GTA Should Generate $1 Billion Annually Like World of Warcraft, says DFC

At DFC Intelligence we often get the question whether there are any pure play public video game companies worth bothering with outside of Nintendo, Electronic Arts and Activision Blizzard. Surprisingly, among companies strong in North America and Europe the pickings are slim. Nevertheless, one of the first companies that comes to mind when a discussion turns to buying a portfolio in the video game industry is Take-Two Interactive (NASDAQ: TTWO).

The problem with Take-Two is simple, the company is almost completely dependent on the Grand Theft Auto franchise. Prior to launching Grand Theft Auto IV in April 2008, Take-Two stock soared to a high of $26 to $28 a share where it remained for several months after the launch. A year later the stock (like most others) had plummeted to the $5 to $6 range. However, by early November, Take-Two’s stock had rebounded to over $11 a share. Clearly there is an issue to how much a company like Take-Two is worth.

One thing that is for sure is the rebound in Take-Two stock in recent months has not been due to financial performance to date. Take-Two has had a dreadful performance both in the year to-date and also in the last reported fiscal quarter which ended July 31st. Of course, the main culprit is that in 2008 Take-Two had Grand Theft Auto to carry the day.

Clearly Take-Two’s value is largely dependent on the GTA franchise. So how much is a franchise like Grand Theft Auto worth? In 2008, Take-Two Interactive was the subject of a hostile takeover bid from Electronic Arts at a price that valued the company at nearly $2 billion. EA was primarily after GTA with a secondary interest in basketball and some other sports franchises. Take-Two fought off the takeover bid, only see their market value fall below $500 million a year later. Today the market value of Take-Two is headed up towards $1 billion again. Investors are clearly seeing value in GTA that is separate from the reality of Take-Two’s actual financial performance.

From DFC’s perspective a franchise like Grand Theft Auto is a potential goldmine in the right hands. There is all kinds of potential to gain additional revenue streams from GTA. The success of products like Zynga’s Mafia Wars shows not only the hunger for crime games, but also new ways to monetize the genre.

Grand Theft Auto titles have historically been lavish affairs with releases few and far between. However, there is now the opportunity to deliver GTA products in more frequent episodic releases between major product launches. On October 29, Take-Two launched an add-on pack of downloadable content (DLC) to Grand Theft Auto IV, The Ballad of Gay Tony. This pack was exclusive to the Xbox 360 as a $20 download.

Clearly the release of The Ballad of Gay Tony had a major impact. When analyzing GamerDNA data on Xbox 360 usage, the audience for Grand Theft Auto IV quadrupled nearly overnight with the release of The Ballad of Gay Tony.

In short, Grand Theft Auto alone is a franchise that should be generating World of Warcraft like numbers of over $1 billion a year on a consistent basis. The question becomes: is Take-Two the right company to take it to that level? Or would a franchise like Grand Theft Auto be better off in the hands of either 1) a larger publishing goliath or 2) a more innovative player familiar with online monetization techniques?

The fact that Electronic Arts was unable to enter areas like mobile games and social games without buying its way in (through purchasing respectively Jamdat and Playfish), gives one little confidence that EA could bring much to the table. Instead, a company like Take-Two seems ripe to partner with or merge with a smaller startup that has know-how which Take-Two lacks.

What Take-Two does know how to do is get products into physical retail distribution. Take-Two got its start in distribution and its Jack of All Games division is still going strong. In fiscal 2008, Take-Two generated over $300 million in revenue from distribution. For the first nine months of 2009, Take-Two’s distribution revenue was down only 9% versus a 58% decline in publishing revenue. This distribution muscle can be very attractive to an online company that lacks a way to go to physical distribution. Retail is still an important part of the business, for the release of Gay Tony, Take-Two also released a $40 retail pack that included previous DLC.

One thing that will be interesting to see is whether Take-Two’s financials get a lift in the fourth quarter which ends October 31. In the last week of the quarter, Take-Two released not only the GTA DLC, but also the game Borderlands from Gearbox Software. Based on DFC Intelligence analysis of Xbox 360 user data we think that in just its one week of availability in October, Borderlands moved between 500,000 to 600,000 units just in the U.S. Borderlands could finally be the new franchise Take-Two needs to go beyond Grand Theft Auto.

In the end, the story with publishers like Take-Two Interactive is that there main value lies primarily with 1) the untapped potential of their key franchises and 2) their ability to get big products through the retail channel. Where Take-Two needs help is realizing the untapped potential to expand a franchise like GTA to online revenue sources. Meanwhile, there are plenty of companies with online know-how but no ability to get a product into distribution.

Published courtesy of DFC Intelligence