Sega head: Industry stunned by Activision/Vivendi merger

December 4, 2007, 4:12 AM UTC

By Jeffrey M. O’Brien

On one level, the proposed $18.8 billion merger of Activision (ATVI) and Vivendi’s Blizzard Entertainment (EPA:VIV) seems to make a lot of sense. Good mergers maximize revenue by combining non-overlapping products (like the Guitar Hero Franchise, Tony Hawk, and the World of Warcraft phenomenon), and maximize profits by consolidating administrative costs. But in an industry like gaming, there’s an X factor, creativity. Sure, these companies fit together nicely in terms of lineup and their combined revenues can rival the Madden-sized gaming king, EA (ERTS). But then what? Can a Santa Monica gaming publisher run by a fast-talking CEO and a division of a French media conglomerate ever come together as one cohesive unit?

To get another perspective on the deal — and just to talk about gaming in the midst of the holiday sales season — I swung by the offices of Sega of America to talk to President and COO Simon Jeffery. He says the merger caught everyone off guard. “Activision has long been looking for a way to merge, and Bobby Kotick hasn’t made any secret of his desire to build a company to challenge EA,” Jeffery says. But EA CEO “John Riccitiello was just saying there wouldn’t be any big deals in the pipeline for quite a while. I was calling around this weekend when we heard about it and everyone was taken by surprise. Even the management at EA was stunned by it.”

Whether the companies can find creative synergy is unknown — but geography won’t be a barrier. Activision and Blizzard are across town from each other, but that no longer really matters. Each has development studios all over the world. Same for Sega. And besides, Jeffery says geography just isn’t generally an issue anymore. Two-thirds of Sega’s game development happens in the U.S., but the company has outposts in Australia and Europe — and it relies on the Japanese studios for the “edgier, more creative, wacky stuff.”

As for the potential upside at a combined Activision Blizzard, Jeffery says the merger doesn’t really buy a new set of relationships, but at some point, a huge company can use its girth to bully a retailer into carrying a game. That could prove useful for the combined company when launching new titles. “Powerful retailers like Gamestop (GME) can make buying decisions that can hurt a smaller company,” he says. “But if you’re EA, you can say, ‘Ok, you don’t get Madden then.”

Will the proposed merger have any effect on the sixth-largest publisher, Sega? Jeffery says “not much.” He’s mainly focused on watching the holiday season, which he expects Nintendo to win. “We think the Wii will sell the largest volume,” he says, before correcting himself. “Actually, the DS will be the biggest platform.”

But now that Sony’s PS3 has hit the magic sub-$400 price point, it will give both Nintendo and Microsoft’s (MSFT) Xbox 360 a run. Sega is developing for all four platforms and the company is banking on two new titles, Mario & Sonic at the Olympic Games (executive produced by legendary Nintendo creative head Shigeru Miyamoto) and The Golden Compass to score big at retail. Further out, Jeffery says he has high hopes for the company’s Ironman game, tied to the May introduction of the movie, starring Robert Downey, Jr., and directed by John Favreau, both of whom are involved in development of the game.