Why Take-Two Could Be a Big Winner for Long-Term Investors

Dylan Lewis: David, last but only least in the sense of market cap, we're looking at Take-Two Interactive. This is the publisher behind the Grand Theft Auto series, the NBA 2K franchise, so they have some sports exposure there. Take-Two is currently a fraction of the size of these other publishers. I think they're about a quarter to a fifth of the size of EA and Activision Blizzard. So, they're a little bit smaller, the profile is a little bit different there. I know the company recently announced a minor roadblock in the delay of its release of Red Dead Redemption 2 title. Can you talk little bit about what's going on with the company, and whether or not that's something people should worry about?

David Kretzmann: Yeah. Red Dead Redemption 2 was originally supposed to come out late summer, early fall this year, 2017. They've delayed that release until spring 2018. Initially, that would raise a yellow flag, but taking a step back here. Take-Two Interactive has two major studios. They have 2K, does a lot of the sports franchises like NBA 2K, WWE. Then, they have Rockstar, which is the studio behind Grand Theft Auto and Red Dead Redemption. And Rockstar has a history, going back 15 years or so, of delaying virtually every major game that it comes out with, so this is really just par for the course. So, it's nothing to me that's very concerning. They're basically saying, we want to make sure this is the best we can possibly make it. And part of the reason they're delaying it is more and more people are getting the latest generation of consoles. So, you have PlayStation 4, Xbox One, that hardware is a significant upgrade from the previous generation of gaming consoles. So, they're saying, we can make this game even better to adapt to that later hardware.

So, for me, I would much rather they delay it six months or even a year, and make sure the game is as good as it can possibly be, rather than putting out a product that they feel is subpar. I think that's part of the reason why Grand Theft Auto has been an incredible franchise. Speaking to the power of this transition to digital, the last Grand Theft Auto was released in 2013, Grand Theft Auto V. But it still makes up 38% of the company's total sales today. That just shows you, more and more people are continuing to buy the game and play the game, and management says, Grand Theft Auto online, that online experience, continues to surprise us and beat our own expectations. With Take-Two Interactive now, about a quarter of their revenue comes from what they call recurrent consumer spending. I feel like they could come up with a better phrase than that.

Lewis: I have to ask you what it means.

Kretzmann: That's not a surprise. It's made up of the money that players will spend on virtual currency within the games, downloadable add-on content within the games, and microtransactions. Essentially, any money that players are spending in the game once they own that game. That's 25% of the revenue now. Again, that's very high margin, sticky revenue.

Lewis: It's all digital, right?

Kretzmann: Right, it's all digital. That just shows that, once players do download or buy these games, they're staying very engaged, and they're spending more money over time. In the case of Grand Theft Auto, you have a four-year separation between when the last title came out, but it's still contributing over a third of your total revenue. That's pretty astounding, and I think that's part of the reason that Take-Two is a little bit riskier. They still have a lot of dependence on Grand Theft Auto. But I don't see that drifting down at any point. There have been over 80 million units sold now of Grand Theft Auto V. So, it has an incredibly long shelf life as a franchise. In the meantime, you have Red Dead Redemption, which, the first one got rave reviews, there's a lot of anticipation for Red Dead Redemption 2, and since they're delaying it a few more months to make sure it's really the highest quality it can be, it'll probably be a pretty successful game. NBA 2K continues to have incredible engagement each year when they come out with a new NBA titles. Again, all these companies are excelling at finding ways to make really compelling games that are engaging over a long period of time. I think as you're transitioning to this digital area, that's really the key. All three of these companies are doing a really nice job at that.

Lewis: I get the sense in this conversation that, really, there's room for all of these companies to succeed, they all have their separately carved out niches. There's obviously going to be competition, particularly with sports licensing, for games, with Take-Two and EA, as those contracts come due. But, the sense that I get is, there's room for all these players to play.

Kretzmann: I think so. This is a global game as well. I don't know the exact breakdown for all the companies. But in the case of Electronic Arts, well over half their revenue comes from outside the U.S. FIFA is really a global phenomenon.

Lewis: It's huge abroad.

Kretzmann: Huge, yeah. That also means that can make it even more compelling if you're directly competing against literally tens of millions of players around the world. So, it makes it really interesting as a player to have that kind of opportunity to engage with players that way. I forget what your question was.

Lewis: It seems like plenty of room to operate for all of them.

Kretzmann: Yeah, the global market is huge. And as the economy worldwide improves, and steadily over time, the world economy is becoming more productive, people will have more leisure time. So, really the main competition for any of these kinds of companies are Facebook, Twitter, Netflix, YouTube, wherever you spend your leisure time, that's really the competition there. I recently watched an interview with Reed Hastings, the founder and CEO of Netflix, and he said the biggest long-term threat for Netflix is if, at some point, there is some content that's just so compelling that people get bored sitting down watching just something, dormant. That gives you a sense for how these media companies should be thinking about the long term. But I think people love being entertained, they love the chance to compete and connect with friends and other people around the world. I don't see this slowing down anytime soon. And, in the meantime, you have stuff, which, this is hard for me to wrap my mind around, but e-sports. You actually have people watching other people play video games. And that's something that's that was especially popular in Asia, but now in the U.S. and Europe, you're also seeing that on the rise, and more and more companies looking to sponsor, advertise at e-sports tournaments. So, I certainly see a long-term runway for this space, to continue doing well.