Innovation & Design

Take-Two's (Predictable) Profit Surge


The publisher of megahit Grand Theft Auto IV swings to a Q2 profit of $98.2 million, amid a hostile takeover bid from rival Electronic Arts

Crime pays. High on the success of its gangland epic Grand Theft Auto IV, Take-Two Interactive announced on June 5 surging second-quarter results, reporting net profits of $98.2 million, or $1.29 per share. The results painted a stark contrast with the same period last year, when the company faced net losses of $51.3 million.

Those rosy results come in the midst of an ongoing standoff with the games industry's largest publisher, Electronic Arts (ERTS), which is making a hostile $2 billion bid for Take-Two (TTWO). On a conference call with investors, executives stayed mum regarding any possible deal, except to confirm they were engaged in discussions with parties other than EA. "Despite the distractions, everybody has their heads down and a smile on their face," said Take-Two's chairman, Strauss Zelnick, of the firm's employees.

Take-Two's would-be acquirer has its eye fixed on Grand Theft Auto, perhaps the industry's most consistently profitable franchise aside from Vivendi's (VIV.PA) World of Warcraft massively multiplayer online role playing game. GTA IV, which was released Apr. 29 for Microsoft's (MSFT) Xbox 360 and Sony's (SNE) PlayStation 3 consoles, has shipped 11 million units worldwide so far. The game's launch set opening records by becoming the highest-grossing entertainment product in history, generating some $310 million its first 24 hours of availability. (By comparison, last year's Halo 3 brought in $170 million and the Harry Potter & the Deathly Hallows book release made $220 million in the same time period.)

Hard Act to Follow

During the quarter, GTA properties—the latest release as well as all previous versions—made up 78% of Take-Two's publishing revenues, underscoring how integral the franchise is to the company's financial health. Executives also confirmed that so-called episodic content for GTA IV—a for-pay download addition for the Xbox 360 version of the game—would not be available until the first quarter of 2009. Zelnick said the decision to delay the product was "primarily for portfolio balance"—in other words to have a GTA-branded title to offer the masses next year.

Indeed, confronting a post-GTA world (a further follow-up will take years to develop), Take-Two is trying to make the most of its upcoming slate of games. The company said it had 33 titles in various stages of development, including follow-ups to its popular BioShock, Mafia, and Midnight Club series. Executives would not comment on a possible mobile version of GTA IV.

Going forward, the company needs a more robust game plan. For instance, its 2K Sports business will not be profitable this fiscal year as previously expected, as it has lagged behind other developers, including properties from EA's own sports divisions. But Take-Two executives bristled at suggestions that the company shed the ailing division. "Frankly, we'd be loath to do that," said Zelnick, adding such a move would not "maximize shareholder value."

One year into a highly scrutinized turnaround, the long-troubled Take-Two is in the best financial position in recent memory. But the company is also keenly aware the June 5 announcement could, in retrospect, amount to a high-water mark following GTA's release. "We've got a long way to go in terms of innovation," admitted Zelnick. "And that doesn't happen over night."

Vella is a writer for BusinessWeek.com in New York.

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