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WIKI ANALYSIS
Take-Two Software is a publisher of video games for platforms such as Playstation, Xbox, Wii, and the personal computer. It's Grand Theft Auto franchise has sold over 66 million units across multiple titles, and has been widely criticized (or celebrated, depending on the audience) for its focus on violent and criminal content.[1] Its newest title, Grand Theft Auto 4 earned more than $500MM in its first week of release in Q2 of 2008.[2]
In Q1 of 2008, competitor Electronic Arts (ERTS) offered approximately $26 per share, or $2B in aggregate, for the Take-Two, which the board rejected, citing expected strong sales of 2008 titles including Grand Theft Auto 4 and arguing that ERTS' offer was below market value.[3] Following positive reviews of Grand Theft Auto 4 in late April of 2008, Take-Two's stock price rose well above EA's offer price, to $27.10.[4] EA's second extension remained open until May 18, 2008, but TTWO continued to resist, and after that date passed without a deal EA extended its deadline to June 16, 2008.[5]
As TTWO continues to hold out as an independent company, the hit-driven nature of the Video Game Industry suggests that the company's success in 2007-2008 developing franchises such as award-winng Bioshock [6] and GTA bodes well for the company's future earnings.
Business Description
Take-Two is a developer, publisher, and distributor of video games. It also competes on a variety of gaming platforms, such as the PC, XBox, Playstation, Wii, and other portable devices. TTWO divides its financial reporting into Publishing and Distribution segments. For more information about these two segments, please see Video Game Industry.
Publishing
Development studios create content and TTWO publishes them under two primary labels:
- Rockstar Games - TTWO's internal development and publishing operation, which releases titles such as GTA 4, Midnight Club, Max Payne, Manhunt, and Bully. [7]
- 2K - Publishes other non-Rockstar developed titles, focusing on specific markets and opportunities:
- 2K Games - The primary publisher to externally developed games fitting in the traditional "hard-core" gaming segment, publishing titles such as The Elder Scrolls 4: Oblivion.[8] Also markets some internally developed titles such as the Sid Meier games, Civilization, and BioShock.[9]
- 2K Sports - The primary publisher of internally developed sports games, such as NBA 2K, NHL 2K, etc. This segment has secured long-term licensing contracts with properties such as the NBA, MLB, etc.[10]
- 2K Play - The primary publisher of externally developed games fitting in the new casual gaming segment, which include TV-show tie-ins, such as Deal-or-No-Deal, and other family-oriented gaming titles.[11]
Distribution
The distribution business handles logistics of distribution for published titles, and also helps distribute other companies' software and hardware through TTWO's retailer network. The company is able to do this due to the retailer-relationships it has established over the course of many years of operations, selling its games across North America, and thus it is able to offer it as a service to third parties as well.
Game Portfolio
While Take 2 did not have a Top-10 selling title in 2006 or 2007, "Grand Theft Auto 4" is expected to take the crown for 2008, easily outselling Halo 3, the top title of 2007.[12] In fact, GTA4 smashed Halo 3's record of $300 MM nearly two-fold, selling 6MM copies worth $500MM.[13]
Across the PC & XBox 360 platforms, Take 2 announced, as of December 19, 2007, over two million copies of BioShock have been shipped.[14] In addition, a PS3 version of BioShock is set to hit stores at the end of October for Europe and beginning of November for US.[15]
Other well-received franchises included "Civilization", "NBA 2K", "MLB 2K", "Midnight Club", and various other games.
Financial Analysis
| Metric ($MM) | 2005 | 2006 | 2007 |
| Revenues | $1,201.2 | $1,037.8 | $981.8 |
| Operating Income | $38.0 | ($187.2) | ($126.1) |
Revenues have fallen since 2005, as TTWO is strongly affect by "hit" nature of their games. Sales of GTA3:San Andreas accounted for over 25% of the company's revenues in 2005.[17] Concurrently margins have gotten worse, due to general rising development and overhead costs. More information can be seen in the individual publishing and distribution businesses. Overall operating income was negative for FY 2006 and FY 2007. This may be partially due to the fact that margins were depressed due to the delay of GTA 4, which had a large development team. TTWO's cost structure is not ideal, with investors leading a board-revolt in Q1 of 2007.[18]
Gross margins at Publishing have gotten worse, partially caused by lowered prices on older-generation products as the company prepared for the next-generation consoles[22], as well as higher royalties due to sales of third-party titles such as Oblivion.
Margins in the Distribution Segment have largely stayed flat, as has its contribution to overall revenue, highlighting the static nature of the distribution business.
It remains to be seen how release of TTWO's expected mega-blockbuster GTA4 will affect margins and revenue growth.
Console games make up a significant portion of TTWO's sales, with the variability between 2005 and 2006 PC/Console sales mix largely caused by the staggered platform launch of San Andreas (2004 for PlayStation 2, 2005 for PC).
Compared with its peers Electronic Arts (ERTS) and Activision (ATVI), TTWO has a relatively low mix of international sales, with over 2/3's of sales in 2005-2007 coming from Domestic and Canadian sources. The violence in many of TTWO's games contributes to the difficulty in distributing them abroad, as well as the higher level of consciousness US gamers have of many TTWO titles, which have become part of popular culture in the United States. This concurrently boosts domestic sales and depresses international sales.
Summary Statistics of the information above can be found in the table below for precise reference:
| Revenue Shares (%) | 2005 | 2006 | 2007 |
| Publishing | 70.9% | 72.6% | 70.5% |
| Distribution | 29.5% | 27.4% | 29.1% |
| Publishing Gross Margin | 44.9% | 24.8% | 31.7% |
| Distribution Gross Margin | 9.2% | 9.0% | 9.4% |
| % of Net Revenues | |||
| US/Canada | 68.1% | 68.7% | 75.3% |
| EU/AP | 31.9% | 31.3% | 24.7% |
| % of Publishing Revenues | |||
| Console | 78.5% | 60.2% | 72.2% |
| PC | 11.5% | 16.6% | 13.5% |
| Handheld | 7.7% | 20.0% | 11.5% |
| Accessories | 2.3% | 3.2% | 2.8% |
Trends/Forces
GTA, the Crown Jewel of TTWO
Take 2's Grand Theft Auto franchise is one of the most coveted brands within the Video Game industry. It's games has an untarnished track record of both quality and sales. The latest installment of the series, GTA IV was released on 4/29/2008. Within 1 week, GTA IV sold 6 Million copies and brought in $500 Million in revenue.[25]. As of August 16, 2008, Take 2 announced over 10 Million copies have been sold through to customers. [26]
In addition, to strong sales from GTA IV, legacy GTA titles (GTA III, GTA: Vice City, and GTA: San Andreas) continues to perform. In FY08 Q3 alone, over 1 Million units of older GTA titles were sold through to customers. [27]
Upcoming installments of future GTA games include 2 DLC Episodic Contents for GTA IV and GTA: Chinatown Wars for the Nintendo DS.
Violence in Some of Take 2's Properties Increased Undesirable Regulatory Visibility
Several of Take 2 franchises, particularly those developed by Rockstar Games, have been lightning poles for critics of video game violence. This attention has led to bans and increased regulation in various countries. Australia banned GTA3: San Andreas[28] and UK originally banned sales of Manhunt 2 for graphic violence but ultimately lifted the restriction after a face off in court.[29] The Hot Coffee modification for GTA3: San Andreas raised scrutiny on video games in the United States, despite protection by the First Amendment. Due to the Hot Coffee modification, sales of the game was temporarily suspended until the mod was fully removed. It is debatable whether or not the mod increased sales of GTA 3 or decreased it.
Low # of Casual Games Exposes Take 2 To The Casual vs Hard-core gamer Dichotomy
Most of Take 2's games fit within the traditional "hard-core" gaming category, catering towards the specific 18-35 year old male demographic. While this has fostered a devoted fan base, it has also limited the company's ability to expand beyond into the growing gaming demographics of younger children, females, and older males. Take 2 has taken various steps to address this flaw, establishing the "2K Play" publishing label, obtaining an exclusive license with Nickalodean to develop games around "Dora the Explore" and "Go, Diego, Go" [30], and creating the Carnival Games franchise. But the fruits of these results have yet to be fully realized, if any will appear.
Additional Revenue Streams
Multiplayer capabilities have become an extremely important aspect of video games. The online multi-player aspects of GTA4 have been highly lauded by critics, but fail to capture incremental revenue on top of the one-time sales. However, Take 2 is attempting to capitalize on the large # of GTA4 players by selling episodic content via the XBox Live Service.[31] In addition, to episodic content releases for GTA4, a publishing deal has been sign Cryptic Studios to help releases its newest forth coming MMO.[32]
Take 2 has also begun to explore other revenue streams from advertising, music and film, outside of the normal game publishing and distribution. An in-game advertising deal is still in effective with Double Fusion to provide ads within various Take 2 games released.[33]. A BioShock movie has been announced[34] and an in-game music store in GTA IV has been created with Amazon.[35].
Competition
- Electronic Arts (ERTS) - The industry's largest player, with a significant portfolio of sports-related software titles that generate consistent revenue year after year. EA is pursuing an acquisition of TTWO in Q1-Q2 of 2008.
- Activision (ATVI) - 2007's most successful publisher excluding Nintendo (NTDOY), with 3 of the top 10 selling games.[36]
- Konami (KNM) - Japanese publisher, which has published hits such as the Metal Gear franchise
- THQ (THQI) - Developer/Publisher which houses 16 development studios.
Market Share
Take-Two is one of the industry's largest publishers, trailing Electronic Arts (ERTS). ERTS' bid in Q1 of 2008 seeks to combine the two publishers to stave off threats from the Activision-Vivendi combination.
| Company | 2006 Market Share |
| Electronic Arts | 19.80% |
| Konami | 9.80% |
| Take 2 Interactive | 8.90% |
| Activision | 8.80% |
| Other | 52.70% |
References
- ↑ Game Industry "Grand Theft Auto series has sold 66 million units to date" March 12, 2008
- ↑ Yahoo (Reuters) ""Grand Theft Auto" sales top $500 mln in 1st week" May 7, 2008
- ↑ Dealbook Blog "Bailing Out at Take-Two" March 11, 2008
- ↑ Dealbook Blog "Grand Theft Auto Reviews Lift Take-Two’s Stock Above Bid Price" April 29, 2008
- ↑ Dealbook Blog "Electronic Arts Extends Bid for Take-Two Again" May 19, 2008
- ↑ Joystiq "BioShock kindly receives AP's game of the year award" Decebmer 17, 2007
- ↑ Take-Two Software, FY2007 10-K "Rockstar Games" pg.4
- ↑ Take-Two Software, FY2007 10-K "2K Games" pg.5
- ↑ Take-Two Software, FY2007 10-K "2K Games" pg.5
- ↑ Take-Two Software, FY2007 10-K "2K Sports" pg.5
- ↑ Take-Two Software, FY2007 10-K "2K Play" pg.5
- ↑ Cnn.com "Grand Theft Auto 4 set to blast sales records" April 29, 2008
- ↑ Yahoo (Reuters) ""Grand Theft Auto" sales top $500 mln in 1st week" May 7, 2008
- ↑ Take-Two Software "Recommendation of the Board of Directors to Reject Electronic Arts Inc.'s Tender Offer"
- ↑ BioShock 2 Release Date
- ↑ Take-Two Software FY2007 10-K "Consolidated Statement of Operations" pg.60
- ↑ Take-Two Software FY2007 10-K "Publishing" pg.42
- ↑ Seeking Alpha "Boardroom Coup At Take Two Interactive" March 30, 2007
- ↑ Take-Two Software FY2007 10-K "Results of Operations" pg.37
- ↑ Take-Two Software FY2007 10-K "Publishing" pg.38, 42
- ↑ Take-Two Software FY2007 10-K "Distribution" pg.39, 43
- ↑ Take-Two Software FY2007 10-K "Publishing" pg.42
- ↑ Take-Two Software FY2007 10-K "Results of Operations" pg.37
- ↑ Take-Two Software FY2007 10-K "Results of Operations" pg.37
- ↑ GTA IV 1 Week Launch Results
- ↑ Take 2 FY08 Q3 Earnings Release
- ↑ Take 2 Interactive FY08 Q3 Conference Call Transcript
- ↑ Afterdawn "GTA: San Andreas banned in Australia" July 29, 2005
- ↑ Manhunt 2 Unbanned in UK
- ↑ Nickalodean Pre-School Game Properties
- ↑ GTA IV Episodic Content
- ↑ MMO Publishing Deal w/ Cryptic Studios
- ↑ In-Game Advertising Deal w/ Double Fusion
- ↑ BioShock Movie w/ Universal Studios
- ↑ GTA IV Music Store
- ↑ 1Up.com "NPD Fallout: Activision is Top Publisher of 2007" January 18, 2008
- ↑ Datamonitor Industry Reports "US - Video Game Industry" July 15, 2007
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