Take-Two Interactive Software, Inc.

views updated

Take-Two Interactive Software, Inc.

575 Broadway, 6th Floor
New York, New York 10012
U.S.A.
Telephone: (212) 334-6633
Fax: (212) 334-6644
Web site: http://www.take2games.com

Public Company
Incorporated: 1993
Employees: 658
Sales: $387 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: TTWO
NAIC: 511200 Software Publishers

Take-Two Interactive Software, Inc. is a New York-based developer, publisher, and distributor of interactive software games. A leader in its field, Take-Two has global reach, with publishing and distribution operations located in Canada, the United Kingdom, France, Germany, Denmark, Italy, Australia, and Japan. The company offers products, either created internally or acquired through third party developers, for all major game consoles (including Sony’s PlayStation2, Nintendo’s GameCube, and Microsoft’s Xbox), as well as for personal computers and handheld computing devices. Take-Two’s distribution subsidiary, Jack of All Games, is America’s top console game distributor, selling to such major customers as Wal-Mart, Toys ‘R’ Us, Target, Kmart, Blockbuster, and Amazon. In recent years Take-Two has established a presence in online multi-player gaming, which promises to be a future growth area in the highly competitive gaming industry.

Take-Two Founded in 1993

Take-Two’s founder was Ryan Brant, the son of Peter Brant, newsprint heir and co-owner of Interview magazine. While earning a degree in economics at the University of Pennsylvania’s Wharton School of Business—from which he graduated in May 1992—Brant gained practical business experience working for his father. He served as the chief operating officer of illustrated book publisher Stewart, Tabori & Chang from May 1991 until August 1993, but anxious to forge his own business career he decided to leave the traditional publishing world. In a 1996 Forbes profile, he explained, “I wanted to get into a business where I could raise capital as a younger guy. In technology people expect you to be a younger person.” Through family and private investors the 21-year-old entrepreneur was able to raise $1.5 million and establish Take-Two in the fall of 1993.

Early on, Brant forged a relationship with Bob Fish, a partner in charge of the entrepreneurial practice of major accounting firm PriceWaterhouseCoopers. PWC offered a significant discount on its services for the start-up, in anticipation of Take-Two becoming a profitable business that in the future could afford to pay a standard rate. According to Brant, “We were looking for somebody who could handle the company as a small firm and grow with us.” The much older Fish would play a significant role in helping to shape the structure of Take-Two.

At the outset Take-Two was simply another computer and video game developer in search of a hit product. It was one of the first developers to invest in well-known actors to star in its live-action products. The trend was started by Mechadeus, a San Francisco game developer that had used an unknown actress in its 1993 offering, Critical Pass. As a follow-up to that modest success, in order to appeal to the target audience of 16 to 35-year-old males, the company hired Tia Carrere, known for her work in the films Wayne’s World and True Lies. The resulting game, The Daedalus Encounter, became an immediate success. Take-Two hired acting legend Dennis Hopper to star in its game Hell: A Cyberpunk Thriller. Released in December 1994, the game would sell 300,000 copies worldwide over the next six months and generate a healthy profit for the company. For its Ripper game, Take-Two then devoted $625,000 of a $2.5 million production budget to sign veteran actors Christopher Walken, Karen Allen, and Burgess Meredith. Not only did the use of name brand talent boost sales, it made it easier for companies like Take-Two to pre-sell its games to overseas distributors in order to raise money to cover production budgets.

In March 1995, Take-Two was established enough to negotiate a four-year licensing arrangement with Sony, allowing it to develop games for Sony’s popular PlayStation game console. Take-Two’s early success then attracted the attention of Acclaim Distribution Inc., the powerhouse distribution operation of Acclaim Entertainment that boasted a 10,000 store network. In February 1996, Take-Two reached an agreement with Acclaim to distribute its titles, starting with Ripper and followed by Hell: A Cyberpunk Thriller and Star Crusader. Despite forging this important alliance, Brant was dissatisfied with the state of Take-Two, which at this point was generating around $10 million in annual revenues. As quoted in a 1999 Crain ‘s New York Business article, Brant observed, “One day we woke up and said, ‘We’re going to get killed here unless we get bigger.’”

Goint Public in 1997

Three years after starting Take-Two, Brant initiated a string of acquisitions that would dramatically expand the company’s business, turning to Fish for help with the resulting accounting and tax issues. Take-Two’s first purchase was completed in September 1996 when it paid nearly $1.75 million in cash and stock for Mission Studios Corporation, a flight simulation game developer whose only product to date was JetFighter III. The game was subsequently released by Take-Two two months later. In order to fund further purchases, Brant then took steps to take the company public. With Whale Securities acting as its underwriter, Take-Two, in April 1997, completed an initial public offering of stock, priced at $5 a share and netting close to $6.5 million. An additional $4 million was raised late in the year through the issuance of promissory notes to venture capitalists.

Although far from an imposing war chest, these funds were sufficient enough for Take-Two to begin to widen its focus from software development to include publishing and distributing games, as well as to extend the company’s reach overseas. In July 1997, Take-Two acquired GameTek (U.K.) and its operation that distributed computer software games in Europe and other international markets (renamed Take-Two Interactive Software Europe Limited). In addition, Take-Two acquired game developer Alternative Reality Technologies, Inc. from GameTek, in the process gaining a number of games, including Dark Colony, The Quivering, and The Reap. As part of the GameTek transaction, Take-Two hired Kelly Sumner, an executive officer of GameTek. Sumner would ultimately become Take-Two’s chief executive officer. Keeping on experienced management would also become part of Brant’s strategy for external growth. Furthermore, in July 1997, Take-Two acquired Inventory Management Systems, Inc. and Creative Alliance Group, Inc. Both companies were involved in the domestic distribution of software games for both game consoles and PCs. In December 1997, Take-Two acquired Alliance Inventory Management, a wholesale distributor of games and hardware in the United States. By building a distribution business, Brant was ensuring additional outlets for Take-Two games and, more importantly, establishing a more consistent revenue base than could be expected from the hit or miss existence of a game developer.

Take-Two continued to grow its business in 1998. In addition to its earlier licensing arrangement with Sony, Take-Two signed a three year deal to develop games for the Nintendo game console, followed by a similar agreement with Sega and its Dreamcast system. In March 1998, Take-Two strengthened itself in a number of areas by acquiring the BMG Interactive unit from Bertlesmann AG for approximately $14.2 million in stock. Take-Two gained a sales, marketing, and distribution operation in France and Germany, as well as a product publishing and distribution business in the United Kingdom. In addition, Take-Two gained a back catalogue of games and the distribution and sequel rights to twelve video and PC game titles. Out of this collection would come Take-Two’s first major worldwide hit, the Sony PlayStation car game Grant Theft Auto, which over the course of the next 18 months would sell over 1.5 million copies. Take-Two also bolstered its game development business by acquiring the UK studio Spidersoft, which it renamed Tarantula and devoted to the development of products for the Nintendo GameBoy Color platform, and the U.S. developer Talonsoft, which was devoted to the creation of historical strategy games (a deal not completed until early 1999).

Take-Two added other important properties to its distribution business in 1998. In June it acquired DirectSoft Australia in a $256,000 stock transaction that added distribution operations in Australia and New Zealand. Domestically, Take-Two took a major step in August 1998 when it acquired Cincinnati-based of All Games Inc., which greatly expanded the company’s distribution channels in the United States and contributed handsomely to the bottom line. For the year, Take-Two more than doubled its revenues over 1997, growing to $191 million; net profit grew to $7.1 million, a significant improvement over the company’s $3.6 million profit in 1997. Take-Two was one of the few companies located in Manhattan’s Silicon Alley to actually make money, yet investors remained somewhat skeptical, viewing it as a collection of companies with no discernable long-term strategy for the future. As a result, the price of the Take-Two’s stock showed little movement, despite the company’s respectable balance sheet.

Company Perspectives:

Take-Two Interactive Software, Inc. is a leading worldwide publisher, developer and distributor of interactive software games.

Take-Two’s product offerings include titles for the leading hardware platforms, such as PlayStation, PlayStation2, Xbox, Game Boy Advance as well as for PCs. Games are published under the Take-Two, Rockstar Games, Gathering of Developers, TalonSoft, Pop-Top and Global Star labels.

In 1999, Take-Two continued to reach out in a number of directions. It greatly increased its spending on research and development of new games, from $1.7 million during the previous year to $5.2 million. Take-Two firmed up its hold on the profitable Grand Theft Auto game by acquiring the outstanding capital stock of its developer, DMA Design Holdings Limited. The company acquired Bungie Software Products, maker of software games for PCs, and Telstar Electronics Studios, the interactive software division of U.K. music publisher Telstar Group pic. Moreover, Take-Two purchased a 19.6 percent stake in a game start-up called Gathering of Developers (GoD) and signed a five-year deal to distribute the company’s PC titles in the United States and Europe. GoD was created by a group of established Texas game developers, some of whom were responsible for the creation of the highly popular Quake and Doom games. They formed GoD as a way to gain more leverage for independent game developers in an industry increasingly dominated by non-creative entertainment industry executives. For Take-Two, forging a relationship with the talent included in GoD was considered a major coup. Recognition of the creative people behind interactive games was also a major factor in the company forming its Rockstar Games label, part of an attempt by a number of companies to begin marketing game authors—in effect, to make rock stars out of engine programmers.

Building an Online Presence in 1999 and Beyond

Take-Two made a number of purchases in 1999 to build up its distribution business. In February, it acquired L.D.A. Distribution, which distributed interactive games in both the United Kingdom and France. In addition, Take-Two picked up a video game accessories manufacturing subsidiary, Joytech Europe Ltd. In March 1999, Take-Two added the budget software publishing and distribution operations in Norway, Sweden, and Denmark of FunSoft Nordic A.S., which was renamed of All Games Scandinavia. Later in the year, Take-Two paid $2.2 million to acquire Verte Italia Spa, a publisher of software and video games with a major distribution operation in Italy. Take-Two also began to look to the Internet in 1999, an area that held great promise for the future of interactive gaming. The company began development of an multiplayer online version of Grand Theft Auto, which the company anticipated would become the first in a number of its titles to be converted. Take-Two also gained a toehold in online commerce with the acquisition of DVDWave.com, retailer of DVD movies, a site on which the company hoped to soon start selling games. Investors took some notice of Take-Two activities in 1999, bidding up its stock above $13, although the price would again sink to the $7 level before finding a middle ground. Nevertheless, Take-Two continued to grow its balance sheet at a furious pace. Revenues in 1999 increased by more than 57 percent over the previous year, topping $300 million, while net income more than doubled to $16.3 million.

In 2000, Take-Two acquired the outstanding shares of GoD, making the game developer into a wholly-owned subsidiary, and also purchased PopTop Software. Aside from these investments, Take-Two devoted much of its cash to growing its online endeavors. In February, it acquired a stake in eUniverse, a major online gaming and entertainment network that boasted more than 6 million unique visitors each month. The investment paved the way for Take-Two to promote its games on the site, including the creation of online communities created around the company’s titles. In March 2000, Take-Two purchased the Israeli video technology company, Pixel Broadband Studios, developers of software that transmitted video games across high-speed Internet access networks. Also in 2000, Take-Two bolstered its online presence by signing a deal with Freeloader, a free downloadable games portal. Furthermore, the company established a London-based subsidiary, Broadband Studios, to focus on the development of online games.

After acquiring more than two dozen companies in the past four years, not all of which lived up to expectations, Take-Two had taken on considerable debt, a situation that troubled investors. Take-Two, however, continued to increase sales at a steady rate despite a general downturn in the tech sector, posting revenues of $387 million in 2000 and income of almost $25 million. For Take-Two, 2001 was a transitional year. Kelly Sumner took over as chief executive, while Brant remained as chairman of the board. Sumner announced that his focus would be on further international expansion. The company enjoyed a run-up of its stock, topping out at $24.50 in June. It fell to the $13 range by early September when the terrorist attacks on the World Trade Center temporarily shut down the business and caused a precipitous decline in Take-Two stock. The company soon regained its balance, and actually looked to benefit from the attacks, with consumers expected to stay home and engage in activities such as interactive games rather than venture outside, a situation that occurred a decade earlier during the Gulf War. Moreover, the gaming industry expected that Microsoft’s Xbox entry in the gaming console business would also spur game sales. As the year came to a close, however, rumors began to circulate that Microsoft was interested in establishing itself in the software side of the gaming industry. To many, Take-Two, with its relatively low stock price and diversified business, was clearly a prime candidate. Whether independent or part of a behemoth like Microsoft, Take-Two appeared destined to remain a major force in the interactive gaming industry.

Principal Subsidiaries

Mission Studios, Inc,; Take-Two Interactive Software Europe Limited; Inventory Management Systems, Inc.; Jack of All Games; Gathering of Developers, Inc.

Principal Competitors

Activision Inc.; Acclaim Entertainment Inc.; Capcom Co.; Eidos pie; Electronic Arts Inc.; Hasbro, Inc.; Konami Co. Ltd.; Midway Games, Inc.; Microsoft Corporation; Mattel Inc.; Namco Ltd.; THQ Inc.