Harmonix confirms layoffs amid sales slump

Just a day earlier, computer game company Activision Blizzard Inc. in Santa Monica, Calif., said it is discontinuing the game series Guitar Hero, which originated with Harmonix and helped create the music game sector. The cuts at both companies underscore the dramatic reversal of fortune that has struck music-related video games, in which players use controllers shaped like musical instruments to play along with popular tunes.

At the peak of their popularity, in 2008, annual revenues from all music games hit $1.7 billion. But sales have plummeted since, dropping by half to $850 million in 2009, due to a sluggish economy and a saturated video game market.

Harmonix was founded in 1995 by chief executive Alex Rigopulos and chief technology officer Eran Egozy, who met at the Massachusetts Institute of Technology’s Media Lab. In 2006, the company was sold to Viacom Inc. subsidiary MTV Networks for $175 million. The original Guitar Hero game, which Harmonix developed with a game company called RedOctane, moved to Activision when that company bought RedOctane. In 2007, Rock Band profits were so strong that Viacom paid $150 million in bonuses to Harmonix shareholders.

Then, in November 2010, Viacom announced that it was putting Harmonix on the block. It turned out that music video gamers were unwilling to pay $50 or more for each new edition of Rock Band or Guitar Hero game software, or for the imitation instruments needed to play the games.

“The problem is that Harmonix’s games are almost too good,’’ said Michael Pachter, an analyst with Wedbush Securities in Los Angeles. “Once people bought a version of Guitar Hero or Rock Band, they really didn’t need to buy another.’’

In December, Harmonix was acquired by New York investment firm Columbus Nova LLC for $50 in cash and the assumption of $100 million in liabilities.

On Monday, the gaming blog Joystiq reported the recent layoffs at Harmonix, which the company confirmed to the Globe yesterday. Activision revealed in a Securities and Exchange Commission filing on Wednesday that “due to continued declines in the music genre, the company will disband Activision Publishing’s Guitar Hero business unit and discontinue development on its Guitar Hero game for 2011.’’

A spokesperson for Harmonix issued a statement yesterday that focused on the future of the company and the music gaming genre, highlighting the game’s newest version, Rock Band 3, and the relaunching of the “Rock Band Network,’’ which provides a gateway for bands to get their music into Rock Band.

“The beat of Rock Band marches on,’’ the statement said. “We’re continuing to invest in the franchise and the brand that we have built, and will do our best to serve all loyal band game fans.’’

But according to Wedbush’s Pachter, sales of the recently released Rock Band 3 have been “disappointing.’’ By contrast, Dance Central, a game Harmonix designed for Microsoft Corp.’s Xbox 360 and its new hands-free Kinect game controller, which allows players to mimic on-screen dancers as the Kinect device watches their movements and grades their performance, has been a success, perhaps an indication of Harmonix’s future direction.

“Harmonix will continue to innovate. They are very smart,’’ Pachter said. “But they know now that their entire future is not in music player games.’’

D.C. Denison can be reached at denison@globe.com.