JULY 23, 2007 • With Viacom’s re-entry into the gaming industry comes a lot of buzz and great expectations. Clearly such a media giant could have a profound effect on the gaming landscape. In other words, some caution is in order.

Briefly summarized the largest branch on the Viacom tree, MTV Networks, has recently completed an $800 million shopping spree of gaming properties. In the last two years the company acquired the in-game messenger program Xfire, GameTrailers.com, Neopets, and Harmonix to name a few. At the same time, MTV also spawned a vast library of online games based on its Nickelodeon characters with sites like nickjr.com, nick.com, and nickarcade.com. In 2006, it also acquired Atom Entertainment, which is parent to shockwave.com and addictinggames.com. Finally, MTV announced with much fanfare during GDC07 that game industry mammoth Electronic Arts would be developing Rock Band, the new game from the now in-house Harmonix, developers of the hit Guitar Hero series for Activision.

In July 2007, MTV’s Nickelodeon division announced plans to invest $100 million to expand its games business. This includes subscription services Nick Gaming Club and MyNOGGIN (for preschoolers). It will also include trying to expand AddictingGames and Neopets. Neopets will be renamed Neostudios in a clear effort to get on the virtual world bandwagon.

Such a sudden and forceful push requires context. For one, there’s the question of historical continuity. Despite the shopping spree, Viacom hastily exited this sector about a decade ago. So what, if anything, should make us believe that Viacom today is better suited to prosper in this sector than before?

Prior to being acquired by Viacom in 1993, Paramount had three interactive divisions: Paramount Interactive, Paramount Publishing New Media, and Simon & Schuster. Of these three only the last one was allowed to continue after the acquisition. Following, in 1998, through a controlling share in Spelling Entertainment, Viacom sold the development operations of Virgin Interactive to Electronic Arts. Eventually the entire group was sold and, after briefly being owned by Interplay, ended up in the hands of former French publisher Titus.

Other game industry activity includes a major investment in the 1994 creation of a publishing and development studio called Viacom New Media and Redstone’s long held stock in game developer Midway. While currently unthinkable, Viacom had even shown interest in acquiring Electronic Arts, but changed its mind when it saw the $20 billion price tag at the time.

Not being able to capitalize on opportunities has dogged Viacom’s game properties in the past. In 2001 Simon & Schuster (fully owned) made a big push on games. One of the biggest efforts was publishing a major massively multiplayer online game (MMOG) from developer CCP, EVE Online. However, under Simon & Schuster’s watch sales of EVE Online performed poorly. Subsequently the game’s developer CCP decided to take control of the game and handle its own distribution via online sales. In the 12 months following, EVE Online saw its subscriber base double. Today, its base of about 150,000 subscribers paying $15 a month proves that the potential was there. EVE Online is a prime example of how large media companies are often simply not setup to handle products designed for the enthusiast consumer that is starting to dominate the Internet age.

Even tangentially, Viacom has had less than successful impact on video games. Activision which had a 10-year contract to the development rights for Star Trek licenses, sued Viacom for breach of contract. According to the 2003 complaint, Viacom had “significantly diminished the value of Star Trek licensing rights,” because it failed and refused “to continue to exploit and support the franchise as it had promised.” Star Trek has never come close to living up to its potential to be licensed into games.

When its game operations and game-related business decisions fizzle out, Viacom historically has retrenched rather than addressing the reasons behind the disappointments. The grand total of Viacom’s gaming activity paints a picture that leaves one hardly optimistic. It suggests that when game companies are acquired by Viacom, they eventually end up being shut down, spun off, or unable to fully realize the potential of their properties.

What is different today, is that Viacom depends on maintaining a strong presence across consumer platforms. This forces the company to be on the constant look-out for new ways to monetize its content and aggressively pursue new digital channels to connect with audiences, reporting a 19% revenue increase over 2006 – mostly from streamlining its operations – with almost 38 percent of its revenue coming from advertising alone ($4.3 billion).

The ability to offer cross-licensing arrangements with its well-known MTV franchise remains a strong bargaining chip. Its current portfolio of broadband networks, which include MTV’s Overdrive and Turbo Nick, offers free ad-supported content to an alleged 24 million unique users and provides more than 100 video streams per month. According to comScore/MediaMetrix, Viacom’s U.S.-based sites attracted more than 40 million unique visitors in December 2006, a 94 percent increase from the year before. And in its effort to generate a greater online and gaming presence for its operations, MTV recently claimed a cool 600,000 registered users to its Virtual Laguna Beach based on its TV show The Hills.

But perhaps the most telling decision took place at the top. In 2006 Philippe Dauman, one of Redstone’s closest, replaced Tom Freston as CEO. Immediately following, the company appeared in the news frequently regarding license related lawsuits. Given Dauman’s track record in the company as senior vice president and general counsel since 1993 this is hardly a surprise. After failing to strike an agreement with Google’s YouTube in what seems to be the logical step for a broadcaster, Viacom instead signed one with the much-anticipated peerto-peer video platform Joost. And additionally began suing Google for copyright infringement on its YouTube site

The pattern that emerges is one centered on intellectual property. While seeming to embrace emergent new forms of media entertainment, the company has clearly placed a much greater focus on protecting its existing library. Instead of fueling innovation, much of Viacom’s recent activity is either defensive or attempts to configure new platforms to distribute old-style content. Its loyalties are apparent in a statement recently made by Dauman in the wake of the YouTube debacle. He stated that advertisers were uncomfortable with professionally produced content ending up sideby-side with “homemade, and sometimes bizarre, video clips.”

So rather than having to sue after the fact and not to be outdone in the recent rush on “user-generated content,” virtual worlds, and social networking sites, Viacom too has set it sights on these areas. Notably marked by acquisitions such as RateMyProfessor.com by mtvU and an agreement with a company called Rapt Inc. to deploy a host of technology services (e.g. pricing solutions), MTVN is looking to streamline its online activities. And Nickelodeon has announced the convergence of its various platforms by incorporating “original kid-created content” from its websites into TV shows. Effective game properties play an integral part in driving eyeballs to the sites and into advertisers’ reach.

Interestingly, Viacom’s former twin CBS has also moved into the virtual game space to extend its existing IP. In February 2007, the company invested $7 million in Electric Sheep, a company that develops 3-D properties in virtual worlds like Second Life. Echoing a similar strategy as Viacom, CBS’ chief executive Leslie Moonves voiced the intent to keep making small investments in new media, although he remained a believer in the company’s core broadcasting and billboard operations. Apparently both parts of the old Viacom still maintain a similar strategy.

With the push for a greater presence in the gaming industry, and related markets, in combination with a greater accent on cross-branding and defending intellectual property suggests that Viacom may set the tone for years to come. Specifically, the weight of a media giant may force a young industry to dance to an old tune and make it lose its flexibility.