The Cut Scene - Video Game Blog by Variety

Warner saves Eidos, might buy it

By now you probably all know that Warner has invested $30 million and bought another 10% of Sci/Eidos as part of a bigger $119 million deal by the struggling "Tomb Raider" publisher to raise enough cash to stay alive.

But, as I wrote in Daily Variety today, the bigger story is how much power WB now has over the company's future. In addition to owning 20%, it controls the company's distribution and marketing in the North American market. That's the biggest videogame company for which WB has taken over distribution through its homevideo operation. It's a major coup.

More importantly, WB is now in a position to prevent any other big media company -- like NBC Universal  -- from acquiring Sci/Eidos. It's also in a very good spot to go ahead and buy the whole thing if/when it's ready. For now, though, WB seems just barely confident enough to let Sci's new CEO go through with his downsizing and re-focusing and try to turn this troubled company into one with a future. This quote I got from Warner Bros. home entertainment head Kevin Tsujihara, who oversees videogames along with DVDs, is pretty revealing on that front:

Sci recently announced a restructuring plan which includes a new management team as well as a number of strategic and operational changes. We think the plan is a good one, and we're impressed by the new management team, so the best option for Warner Bros is to support management's decision and work with them to build Sci's business.

So if Sci/Eidos does manage to get its sh*t together, look for its ties to WB to get closer and closer and quite possible turn into an acquisition. Warner, after all, is investing heavily in videogames, as evidenced by its purchase of Traveller's Tales last year.

Also worth noting, just to see how much things have changed in 16 months: In December of 2006, Warner Bros. spent $86.8 million for 10% of Sci/Eidos. Last week it paid $30 million for virtually the same size stake. Ouch.

Read the whole story in Daily Variety.

Kane and Lynch sold 1.4 million units -- A point for EA's John Riccitiello

Buried in its restructuring statement was this bit of data from Sci/Eidos: Kane and Lynch sold 1.4 million units.

That's a solid, though far from spectacular, worldwide performance for a game that got very mixed reviews (though I personally thought it was great).

However Sci said it could have done much better. "We believe it could have sold more had we optimised the opportunity," it said in a statement.

Given Sci/Eidos' size, of course, it can only "optimize the opportunity" so far. Which was exactly one of EA CEO John Riccitiello's arguments last week as he explained why Take-Two would do better as part of his company."I wouldn't change a line of code in 'Bioshock,' and the same goes for 'GTA' and 'Max Payne,' " he said. "What we would do is sell more of them. Given our scale, we have substantial operations in places we don't believe they have ever visited. ... That allows us to sell more software and do so more efficiently."

Sci/Eidos cutbacks show it's hard out there for an indie

This week may have been the ultimate proof of just how hard it is for independent publishers -- meaning anyone who doesn't generate around $1 billion per year in revenue or more.

First Take-Two is targeted in an aggressive takeover bid by Electronic Arts, whose CEO justifies it by saying that in the current industry, "the need for scale is becoming more pronounced." Even Take-Two executive chairman Strauss Zelnick admitted that, as an industry trend, "we'll see continued consolidation."

In the wake of that, THQ, Midway, and Atari, all of which are struggling financially in large part because they're just too small, got big stock boosts on Monday following the Take-Two bid, indicating that Wall Street thinks they're going to be acquired.

(Outside the videogame industry, but within media, it's also worth noting the demise of New Line and its integration into Warner Bros. as evidence of this trend.)

Now we have Sci/Eidos engaging in a massive restructuring after it wasn't able to close a deal with any of its potential acquirers. "Our infrastructure is too big and expensive for the scale of the business," CEO Phil Rogers said in a statement. "The cost of delivering world-class games has increased significantly and we must provide appropriate levels of resource to maximize these opportunities."

Translation: The costs of making, marketing and distributing a diverse slate of games has become too big for a small publisher that really has just one hit franchise ("Tomb Raider"). So how is Sci/Eidos going to adapt?

-Changing to a studio structure focused on franchises like "Tomb Raider," "Hitman," and "Deux Ex."

-Create a casual and online gaming division called "Eidos Play."

-Cancel 14 unnamed projects in development. (These are presumably mostly new properties -- the kind that a small publisher can't afford to take a $20 million or $40 million risk on)

-Lay off 25% of its workforce, or about 250 people

Rogers was pretty blunt about Eidos' performance in the second half of last year, during which it lost  $162 million on $145 million of revenue (roughly translated). Losing more money than you take in revenue is, to put it bluntly, dismal.

Close watchers of the videogame industry will notice something about Eidos' plans -- it's remarkable similar to what Zelnick and CEO Ben Feder have been doing with Take-Two in the past year. Take-Two is organized around studios like Rockstar, its sports unit, and now 2K Boston, maker of "Bioshock." It laid people off. It even started a casual division last fall called "2K Play." Couldn't Eidos at least have come up with a more original name?

For more on the problems of independent publishers and the trend toward consolidation, I highly/humbly recommend a story I have on the topic in this week's weekly Variety, which just posted online. There's one quote that seems particularly apt given Sci/Eidos' news:

"The financial pressures of competing have gotten so acute that scale has become critical," says Arcadia Investment analyst John Taylor. "Most of the independents with sales below $1 billion per year are going to struggle."