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Whether you are a hardcore gamer or a casual player, you've probably heard of Rock Band and Guitar Hero, video games that are allowing people without musical ability to become rock stars in their living rooms. Developed by the small studio Harmonix, Guitar Hero I and II have combined to gross $360 million since the first version's release in 2005, and Guitar Hero II was the third best-selling video game of 2006. The gaming business has taken notice. Industry giant Activision (ATVI) purchased RedOctane, the publisher of Guitar Hero and the manufacturer of the game's guitar-shaped controllers, for $99.9 million in summer '06.
But of equal importance is the potential for the music business to capitalize on the success of these new games via online stores where users can download new songs and albums to expand their band's repertoire. That's why MTV purchased Harmonix for $175 million in 2006, setting the stage for a duel between Activision, which released Guitar Hero III in October 2007, and MTV/Harmonix, which released Rock Band one month later. Early returns showed that there was a vibrant market for both games, as both titles topped a million sales within two months of their release date. "Guitar Hero III" had sales of $750M in its first year, while Rock Band, combined with the sequel Rock Band 2, had sales of $547 between December 2007 and September 2008. As of October 2008, Activision has also released the fourth Guitar Hero installment with "Guitar Hero World Tour". This latest game is the true competitor to Rock Band as World Tour allows players to play drums and sing vocals in addition to the classic guitar gameplay of the previous titles.
In 2005 an art mogul/musician out of Hollywood California by the name of Ajax Garcia began manufacturing an interactive art product that was designed by his company BigKidz Toy. Even though the concept was not a new one the flashy packaging and brilliant business model made the coloring ROCK BAND art poster package a fresh idea and hot seller to many fans from all over the world. BigKidz Toy had distributed these hot poster packages through the tour industry as his clients were traveling rock n' roll bands.
Mad Catz Interactive signed a multi-year licensing agreement with Harmonix to produce the peripherals for Rock Band in January 2008. The company is a leading producer of peripherals for gaming consoles, and the company designs and markets accessories for video game systems and publishes video game software under the brand names Mad Catz, GameShark and Joytech. Mad Catz also sells PC accessories through its Saitek brand. For Rock Band, Mad Catz produces wired and wireless guitars, a drum percussion set bundled with professional quality wooden drum sticks, and a wired microphone, all of which are bundled and sold with the game.
The Rock Band deal is just one of several Mad Catz has made in the past year as the company looks to be a market leader in third party gaming accessories. In September 2007 the company acquired Joytech, a European competitor in third party gaming peripherals, and two months later bought Saitek, a worldwide provider of accessories for PC games. Mad Catz plans to operate both brands under their existing names as subsidiaries of Mad Catz Interactive, Inc.
Harmonix Music Systems is the original developer of both the Guitar Hero franchise and Rock Band. The company released several music games prior to the first version of Guitar Hero in 2005, notably the Karaoke Revolution franchise, released by Konami, and FreQuency and the sequel Amplitude under Sony Computer Entertainment's label. Those games earned loyal niche followings, but mainstream success did not come until the release of the Guitar Hero franchise.
The Guitar Hero franchise has netted over a $1 billion in sales and has moved 14 million units in North America, becoming the number 1 title in both dollars and units in 2007 according to the market research firm NPD Group. Future benefits from Guitar Hero sales will not go to Harmonix, however; in 2006, Activision acquired the rights to the franchise when it purchased the game's publisher and distributor, RedOctane, for $99.9 million in cash and common stock.
Harmonix future is instead tied to its new relationship with MTV Networks and to the success of Rock Band, released in November 2007. The company is now a subsidiary of the American media conglomerate Viacom (NYSE: VIA.B). Viacom has a variety of interests in film production, television networks, internet resources, and video gaming, with assets such as Paramount Pictures, DreamWorks, MTV Networks, BET, and Nickelodeon. The purchase of Harmonix for $175 million in 2006 diversified MTV Networks' product portfolio and gave Viacom an inroads into the exploding market for music games.
Affiliation with MTV significantly aided Harmonix in the development of Rock Band. In addition to offering financial and creative support, MTV leveraged its status in the music business to negotiate licensing deals with record companies for the rights to songs. Rock Band was an expensive undertaking for Harmonix at an estimated $200 million, and the resources of MTV were crucial in the game's development and early success.
EA distributes Rock Band in the U.S. In FY 2008, Rock Band represented approximately 10% of the company's overall revenues.
This firm cashed in on the success of the Guitar Hero franchise. Originally a subscription video game rental service, they entered the publishing market as well as the manufacture of video game peripherals with a dance pad for the game In the Groove. Their next project was Guitar Hero with Harmonix, and their production of a guitar-shaped controller became a large part of the game's success. RedOctance was bought out by Activision after Guitar Hero II built upon the popularity of its predecessor, for $99.9 million in cash and common stock. The company continues to publish the Guitar Hero franchise and manufacture the controllers, now as a complete subsidiary of Activision. Activision tapped Neversoft, best known for the Tony Hawk skateboarding game franchise, to develop Guitar Hero III.
Activision has been in a battle of late to maintain a position at the top of its industry, as Nintendo, Electronic Arts, Sony Computer Entertainment and a host of others have carved out large shares of the market. However, the acquisition of the Guitar Hero franchise and the continued success of the Call of Duty franchise has propelled Activision back to the top of its industry. Activision's Guitar Hero III and Call of Duty 4' were the top selling games in the 2007 holiday season, and the company's profits nearly doubled in the holiday quarter after an 80% increase in revenue. For the year the firm had five of the top ten best-selling games on the market.
In short, 2007 was a record year for Activision, which increased its market share to 16.8%, up 7.9% from the year before. Guitar Hero was the primary catalyst of this success. The company announced that the music games set a record for best-selling franchise in a single year, earning the company $820 million in 2007. In just over two years on the market, Guitar Hero games have surpassed a $1 billion in sales.
In 2008, Activision announced a merger agreement with Vivendi SA in which the company acquired Vivendi's online gaming franchise Blizzard (makers of the World of Warcraft). Vivendi is the owner of Universal Music Group - and so one of the side benefits of this deal is a greater expansion of Guitar Hero's song library, as Universal's entire collection of music will be available for Activision's developers to play with.
Rock Band allows up to four players to perform in a virtual band, using peripherals modeled after musical instruments (guitar peripherals for lead guitar and bass, a microphone for vocals, and a drum set). The "instruments" are used to simulate the performance of rock music by hitting color-coded buttons in the rhythm of scrolling notes on-screen.
Players create their own in-game character, customizing appearance, on-stage movements, and chosen instrument, and in multi-player mode players choose a band name, logo, and hometown. The band begins by playing small hometown venues, then moves onto bigger gigs at larger venues, unlocking tour buses and private jets through successful performances along the way. Unlocking and completing new gigs gains access to additional songs. Successful performances also earn the band fans (a metric for measuring the band's popularity), stars (accumulated based on the success of each individual song performed), and in-game cash which each player can spend at the "Rock Shop."
The Guitar Hero series is similar to Rock Band in gameplay, using the system of scrolling color-coded notes that Harmonix developed in its early games FreQuency and Amplitude. An extended guitar neck is shown vertically on the screen, and colored markers scroll in time with the music. Players must hit the corresponding color key on the frets of the guitar controller while simultaneously hitting the strum button in the rhythm of the song.
Four versions of Guitar Hero have been released - Guitar Hero and Guitar Hero II, developed by Harmonix and published by RedOctane; and Guitar Hero III: Legends of Rock,' and "Guitar Hero World Tour", developed by Neversoft and published by Activision. The first two versions of the game featured mostly cover versions of classic rock songs, but Guitar Hero III includes dozens of original recordings by some of rock music's biggest names, including Guns n' Roses, Slipknot, and the Rolling Stones. The third version of the game also features rock legends Slash and Tom Morello as characters and has a new "battle mode." "Guitar Hero World Tour" takes the franchise one step further as it added the ability to play drums and sing vocals. The fourth installment also allows players to use the "music studio" to record their own songs.
The success of music video games has potential to significantly impact the recording industry. Music studios and record labels have taken a much-publicized hit with the rise of the Internet and widespread peer-to-peer music sharing, and CD sales continue to decline. Seeking ways to capitalize on the trend toward digital music downloads, record studios see Rock Band and Guitar Hero as a means to raise awareness of musicians and their work while opening up a new market of buyers for songs and albums.
Labels are actively pitching their music for inclusion in both games, both as tracks included with the initial version of the game and, more importantly, as supplementary content available for purchase through the game's online store. Rock Band and Guitar Hero III each feature dozens of original recordings by prominent artists. Part of the challenge of using original recordings is that the game's developers need to access the multi-track master versions of the songs. This was where MTV's connections helped Harmonix to develop the content for Rock Band. Activision also got creative in seeking original recordings for Guitar Hero III - for example, the firm convinced the Sex Pistols to return to the studio for the first time in years to re-record several classic songs for use in the game.
Some of these classic songs come with the game, and users can play them as soon as they get it out of the box. Music distributors hope to profit from this free content, since after playing the songs in-game, many users then log on to online music stores and download the featured tracks. For example, Metallica, featured prominently in Rock Band, saw an online sales spike of about 40% in the month after the game's debut.
But the most significant profits for record labels come from the games themselves, when users get bored with the included tracks and seek supplementary content from the game's online store. These expansion songs cost $2 each, but users seem willing to pay a premium for tracks that they can play again and again with their gaming consoles. In January, MTV reported that since Rock Band's release, users have downloaded over 2.5 million additional tracks, while Activision reported 5 million+ downloads in the three months since the release of Guitar Hero III.'  The overall impact of this additional revenue stream on the music industry is still unclear, as it is such a recent development, but the potential the games hold for record labels has become very clear in only a few months.
For more on the video gaming industry, see Game Console Wars.