So, lets summarize a bit.
Activision-Blizzard and Microsoft are safe, at least, safe insofar as Altman’s Z test is concerned. Both are highly capitalized companies that are not in any immediate danger of failing.
EA’s likelihood of failure is increasing, but there is still time to make some moves to turn the company around.
The same cannot be said for the last three companies in this North American group: Take Two, THQ, and Midway.
For these companies, it is time to figure out what can be saved/sold, and make an orderly exit towards the Courts.
Bankruptcy Simulator
- Z-Score: 1.86
- Key Games: Grand Theft Auto, Max Payne, Bioshock
- Key Takeaway: You can be innovative, and you can be controversial, but that does not mean you will be profitable.
- Strategy for 2009: Keep Rockstar, Divest of Rest.
Take Two is one of the innovators in the video game industry.
Rockstar Games is Take Two.
Rockstar’s Grand Theft Auto 3 was a major gaming milestone-it was the game that defined the open world “playground” or “sandbox” game format. GTA3 allowed you to complete the story missions in any order you chose, or allowed you to just explore the world they created.
It is a milestone in gaming, no matter what you think of the subject matter.
Since then, I hesitate to say Take Two has rested on its laurels. Rockstar Games has been refining the Grand Theft Auto and Midnight Club series, Firaxis is milking the Civilization series for all it is worth, Bioshock made us name check Ayn Rand, and Bully takes us all to boarding school.
Take Two has a solid lineup of titles, and their games are often exposed to a plethora of publicity for the moral, philosophical, social, and political questions the games present the player.
The reason for this is that Rockstar Games tend to put a mirror up to the player and ask a very simple question: what type of person are you? The answer to that plays itself out in the virtual world they lay out for you.
It is quite possible to complete a GTA title (for example) without doing anything unsavory, such as mowing down pedestrians, killing prostitutes, or killing police. The fact that you can do all of those things in the game has resulted in controversy.
In fact, the games do not really judge either way: there are consequences of your actions, but there are no real value judgments in the game. Most of the drama of the Grand Theft Auto series takes place in between your ears, rather than on the screen.
Rockstar Games develops the video game equivalents of indie films.
That lies at the crux of what is ailing Take Two: they are a gaming “art house” that management decided should be a major studio like EA, and embarked on an ill advised growth by acquisition strategy that has all but bankrupted the company.
In terms of strategy, broadening your product lines so that you have revenue when your major titles are under development makes perfect sense. Adding additional head count, expense, and acquisition costs to achieve that are the intelligent way to do that.
Let’s start with the premise that each acquisition that you make that does not support your core brand takes resources away from it.
According to the latest earnings call, Take Two’s 2008 revenues are broken down roughly as follows:
- 45% Rockstar
- 25% 2K Sports
- 20% 2K Games
- 10% 2K Play
Now, 2K Games includes what is left of Irrational and Illusion Softworks. If you realigned them to where they should be structurally, Take Two’s revenue breakdown would look more like:
- 55% Rockstar
- 25% 2K Sports
- 10% 2K Games
- 10% 2K Play
Again, Rockstar Games is Take Two.
So with 36 titles currently under development, it follows that each dollar spent that does not support Rockstar is a dollar mismanaged.
I think that is why EA took their hostile takeover bid off the table.
While Riccitiello is right, EA could take Take Two and plug it into EA’s marketing machine and make gobs of money, a glance at Take Two’s revenue structure and their management efficiency gave them ample cause to let the offer expire.
So, is it too late for Take Two?
Without a good turnaround strategy, one which realigns the company around Rockstar, I don’t see them coming out of bankruptcy.
What Take Two should do, assuming they go into bankruptcy protection, is position one or more of Max Payne, Manhunt, Bioshock, Mafia, and Midnight Club as major franchises to release in an non-GTA year, to streamline the revenue cycle in a way that makes sense to investors.
Then Take Two should determine which products and studios do not align with Rockstar Games, and sell them off.
I think EA is waiting in the wings to see if Take Two will fail, so it could pick up Take Two’s intellectual property/studios on the cheap. I just hope they have the good sense to leave Rockstar Games the hell alone.
Take Two is a cautionary tale: know what your company is all about, and maximize that.
