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Analyst: Take-Two Not A 'One-Hit Wonder,' But 'Overly Ambitious'
by Leigh Alexander [PC, Console/PC]
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December 4, 2009
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Analysts and investors' biggest reservation about publisher Take-Two is its inconsistency -- specifically, whether the publisher can be profitable in a year that it doesn't release a Grand Theft Auto game.
Just yesterday, the publisher warned its investors of poorer-than-expected financial performance and a reduction in its forecast for the year, citing underperformance of its holiday games and Major League Baseball franchise.
But the company is no "one-hit wonder," says Wedbush Morgan analyst Michael Pachter. In fact, he says, the company "has at least eight bona fide franchises, with the potential for 10 or 12." Take-Two's problem, according to the analyst, is that it aims too high.
"While making solid decisions about greenlighting games, we believe that management has been overly ambitious about the company’s development schedule," says Pachter, who criticizes the company for "unpredictable" release dates and the way its high quality standards routinely force it to delay major games, as it's done with BioShock 2 and Max Payne 3.
Investors would also be justified in having reservations about the lack of visibility on the key GTA franchise, says Pachter, who suggests Take-Two would benefit from more predictability on when new GTA games will launch.
Grand Theft Auto IV took 3 1/2 years to develop, and a new version hasn't even been announced yet, the analyst points out. "Dan Houser, one of the three key employees behind the franchise (along with brother Sam and producer Les Benzies) said in a recent interview that the trio hadn’t even thought of the locale for the next installment, let alone the plot," he says.
"While we find this unfathomable, if it is true, it suggests that there will not be another installment of GTA until late 2011 at the earliest, putting the game on a 3 ˝ year release cycle," adds the analyst.
"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 3˝ year schedule, management owes its shareholders the obligation of informing them of this fact."
Finally, as Pachter notes, Take-Two's lineup is "quite impressive" -- and yet company management has said may not be able to profit on $1.2 billion in revenue.
"We think that this is probably true, and wonder when the company expects to have a sufficiently deep lineup to permit revenue growth to a profitable level without an installment of GTA," he says.
The analyst estimates Take-Two could turn a profit if it were able to sell 12 million units of its new franchises -- but says it's "unlikely" that can happen, and that with its current release pattern, investors can continue to expect Take-Two to lose money in non-GTA years.
"Of course, if Take-Two can deliver its franchises on a more compressed schedule, its earnings power would essentially double, and the stock would command a much higher price," he says.
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Yeah it would be so much better in the long term for them to have low quality standards and put out sub-par titles and destroy these two IPs for future games/revenue.... yeah that makes sense.....
You're right, since we all know innovators like Apple sell at absurdly low share prices... like say $192 per share. And Google, they innovate but never see a return in share price. They're sitting at the rock bottom price of $585 per share.
Like anything else, there is no general statement to make about the stock market. Yes, some company execs focus purely on short term results and temporary spikes in stock price to cash in on performace bonuses and what not, but a vast majority of publicly traded companies balance their short term and long term goals.
Were I employed by Take Two I would be in constant distress over the inconsistent earnings by my employer. It essentially creates a sense that the non-GTA release years are prime for layoffs or that the non-GTA products are of less value since they are not expected to truly benefit the bottom line.
@Louis-Félix Cauchon: The different with Blizzard is that it has remained profitable despite it's game delays and mysterious product launch schedule. They have earned the ability to control their releases around quality due to the very fact that they are not losing money in the interim.
@Joe Woynillowicz: The complaint is not focused on the game delays, but Take Two's inability to have the foresight to predict the delays much earlier into development. It could benefit the company not to announce consistently incorrect launch timeframes that then throw quarterly/yearly revenue forecasts completely out the window once delays hit. Compare this to Nintendo for example. Nintendo is generally vague regarding their release schedule until development hits clear milestones. They are not sporadically rearranging their announced release schedule.
There are far better game industry analysts out there. His attitude and his ego make him an unreliable steward for your investments. Put this guy to pasture.
I really do not understand why people pay as much attention to Pachter as they do. In fact, I quote him only once in the entire book, and that one quote is to point out my disagreement with his analysis.
Keep in mind that analysts are trained to focus on short term financial trends, and they often lack long term strategic thinking. That said, there are a few good analysts, like Haider Farhan of Bear Stearns, whom I quoted in 2006 for his prediction of the success of the Wii when others were ridiculing Nintendo and predicting Microsoft's dominance. This is what Farhan had to say about the Wii in May 2006:
"Although the PS3 does have better graphics and we're willing to bet it'll have a really wide array of games to select from, we're really looking forward to the Nintendo Wii and all its titles. We feel the fun aspect the Wii will deliver is going to be difficult to beat with better graphics alone."
Pachter has little understanding of the segmentation of the video game market. For example, he recently said that “the Wii audience will grow more sophisticated, and will want games like BioShock and GTA.” Although I agreed that Nintendo needs to upgrade the Wii, Nintendo's target market is not going to abandon the console because they want to play Bioshock! Instead, the threat comes from Nintendo's competitors as they seek to offer more products that appeal to casual gamers.
They need to be vague so the quarterly/yearly revenue is not riding on this product's sales. If 75% of their portfolio (or a large majority of their high profile franchises) is delayed to another quarter throughout an entire year, then something is very wrong with how the company can predict their releases.
No one is stating that Take Two should stop making high quality games, simply that they provide a predictable and reliable earnings estimate. This can only be done if the development cycles of these games are better planned to either allow for delays or for the bottom line of the company not to change so sharply when these delays occur.
Very interesting arguments!! You guys are why I love this site. I think that many people over-value Pachter's insight into this industry. He advises investors on current trends that are affecting their monies currently. He is not the final word. He is a valuable source for a particular point of view. That being the view of an investor for his/her earnings this quarter. That's his job. Where T2 can improve is in letting their INVESTORS know that GTA will not be out until 201? at the earliest. Then they can manipulate their monies as they see fit. Sell, don't sell. At least they know. "And knowing is half the battle." There is absolutely nothing wrong with delaying a game until it's ready. Nintendo has proved that. Can a game have strong sales in the spring? T2 has already proved that. Develop a reputation for quality with your best franchises - that's a best case scenario!! When the public sees the name, they will buy without reservation. Ask Bungie.
These type of gamers should quite frankly be largely ignored.
Brand equity does matter so the game quality in a franchise clearly makes a difference in profitability. A case in point is how the Tony Hawk franchise crashed from a Madden-level annual franchise into nothingness. And exploited franchises that release yearly games simply to meet a bottom line are often met with scorn (i.e. EA and its mediocre churning of sequels for major franchises like the Sims) by "hardcore" gamers. But as the Wii has shown these people are but a fraction of the gaming audience.
Games are not free to make. They have huge sunk costs that only increase with time and sales that will generally decrease the farther a release console is into its life cycle and the deeper and cheaper it's game library.
You don't necessarily have to sacrifice quality for a yearly release schedule. The COD franchise is a prime example of this. Infinity Ward only develops every other title and develops the brand equity. The odd-numbered titles in the Franchise are off lower quality and many "hardcore" gamers don't buy them but they still sell very well and the larger portion of the market which is more "casual" audience of the PS3 and 360 still buy them. Overall, the net result is that more people are made happier with a snappier release schedule.
And there are clear cases where delays have really hurt companies and the market. Sony could have really used Gran Turismo 5 this holiday season as a 1-2 punch (with the price cut) to massively boost sales in Japan and Europe. This in turn would've ensured a larger install base for many publishers that are releasing sony-exculsive and multiplatform games in the next 6 months. Square's bottom line was massively hurt by how delayed FFXII--which was released so late in the PS2's life cycle it only sold a few million copies whereas it probably would have sold closer to FFXs numbers of almost 10 million if it had been release during the PS2's heyday. Square is a company that has faced serious profitability problems as it's titles have weakened vis-a-vis the American market with Oblivion and Bioware RPG's becoming more popular and WOW being vastly superior to FFXI.
On net though, there is absolutely nothing that declares profit suffers from a more consistent and predictable release schedule. The entire business benefits from top games being released at a faster rate. EA takes this to an extreme but it is also a very profitable company with a large stable of "high quality franchises" and still releases new types of high quality games like Dead Space.
I also think that the "hardcore" gamer fanboy that whines about quality above all else should be ignored. Like it or not casual and casual-hardcore make up a huge part of the market and their spending is what makes games profitable enough and the market big enough for developers to take risks on larger and better games.
After all, if a company doesn't have any plan as to how it's going to be making money (and where it's going, what it's focus is, etc) that's a bad thing.