EA's Game-Making Play for Take-Two

CEO Riccitiello's bid for the owner of the Grand Theft Auto franchise dovetails nicely with his strategy for a reinvigorated Electronic Arts

by Cliff Edwards and Matt Vella

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Just months after John Riccitiello took the helm last year as chief executive for Electronic Arts, the top independent video games publisher, he delivered a stunning indictment of the industry: "We're boring people to death," Riccitiello said last July of the long-held penchant for developing hit franchises and updating them year after year. "There's been lots of product that looks like last year's product—that looked a lot like the year before."

Yet on Feb. 24, Riccitiello appeared to dust off the very playbook he suggested the industry throw out. EA (ERTS) revealed it had been rejected twice in unsolicited offers to acquire troubled New York-based Take-Two Interactive Software (TTWO), which has made its fortune almost solely on the controversial and violent franchise of carjacking games known as Grand Theft Auto.

It would bring yet another franchise into EA's portfolio. Take-Two has lucrative deals with Major League Baseball and the National Hockey League that produce annual updates to get consumers to shell out $50 to $60 year after year.

Critical Timing

At first blush, it would appear Riccitiello has little choice. EA's crown jewel Madden NFL franchise was the company's only title among the 10 best-sellers in 2007. And with EA's pipeline of new games backloaded with releases in the second half of 2008, he's betting a quick purchase of Take-Two will bring an immediate return on the investment. A delay in reaching a deal that extends much beyond the release of a new Grand Theft Auto installment in late April "will make this asset less valuable," he says.

Wall Street tends to agree. Analyst Todd Mitchell at Kaufman Brothers Equity Research predicts Grand Theft Auto IV will sell as many as 4.5 million copies in just a few weeks after its release. What's more, Mitchell notes, Take-Two also owns popular franchises such as Sid Meier's Civilization series and the recently introduced BioShock console and PC game. Both could contribute significantly to EA's portfolio, he says.

Recent Restructuring and Recruiting Efforts

Looking at the bigger picture, the potential acquisition fits nicely into Riccitiello's long-term strategy. He has tackled the internal ennui that was building around the company's game lineup by shaking up the status quo, bringing in fresh content and developers, while delaying the release of games he considered unready for prime time.

In just a year on the job, the industry veteran has attempted to foster new creativity by restructuring the company into four semi-autonomous divisions that look decidedly less corporate than the EA of yesteryear. And though he's called many game franchises boring, he has never said he plans to abandon the system that has made the company so popular with investors.

Indeed, EA has moved aggressively to acquire talented developers who have created online multiplayer games and content that capture consumer interest—franchise or not. "Take-Two's extraordinarily talented creative teams deserve a permanent home with a stable and growing publisher that will provide an environment that allows them to do what they do best—create great games," Riccitiello said in a conference call Feb. 25 with analysts.

There's a big risk, of course: Many of those coveted Take-Two developers could jump ship with any takeover, said Shawn Milne, Oppenheimer's online commerce and interactive entertainment analyst. He also pointed out in a note to clients that "a significant portion of Take-Two's titles are unprofitable."

Ancillary Opportunities with Take-Two

But EA still stands to benefit from the potential acquisition. EA's frontal assault on one of its chief rivals would remove the only significant competition to its core sports business, which brings in 43% of the company's annual revenue. "Take-Two's sports franchises are additive to EA, enabling them to eliminate competitors. Everything else is gravy," says Wedbush Morgan Securities analyst Michael Pachter.

And games such as Take-Two's BioShock could be developed into movies, books, and toys under Riccitiello's strategy to better distinguish EA from rivals without such ancillary businesses.

But even if Take-Two succeeds in rebuffing the offer, EA won't be in dire straits. It has more than a dozen major titles coming this year. Spore, a game from Sims creator Will Wright in which players develop a society from a microbe to an intergalactic empire, is one of the most anticipated games of the past decade. Its launch, slated for Sept. 7, is likely to add a much as half a billion dollars to EA's revenues this year.

Riccitiello believes EA may one day even go so far as to give away many of its games for free, making its money off action figures and other licensing deals the same way that George Lucas did with the Star Wars movie franchise. That may be a long way off, but it's clear that the course the company charts over the next few years is going to be anything but boring.

Edwards is a correspondent in BusinessWeek's Silicon Valley bureau. Matt Vella is a writer for BusinessWeek.com in New York.