First, let’s talk about the good news.

In 2009, according to the 10-K annual financial statement published this morning by Viacom, Harmonix and MTV Games publicly traded parent company, the Rock Band franchise sold 1.8 million bundles, 2.6 million games, and 614,000 hardware peripherals.  Also, there were over 50 million songs downloaded!  So with that, I say bravo!  But let’s get to what I’m sure everyone else will be reporting soon…

The 10-K statement also had one interesting financial disclosure within.  Here’s what was stated in the 10-K for Viacom (NYSE – VIA), followed by my (educated) interpretation:

Contingent Consideration on Acquisitions

The Harmonix acquisition agreement provided that to the extent financial results exceeded specific contractual targets against a defined gross profit metric for the calendar years 2007 and 2008, former Harmonix shareholders are eligible for incremental earn-out payments. In 2008, we paid $150 million, subject to adjustment, under this earn-out agreement related to 2007 performance. At December 31, 2009, we believe that we are entitled to a refund of a substantial portion of amounts previously paid, but the final amount of the earn-out has not yet been determined.

Now, reviewing 10-K’s used to be my livelihood, so let me translate out of accountant-speak in to what this actually means…

Viacom agreed to pay the Harmonix founders a $150 million bonus, apparently with the stipulation that if Harmonix did not meet defined profitability metrics setup during the acquisition, portions of the bonus must be paid back.  With the music gaming genre “softening” in 2009, financial results did not meet the projections, and thus the founders may not be entitled to the entire $150 million.

For a little background: As a publicly traded company, Viacom explained to analysts what type of financial growth they expected from their acquisitions (i.e. Harmonix).  And the way the market works, if the analysts think they can do better than that, they adjust the expected results, and communicate to shareholders what to expect.  If the analyst-prepared target isn’t reached, the shareholders get pissed and Viacom suffers… it’s kind of odd how the market works that way, but that’s the short answer. (This explains why, for example, if Microsoft has record earnings, but if they didn’t do what they were expected by Wall Street, their stock price still goes down.)  And since there are two ways to reach expected profits: either increase revenue or decrease expenses, when 2009 was trending away from the gangbusters conclusion initially expected of them, efforts were initiated (almost assuredly by Viacom) to get as close to expected results as possible, and subsequently the axe came down.

One thing that I have a feeling most video games blogs reporting this will probably report is that “Harmonix is bleeding money!!1!” which is not necessarily the case.  As explained above, the gross profit financial targets were not met, which is much different than saying they are not profitable.  Viacom, like many other publicly traded companies, does not report the financial results for specific subsidiaries, usually based on the sheer quantity, as well as proportional materiality of them, so unfortunately there is no way to corroborate this.

Add your $.02 below… sorry, bad financial pun…

[SEC filing... you can look, but it'll probably be mostly gibberish to you]

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