Viacom Inc. and the video game industry are hoping they'll get more than a little help from the Beatles.
When the Beatles: Rock Band hits stores Sept. 9, Viacom is betting that the new title from its MTV unit will end a slump in the market and vindicate the company's expensive and unprofitable entry into the music video game business over the last two years.
The new game applies the simulated rock star experience that many are familiar with from other Rock Band games and Activision Blizzard Inc.'s Guitar Hero and brings in the Beatles, who have never before appeared in a video game.
It comes at a crucial time for the industry as sales of music game videos have plunged 46% in the U.S. this year, according to NPD Group.
Viacom will pay Beatles rights holders an unprecedented amount to include the band members' songs and likenesses in the video game. It has guaranteed them a minimum of around $10 million and will shell out royalties of $40 million or more if the game sells as expected, according to three people familiar with the terms of the deal.
"The royalty rates on this are not even comparable to anything that has been done before," said Martin Bandier, chairman of Sony/ATV Music Publishing, a joint venture of Sony Corp. and Michael Jackson's estate, which controls the publishing rights to most of the Beatles catalog.
Others who will benefit from the game include Apple Corps, which represents Paul McCartney, Ringo Starr and the estates of John Lennon and George Harrison, plus EMI Music, owner of their recordings.
Guitar Hero pioneered the music video game genre in 2005 and remains the top seller. Its seven major entries have sold a total of 34.2 million units around the world. And its publisher, Activision, is hardly letting up. Four new Guitar Hero games will debut this fall, including a hip-hop spin-off called DJ Hero and a family-friendly version called Band Hero.
Although Activision spent only $100 million to buy the Guitar Hero franchise in 2005, Viacom has spent more than three times that much on its music gaming ambitions.
In 2006 it paid $175 million to buy Harmonix Music Systems Inc., the development studio that created Guitar Hero and has since released two games under the Rock Band banner that, along with several minor spin-offs, have sold more than 13 million units worldwide.
Last year, Viacom gave Harmonix's owners a bonus of $150 million because Rock Band met sales and gross profit targets set forth in the acquisition agreement.
That's an expensive gambit considering that Rock Band has been a consistent money loser for Viacom, largely because of its plastic instrument-like controllers. Manufacturing them in China, shipping them around the world and packing them into boxes that fit on retailers' shelves have proved more complicated and expensive than the company expected.
Last quarter, for instance, Rock Band dragged down the operating margin of Viacom's MTV Networks to 35% from 39%.
"In the early stages of the property, plastic was a difficult business with very thin margins," said Scott Guthrie, general manager of MTV Games. He expects the company's video game business to be profitable by the fourth quarter.
Getting there will require running counter to potentially troublesome industry trends. Music game sales may be falling not only because of the recession, some industry analysts speculate, but also because consumers are tiring of the genre.
"Music gaming is a trend that became white-hot last year and has cooled off quite a bit," said John Taylor, a video game industry analyst at Arcadia Research.
Viacom and Activision have responded to that slump by bringing in new executives to oversee their music gaming businesses.
And Viacom is shifting its business strategy in an effort to make the Beatles: Rock Band more profitable than the series' predecessors.
Although MTV is offering a limited edition of the Beatles: Rock Band with instruments based on ones used by the band, it costs $250, $70 more than the equivalent version of Rock Band 2 last year. Dollar-conscious consumers who don't already have instrument controllers will probably be attracted to a $160 "value bundle" that uses ones from the original Rock Band that Viacom has been unable to sell.
The marketing material for the Beatles: Rock Band urges consumers to use Guitar Hero controllers, enabling Viacom to piggyback on its more successful rival.
"Our core competency is media," said Paul DeGooyer, senior vice president of electronic games and music for MTV Games. "Let [Activision] take on the burden of getting those super-tight margin instruments out there."
Bobby Kotick, chief executive of Santa Monica-based Activision, said his company was more than happy to sell controllers to the Beatles: Rock Band players, as it has increased the efficiency of manufacturing them this year and earns a profit on them.
Kotick expects that the Beatles game, for which his company made a presentation to the rights holders but never formally bid, is going to be a "big launch." But he said Activision would compete on two fronts.
Guitar Hero 5, which comes out Tuesday, emphasizes value, offering 85 songs and a free copy of December's Guitar Hero Van Halen. It will cost the same price -- $60 -- as the Beatles: Rock Band, which ships with 45 songs.
DJ Hero and Band Hero, meanwhile, feature music that hasn't had much presence in music games previously.
"So far we have only delivered classic rock, so we're going out with a much broader product offering," Kotick said.
MTV's marketing blitz, significantly bigger than for any previous Rock Band game, will initially focus on the most avid gamers, who are likely to buy on Day One, when it goes on sale along with a remastered version of the band's catalog.
As the holidays approach, advertising will aim at nongamers who may be drawn by the appeal of the band.
"We are expecting this game to be a top-five title by the end of the year," Guthrie said.
Based on initial orders by retailers, he predicted that Viacom would have recouped its production costs and minimum guarantee to the Beatles rights holders on the first day of sales.
Beyond that, however, the company will continue to owe hefty rights payments, which Viacom Chief Financial Officer Tom Dooley said on a recent earnings call would result in a profit margin 10 percentage points lower than for other future Rock Band games.
The Beatles: Rock Band's success, however, won't come from store sales alone. In a clear bid to wring more revenue from the property, Viacom is holding back several of the band's best-known albums, such as "Abbey Road" and "Sgt. Pepper's Lonely Hearts Club Band," to be downloaded. Consumers who want to play those albums in the game will have to pay as much as $17 for each.
"The really big opportunity is the downloadable content," Bandier said of the royalties that will be flowing into his company.
The other prospect is turning Beatles game players into Rock Band fans. More sequels are in the works, and Viacom is counting on more people joining what it calls the Rock Band platform this fall.
"We believe the opportunity here is to widen our audience base," Guthrie said. "We absolutely want to get people engaged in our franchise and then widen the genres of music available."