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Activision Stuns With Firing of 'Modern Warfare 2' Execs

The video game world was reeling Tuesday after two top executives and the developer responsible for last year’s biggest game were suddenly and unexpectedly dismissed.

Modern Warfare 2
Modern Warfare 2

Jason West and Vince Zampella, the president and CEO respectively of Infinity Ward, have left the company, apparently removed by publisher Activision after alleged “breaches of contract and insubordination”. (Infinity Ward is a wholly owned subsidiary of Activision.)

Employee turmoil is commonplace at game publishers—the industry has seen multiple thousands of layoffs in the last 12 months—but when the people affected are the leads on “Call of Duty: Modern Warfare 2,” it’s something that makes investor ears perk. “MW2” set new industry sales records last year, selling 4.7 million copies in its first day in the U.S. and U.K. alone. In January of this year, the game passed $1 billion in retail sales.

The company did not reveal further details for the action and did not return calls for comment. Broadpoint AmTech analyst Ben Schachter, in a note to analysts, pointed out, though, that there has been recent chatter on Wall Street “regarding possible M&A interest about Infinity Ward from private equity firms and others.”

The long-term impact on Activision is unclear. The company, in a 10-K filing on Monday noted that an internal investigation was occurring at the developer and was “expected to involve the departure of key personnel and litigation.” (West and Zampella were not named specifically in the filing, but both have indicated via their LinkedIn pages that they have left the company.)

“At present,” Activision said in the filing, “the company does not expect this matter to have a material impact on [earnings].”

It certainly won’t affect this year’s “Call of Duty” installment. Activision leapfrogs development of the games between two studios. The 2011 installment of the game will be developed by Sledgehammer Games, a new wholly-owned studio that is being run by former Electronic Arts game makers, Activision said Tuesday afternoon.

The company also announced the formation of a business unit that will focus exclusively on the “Call of Duty” games and it is in discussions to extend the franchise to Asia.

Infinity Ward is reportedly working on a new franchise, which might have spurred some of the outside interest. The developer is also working on downloadable content for “Modern Warfare 2” that is expected to contribute up to 4 cents per share to Activision’s 2010 earnings.

The larger question is how will the team at the development studio react to the departures. Infinity Ward created the “Call of Duty” series and installments made by the team have consistently earned higher critical scores. Turmoil and turnover could negatively impact that, which could impact earnings long-term.

That said, recent consolidation in the industry has resulted in a sizable pool of notable talent. And if the current team sides with its former managers and leaves, it would quickly be replaced.

“Given Activision’s studio compensation model (based on franchise profitability), we would believe there would be no shortage of top development talent looking to work on such a valuable brand,” writes Janney Capital Markets analyst Shawn Milne.

Activision Publishing CTO Steve Pearce and Steve Ackrich, head of production, will lead Infinity Ward on an interim basis.

Activision is also hardly a one-trick pony. “Call of Duty” is a franchise that is very important to the company, but the publisher also derives substantial revenue from titles created by Blizzard Entertainment. That group is expected to release two games this year – the long-awaited “Starcraft II” and an expansion pack for its hit online game “World of Warcraft”. Both games are expected to be enormous sellers.

And while the music genre is nowhere near as large as it was two years ago, Activision’s ownership of the “Guitar Hero” franchise will continue to bring in respectable revenue.

Many analysts, in fact, believe the company’s 2010 guidance is conservative. Between the expected reception for Blizzard’s upcoming titles and the next “Call of Duty” (which won’t come close to matching last year’s sales, but will still likely do well), the rest of the company’s games can perform just marginally and Activision will hit its numbers.

While the headlines with the Infinity Ward situation will be ugly (particularly among the gaming press), Activision (as a company) is doing substantially better than its competition. Electronic Arts , the one-time leader among game publishers, has laid off thousands of employees and been unable to turn around losses. Take Two Interactive Software has warned investors that it will not make a profit this year, despite having the strongest lineup of games in years.

Activision, though, remains a top-rated stock among analysts.

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