Activision pulls plug on Guitar Hero, laying off 500 workers

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Striking the death knell for a once-hot music game business, Activision Blizzard on Wednesday said it will disband Guitar Hero and scrap development of a Guitar Hero title slated for this year.

At the same time, the Santa Monica company told analysts during a conference call to announce fourth-quarter results that it will invest heavily in creating an online service dubbed BeachHead for an existing video-game franchise, Call of Duty.

Activision, which provided little detail on the upcoming service, also dropped hints about a new product it plans to announce next week at Toy Fair in New York, as well as a new multiplayer online title from its Blizzard Entertainment studio in Irvine. Executives declined to further explain the new projects.

Meanwhile, Activision said it plans to lay off about 500 workers, roughly 7% of its workforce, associated with Guitar Hero and other games for casual players. The publisher also announced it has axed True Crime: Hong Kong, a ‘shooter’ game modeled after Take-Two Interactive Software’s blockbuster Grand Theft Auto franchise.

‘To be blunt, it just wasn’t going to be good enough,’ said Eric Hirshberg, head of Activision’s publishing business.

The double-barreled announcements of new projects and canceled titles highlight the hit-driven nature of the video-game industry in which consumers flitter from one fad to another. Two years ago, Guitar Hero generated more than a billion dollars in revenue for Activision. Now, dancing games and online games are all the rage.

Though Activision is not yet in the dancing genre, it is bullish on digital distribution and online games.

Among the more intriguing upcoming projects is an as-yet untitled online game from Activision’s Blizzard division. The studio’s popular World of Warcraft online title has garnered 12 million subscribers who pay up to $15 a month to play the game. Its latest release, an add-on game for World of Warcraft called Cataclysm, sold 4.7 million copies within a month of going on sale in December.

But Blizzard has not yet set a date for releasing its new game, along with another expected title based on its Diablo franchise. As a result, its parent company released financial projections that didn’t include Blizzard’s upcoming games. Activision said it expected 2011 revenue to hit $3.95 billion, substantially less than its 2010 revenue of $4.45 billion. The forecast came in lower than most Wall Street analysts had been expecting, triggering an 8% slide in the company’s stock price.

Activision’s shares were also depressed by investor concern over the concentration of the company’s revenue in just two franchises, Call of Duty and World of Warcraft, said John Taylor, an analyst with Arcadia Investment Corp. in Portland, Ore.

‘It’s a double-edged sword,’ Taylor said. ‘It’s great when the numbers are growing. It’s not great when they run out of gas, like it did with Guitar Hero.’

For its fourth quarter ended Dec. 31, Activision posted a $233-million net loss, or 20 cents per share, on $1.43 billion in revenue. A year earlier, it lost $286 million, or 23 cents per share, on sales of $1.56 billion.

Its shares, which lost 19 cents to $11.69, tumbled an additional 92 cents, close to 7%, to $10.74 in after-hours trading following the earnings announcement.

-- Alex Pham