard now, however, is very simple to answer - the answer being "not a lot".

The studio's independence from its owners at Vivendi Games is a matter of games industry legend. Anecdotes - possibly apocryphal - abound of the unwary publishing exec who didn't realise just how sensitive the firm is to interference with its business, and found himself ejected onto a Californian pavement with an astonished look on his face.

Whatever the literal truth of any such incident may be, the meaning is clear - Blizzard is an autonomous unit with a degree of independence almost unheard of elsewhere in the industry. This is extremely unlikely to change under the new regime at its parent publisher, and it's unlikely that anyone there particularly wants to wave a knife in the direction of any goose laying golden eggs on the magnitude of World of Warcraft anyway.

If anything, the name "Activision Blizzard" is a clear indicator of just how this deal will pan out from Blizzard's perspective. They will retain their autonomy, and will continue to decide which games to make and when to make them, for as long as they continue to produce hit titles. The name Vivendi Games is gone, replaced by that of the studio which has been the jewel in its crown for years. The goose that lays the golden eggs has taken over the farm.

The effect which the merger has on Blizzard, in other words, will be minimal. That's not true of the effect which Blizzard will have on the merged company, however. Bringing the studio into the fold effectively cracks two difficult problems which Activision was facing in its otherwise successful business - massively multiplayer gaming, and the Asia Pacific markets.

Both of those are challenges which are expensive and incredibly risky to tackle. Conveniently, both are challenges which Blizzard has solved in the past decade - first with the huge success of its role-playing and real-time strategy franchises in China, Korea and elsewhere in Asia Pacific, and later with the unprecedented success of World of Warcraft in online markets everywhere around the world.

Activision Blizzard, then, enters the world with those two problems solved - not to mention a very strong Western publishing business on PC and console, courtesy of Activision. However, Blizzard's independence from the rest of the business makes it hard to envisage its online infrastructure or Eastern reputation and distribution channels being leveraged on a widespread basis for other Activision Blizzard products. Such a move would require a major change of heart in the Blizzard camp - and, perhaps wisely, no such change seems to be in the air at the studio.

Joining the Dots

Where Blizzard is likely to remain unchanged by the merger, Vivendi Games and its labels, such as veteran PC gaming label Sierra, are likely to go through significant upheaval. Activision is, in almost every facet of the PC and console space, a more successful publisher than Vivendi Games - kids' games being one obvious exception. While Vivendi Games' franchises won't be going anywhere, the publishers operations and management will see significant overlap with Activision.

It's too early, of course, to speculate on any resulting downsizing - and it's worth noting that the combined business will be handling a huge number of products and franchises, which should minimise any direct overlap between roles. Still, there's no doubt that one of the objectives of this merger will be to bring Activision's recipe for success to the studios and franchises managed by Vivendi Games - a fact made clear by the appointment of Activision's senior staff to lead the merged firm.

One aspect of the deal which has been discussed at great length in the past day or so is the size of the firm which will be created. It will, indisputably, be a heavy hitter in the industry, and the most profitable third-party publisher around - although in terms of sheer revenue, Electronic Arts will remain unchallenged on its perch for now.

On the other hand, a question which we haven't heard being discussed much as yet, but which may turn out to be hugely important, is just what Activision Blizzard's creation will mean for Europe's role in the games industry. While the governance of the new company will be largely based in the United States, the balance of power has certainly shifted across the Atlantic somewhat with this new merger - as the industry's most profitable publisher's majority shareholder will be none other than European media group Vivendi.

Vivendi will hold at least 52 per cent of the new publisher, if not more. We don't see Activision Blizzard's operations moving en masse across the pond any day soon; after all, Vivendi Games ran its operations from the United States even when wholly owned by Vivendi. It's still interesting to note that, along with the remarkable growth of Ubisoft in recent years, today's deal demonstrates a clear trend in rebalancing the industry's power base across the Atlantic.

Whether that will be particularly meaningful for either European consumers or European developers is, of course, another question entirely. Developers would certainly benefit hugely from having more publishing functions based in Europe, rather than having to deal with eight hour time differences between Europe and either Los Angeles or Tokyo. Even more importantly, dealing with a company whose finances are handled in Euro would take some of the sting out of the massive discrepancy between US Dollar and Euro values at present, with the weak Dollar threatening to make European developer costs uncompetitive.

It's uncertain that either of those things will come to pass. Although Vivendi will own a majority share of Activision Blizzard, the publisher's own base will be in the United States. For now, at least, the European ownership of Activision Blizzard is unlikely to make any real difference to how (or, more importantly, where) the company is run.

Finishing the Picture

This is certainly the most important deal to be done in the industry for some time - and although it's far from being the only large merger deal of recent years, it's notable for being two Western publishers involved, where previous deals were all about Japanese firms.

Squaresoft and Enix, for instance, created a vast powerhouse in the RPG market in Japan when they merged, while SEGA's merger with gambling and arcade machine maker Sammy gave it the financial stability to become a top player in the market once again. Most recently, Namco's merger with Bandai has created a combined treasure chest of intellectual property almost unrivaled in the industry.

The Activision Blizzard announcement comes on the heels of Electronic Arts' acquisition of top flight development firm Bioware Pandemic - and seems likely to be the beginning of a spate of mergers and acquisitions, rather than the end. With the storm-cloud of the generational transition passing overhead and the next-gen formats establishing themselves, minds both inside and outside the industry are focusing on acquisitions.

Further transactions seem inevitable. Those major media firms who don't already have pieces in play in the games space (News Corporation, for example) will be looking for them; those who already have minor investments in games (such as Viacom) may well seek to increase their stakes. Media giant platform holders Microsoft and Sony could see acquisitions as a weapon in their increasingly tough battle - and of course, those firms who don't wish to become prey will have to consider mergers in order to ensure that they're swimming with the bigger fish.

In the short term, however, the industry will be scrambling to make sense of the changed landscape in the publishing market - and welcoming a familiar, but yet entirely new, publisher to the fold. Vastly profitable, well-funded, European-owned and packed with enviable management and development talent, Activision Blizzard is the most exciting thing to happen to the publishing market in the West in years. It's certainly the most surprising announcement of 2007 - but does 2008 have surprises in store that can eclipse even this?