Take-Two's Flaky Catalyst

When a video game sells well, why not make it a franchise? That's the game plan for Take-Two Interactive Software (NASDAQ: TTWO  ) , as 2K and Gearbox Software just announced that Borderlands: The Pre-Sequel was going to be released this fall. 

Usually, releases of the next iteration of a large franchise gets investors excited. They expect the gamers who played the later versions to rush out and buy the new game (or in this day and age, buy it online.) Shareholders should be warned in this case, though, because past trends aren't quite in Take-Two Interactive Software's favor.

A decline
According to VGChartz, the first Borderlands sold 3.24 million copies for the Xbox 360, 1.91 million copies for the PS3, and 0.13 million copies for the PC. Around 0.13 million copies of the Borderlands: Double Game Add-On Pack (which comes with two downloadable content packages) also sold when it came out a year later for the Xbox 360. When you add up all the numbers, Take-Two was able to sell a healthy 5.41 million copies of its first game in the franchise. 

To try and keep the momentum going, Take-Two released Borderlands 2 in 2012. This iteration sold 2.68 million copies for the Xbox 360, 1.73 million copies for the PS3, and 0.68 million copies for the PC. This paints a gloomy picture for investors banking on blowout sales of Borderlands: The Pre-Sequel, as the total copies sold for Borderlands 2 fell by 5.9% compared to the first game. 

Now keep in mind there could be some discrepancies in these numbers, like how Borderlands came out in 2009 while Borderlands 2 came out in 2012; this gave Borderlands more time to sell more copies. The decline is still there, though, which at the very least makes it hard to be bullish on the upcoming "pre-sequel."

Left out
One huge factor that investors have to consider is that Borderlands: The Pre-Sequel isn't available on the Xbox One or PS4. The rational behind this move can easily be sumed up in these two quotes from Gearbox Software president Randy Pitchford.: 

It's not free to build a game for next-gen. When you're deciding where you're going to spend your resources, I think we're going to spend all of the attention we can on the game itself.

And if you try to imagine the set of Borderlands players that have already upgraded [to Xbox One and PlayStation 4], that's not 100 percent. The difference in users who own newer consoles but do not have an Xbox 360 or PlayStation 3, is so close to nil that you can't make a business rationalization around that.

The general idea is that most gamers who would want to purchase Borderlands: The Pre-Sequel still have their Xbox 360 or PS3 and therefore would still want to purchase the game. In the short term this does sound like a good idea, as far more Xbox 360/PS3 consoles have been sold than Xbox One/PS4 consoles. It's also cheaper to develop for the older hardware.

In the long term, however, Borderlands: The Pre-Sequel and its downloadable content will be cast off to the side as more games for the next-gen consoles come out and more PS4 and Xbox One consoles are sold. Why would gamers who own a PS4 or Xbox One want something that doesn't utilize the expensive hardware they just bought? This will cause sales to fall off faster than normal, shortening the life cycle of the game.

On a positive note, it does look like the "Borderlands" franchise has a solid fanbase. According to GameSpot, Borderlands was well received with a rating of 8/10 from GameSpot, 81/100 from Metacritic, and an average user rating of 8.5/10. For Borderlands 2, GameSpot's data paints a similar picture. GameSpot gave it a rating of 8/10, Metacritic gave it 89/100, and the average user gave it a 8.5/10. 

So even though Borderlands 2 lagged behind Borderlands, maybe all is not lost. At the very least there is a sizable fanbase waiting for the chance to pounce on the newest edition in the series. If this is true, then these gamers are more likely to purchase high-margin digital content like DLC packages that add more to the game. 

Another bright spot for Take-Two Interactive Software is that even though unit sales fell for Borderlands 2 versus Borderlands on the Xbox 360 and PS3, it shot up (off a very low base) by over 500% on PCs. If the new "Borderlands" game can hold its own in console sales, then maybe another sharp uptick in PC sales can revive growth. 

Foolish conclusion
To be fair to Take-Two, both "Borderlands" games did sell over 5 million copies. This time around, however, Borderlands: The Pre-Sequel won't be able to bank on major sale price cuts down the road to keep up sales a year or so after its released. By that point, many gamers will have moved on to the next generation of gaming. All in all, don't invest in Take-Two expecting blowout sales of the new "Borderlands" game. Look at its other emerging franchises like Evolve.

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Comments from our Foolish Readers

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  • Report this Comment On April 22, 2014, at 10:33 AM, Interventizio wrote:

    The management's reasoning is crystal clear. I'd have done the same. New gen consoles are still not enough widespread.

  • Report this Comment On April 22, 2014, at 1:49 PM, nenhob wrote:


    The 'cartoon' graphics greatly lower dev costs for borderlands versus high res varieties. Also, it wouldn't surprise me if this is simply a compilation of scrapped ideas for both games, thrown together rather quickly, meaning a lot of the dev costs have already been spent. Also, to interventizio's point the install base is very large. a low budget game, coupled with two other releases evolve (which was acquired for pennies on the dollar in a bakruptcy auction) and civilization, as well as annual releases by 2K sports and potential GTA DLC leads me to believe that this isn't even a blip on the radar.

    Also, why isn't this on the yahoo feed?

  • Report this Comment On April 22, 2014, at 6:26 PM, speculawyer wrote:

    A problem with all long-development cycle businesses is that you can't accurately predict the future. A microprocessor architect one said it was like playing Russian-roulette where you pull the trigger and find out 3 years later if you are dead. In this case, there is no way they could have known that the PS4 and Xbone would sell so fast. Console transitions are generally slow. So they just stuck with the old platforms for this pre-sequel.

    But surprise, surprise . . . the PS4 and xbone are selling like crazy. There is actually a shortage of good titles for them. And who ever puts out a good title for them quickly will sell a lot of copies. Titanfall was #1 in March and it was only on the Xbone.

  • Report this Comment On April 24, 2014, at 5:21 AM, callumturcan wrote:

    It is on the Yahoo Feed now, it was posted on April 22 on Yahoo Finance and this article was syndicated on April 21, so there was a one day lag for some reason. I agree that lower development costs will boost margins, I just question how long this game will stay relevant as 5 million Xbox One consoles have been sold and 7 millions PS4 consoles have been sold, and as next-gen console sales rise, in my opinion (I am a very active gamer myself) gamers would prefer to by games that have better graphics, more realistic physic engines, and run on next-gen consoles that support a better overall gaming experience due to significantly better hardware and 300,000 dedicated servers to improve connection speeds. So Borderlands:The Pre-Sequel could sell well initially, but I think that the games life cycle will be short lived and could curb DLC sales in the future or cause the franchise to lose relevance as gamers slowly switch to the PS4 and Xbox One. Maybe it won't, or maybe PC sales could help make up for the short life cycle, but overall I question this approach as it seems more short term and could significantly hamper this franchise. I'm not saying I'm bearish on Take-Two, I just think this could hurt the Borderlands franchise in the long run and could potentially kill the franchise in the long term. Evolve on the other hand is definitely a game you guys should check out, and I provided a link at the bottom so you can check out Evolve. Civilization could also offer plenty of upside, but we will have to wait and see. Grand Theft Auto 5 DLC's have plenty of potential as well and offer high digital margins, but I wouldn't invest in this company because of the new iteration of Borderlands or GTA V DLC's, because beyond the potential short term gain Take-Two could reap, these titles have a limit on how long they will get gamers interested. I prefer to take a longer term approach to investing and think short term moves like this don't provide stable value creation. DLC's are always a smart move, but now it's time to focus on devetloping games for the long term on the next-gen consoles. And on a side note, who is Talum? My name is Callum Turcan, you can see it at the top of the page, but if you were referring to someone else or made a typo I can understand that, just next time use @Callum or @Turcan if you want me to respond back so I know who you are talking to. As far as good titles go, Watchdogs comes up in May and June will see several other intriguing games come out. We can agree to disagree, and it will be interesting how this all plays out and I'll right more video game articles in the future to see how everything goes down. Appreciate the comments, regardless if you agree or disagree me with because you all made valid points.

  • Report this Comment On April 24, 2014, at 1:49 PM, nenhob wrote:


    It was a typo, I apologize. I think you are highlighting my point. With the hard core gamers on next gen only(even without a good game lineup), and TTWO's larger projects throughout the year, I really think this is a non-event and to speculate that the franchise lively hood is someway dependent on this iteration is a little exagerated. As far as the cost structure, I'm just speculating the game could be entirely composed of scrapped previous borderlands concepts. As a casual gamer I may likely buy this title. I am waiting for a decent console price cut, or a game that actually excites me(that may very well be evolve) and I still have plenty of content on old gen. Therefore, my completely unscientific opinion, was the game may appeal to many that have not upgraded, and TTWO is not alone as ubisoft has a similar strategy.

  • Report this Comment On April 28, 2014, at 12:47 AM, nenhob wrote:


    If TTWO's pipeline doesn't impress, do fundamentals? A billion in cash for a 1.7 billion dollar company? We have an EV/E of 4(likely even lower when we get q4 results), a p/s of just 0.7. Looks to be by far they cheapest major producer at the beginning of a new console cycle which historically has dictated the cyclical bottom in video game software sales. Zelnick also promised over 10 games in next gen development, I personally think we are going to see plenty more content in the coming years. And any thoughts of managements repeated promise of "profitability in fiscal year 2015 and the foreseeable future."?

  • Report this Comment On April 28, 2014, at 12:51 AM, nenhob wrote:

    Oh and finally, do you see any upside to GTA online? It appears micro transactions/stickiness have gone very well. Is GTA online in OK standing with the avid gamer? Any potential for a reoccurring revenue stream?

  • Report this Comment On April 28, 2014, at 1:40 AM, callumturcan wrote:

    @nenhob GTA V's micro-transactions will remain strong as many gamers have their credit/debit card hooked up to their console or PC, thus spurring more "compulsive" buying and general purchases overall. When you also factor in that the game sold very well and has an avid fan base, it will contribute somewhat to Take-Two's overall performance over the next few years. Keep in mind that there were some glitches with GTA V online initially, but as long as Take-Two stays on top of its update game then yes there will be reoccurring revenue for some time, which carries very high margins. Also BioShock Infinite will add in reoccurring revenue, as Burial at Sea – Episode 2 was just released.

    Take-Two needs to have a solid pipeline of games, which is why it's so important that investors see how initial reviews are of games like Evolve, because fundamentals can easily change with time and quickly make a stock like Take-Two tank. Take-Two does have almost $1 billion in cash, but it also has $1.163 billion in liabilities, with long term debt coming in at $450 million.

    Currently, GTA V Online and BioShock Infinite will add significant reoccurring revenue, but as far as short term catalysts go Take-Two only has Borderlands and reoccurring revenue to go off of (there are other games but I'm considering the major titles). Unless Borderlands really hits it out of the box, investors would need to wait until we get a better picture of what Evolve sales could look like.

  • Report this Comment On April 28, 2014, at 1:47 AM, callumturcan wrote:

    @nenhob Take-Two could be fairly valued at this time, even if micro-transactions surprise to the upside. As far as long term profitability goes, micro-transactions will definitely help Take-Two get there, but its game pipeline needs to sell well in order to do so. I was bullish on Take-Two before BioShock Infinite came out, but at this time I would hold off on taking a major stake in Take-Two until they release earnings. New games for next-gen consoles are hard to gauge sales wise because so little information is out there, which makes it a hard long term call and more of a speculative bet. At this time it all comes down to how well Borderlands: The Pre-Sequel sells and if micro-transactions hold up (which I'm more bullish on than the new Borderlands), and for long term profitability than is dependent on a solid game pipeline and fiscal responsibility. I know Take-Two's fundamentals look strong now, but keep in mind that GTA V and BioShock, its two best titles, were just released. Going forward Take-Two doesn't have the luxury of banking on what worked in the past.

  • Report this Comment On April 28, 2014, at 1:50 AM, callumturcan wrote:

    @nenhob there is also the new Civilization V bundle for the PC and the Borderlands 2/Dishonored Bundle for every type of gaming system, but this is just trying to rehash old income and won't offer that much potential.

  • Report this Comment On April 28, 2014, at 10:07 AM, nenhob wrote:


    Thanks for the feedback! I think you are very spot on with your industry analysis. It is a hit driven business and TTWO is by far a risky bet. EA and ATVI have more diverse product offerings, however I think EA lacks direction(I'd like to see the CEO at the helm for a little longer) and ATVI is artificially overvalued in my opinion due to they enormous success of WoW and COD (however hearthstone seems to be a hit so my opinion could be entirely irrational and perhaps ATVI deserves it's premium).

    Thankfully I have been long TTWO for a little over a year now (pipeline seemed insane at the time, BL2, BSI, and GTA V, althought GTA was delayed, were all lined up within a 12 month window. My macro catalyst was next gen consoles.

    I also have listened to every conference call for I would say about the past 6 quarters. Irrational studios was an extreme expense for the company. After the tepid success of BSI, TTWO has decided to close Irrational, and I believe this greatly has attributed to mgmt statement of 'profitability for the foreseeable future'

    Finally, I'm a mgmt guy, and I think Zelnick is the best in the industry. If you look at what ZelnickMedia has done for the company since it staged a takeover bid after the 2007 SEC fraud violations. He has also been CEO only since 2010. In this time frame, TTWO has transformed into a company that liked to 'play' with the GTA windfalls (let's face it, GTA is the reason we even know what TTWO is), into a company that has continually cut cost and to me appears to be 'investing' the windfall into next gen projects.

    I know S&P discounted TTWO because of earnings volatility and years of extreme success (red dead redemption) followed by years of steep loses. If we avoid the losses does the discount go away? I hope so.

    I've exited half my original position and recouped my purchase price. But for my remaining investment, I feel confident (perhaps overly so, and again, I really appreciate an author that facilitates the discussion board)

    Thank you Callum!

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Callum Turcan

I love America and am proud to see us getting closer and closer to energy independence, which is why I cover energy stocks. Twitter: @CallumTurcan

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