PS3 Informer

Take Two Doesn't Need Another GTA in 2010

Michael Pachter is beginning to show his age. The Wedbush Morgan analyst, who has made a name for himself predicting the ups and downs of financial fortunes in the video game industry, thinks that we need more Grand Theft Auto soon. However, this is a short-sighted view which ignores the current realities of the video game publishing market and places too much emphasis on a single bellwether IP. Take Two's (TTWO) strategy of releasing polished hit games in a variety of different genres is more in line with the current economic reality.

Still, the analyst thinks that a development cycle of three years or more is too long for a game with such massive appeal. The problem, Pachter pointed out in a recent statement, is that Dan Houser and the rest of the company leadership has not provided any indication about when the next installment of GTA might arrive. Pachter thinks that because GTA is still the most important horse in the Take Two stable, that uncertainty is likely to spook investors.

"We think that the lack of visibility around the GTA franchise is an impediment to attracting investors to the Take-Two story, and reflects poorly on management. In our view, if the company's most important franchise is on a three and a half year schedule, management owes its shareholders the obligation of informing them of this fact. With no visibility into the timing of the next installment of GTA, we think that many investors will remain skeptical of the Take-Two story," Pachter said.

However, by worrying about a last-generation hit like Grand Theft Auto shows that Pachter is out of touch with the current state of the video game industry.

Importantly, the economic recession has impacted all media content sectors, including the video game industry. With jobs in short supply and American consumers reining in spending, expenditures on video games have been lower this year than in years previously. The effect of this economic uncertainty is that developers, publishers and investors have become more risk-averse. A botched release that doesn't garner stellar review scores will have a very difficult time attracting gamers who are intent on making every dollar count. That's why developers and publishers need to make sure that they deliver a polished, bug-free and well-marketed final product. The decision by Take Two to delay the new Max Payne game to Q4 2010 suggests that the company understands this dynamic well. It is economic folly to rush a game out the door in an incomplete state when it has the potential to deliver much greater profits as a polished hit.

Take Two has delayed Max Payne in order to polish the title and market it more successfully.

At the same time that it focuses on producing quality products in the near term, Take Two needs to keep another eye on the future. A sustainable business model needs more than just one hit game repeated ad nauseum. The publisher already successfully fought off a takeover bid from Electronic Arts, but in order to continue to operate independently, Take Two needs to create many more successful franchises and continue to innovate in terms of gameplay. The company's upcoming Red Dead Redemption is a good example of leveraging existing technology (the GTA IV engine) while providing original new content. We predict that the game will be a surprise hit, easily surpassing sales of the PS2 original. Rockstar's PS3 exclusive title The Agent is another potential mega hit. The company's products have traditionally performed very well when paired with Sony hardware, and the growing installed base of PS3 owners make this a potentially profitable project in the same way that Grand Theft Auto III was.

Finally, judging by the mood on message forums and other gaming communities, it is apparent that the public has grown weary of the Grand Theft Auto formula, at least for the moment. With two sizable downloadable content packs recently released for the 2007 game, the Housers have barely even finished fleshing out their vision of GTA IV, let alone started thinking about GTA V. The GTA series is not like Madden, where gamers are willing to pony up their money for what amounts to incremental changes in gameplay. If the Housers can't deliver a GTA installment that feels fresh and innovative, it would ultimately hurt sales and drive away fans. Luckily, the developers and management seem to understand this crucial point. In a recent conference call, Take Two chairman Strauss Zelnick said essentially the same thing:

"We don't feel that GTA ought to be an annualised franchise. There's a balance between how long it takes to develop such an incredible title... and how long you wait for the [customer's] appetite to be both satisfied and whetted for the next title. That's something I think the company has done well." Zelnick stated in a conference call with investors.

Investors who become skittish because a Grand Theft Auto sequel is not forthcoming in 2010 probably have the wrong approach. The video game industry currently depends on hit titles, but those hits need to be innovative, polished and marketed properly in order to succeed. Grand Theft Auto is only one part of Take Two's overall publishing strategy, which needs to be managed appropriately with an emphasis on quality and innovation.