One video game stock that has certainly brought many of its investors riches is Take-Two Interactive (NASDAQ:TTWO), creators of popular franchises like Grand Theft Auto and BioShock. Over the last five years, the stock has delivered a roughly 344% return -- easily outpacing the overall market. 

If you're thinking about investing in the company, it's important that you have a solid understanding of just how the company makes its money.

A character in Grand Theft Auto 5 on the phone with buildings in the background.

Image source: Rockstar Games/Take-Two Interactive.

A very console-centric business

Take-Two Interactive breaks down its revenue into two distinct categories: consoles as well as its PC and other segment. During the first nine months of the company's fiscal year 2019, about 85.1% of its net revenue came from console gamers, while the remaining 14.9% came from PCs as well as other platforms. 

In this way, Take-Two Interactive differs from two of its publicly traded rivals, Electronic Arts (NASDAQ:EA) and Activision-Blizzard (NASDAQ:ATVI). EA is quite console-centric, too, but only 70% of its revenue during its most recent fiscal year came from consoles -- the remainder was fairly evenly split between mobile gaming and the PC market. Activision-Blizzard's platform mix is actually quite evenly split between PCs, consoles, and mobile gaming. 

Take-Two Interactive's high console dependence isn't surprising. One of the company's biggest franchises, Grand Theft Auto, is very much a console-first platform (although the company did eventually get around to releasing PC versions of its Grand Theft Auto titles). Another of Take-Two Interactive's highly successful franchises, Red Dead, is exclusive to game consoles. 

Full game vs. add-on content?

In the past, game publishers relied heavily on revenue from sales of a base game. Sometimes those companies would come up with some additional content -- say, an expansion pack or two -- but it was the base game sales that ultimately made up the bulk of a major game publisher's business.

That, in recent times, has changed thanks to high-speed internet connections making it easier than ever for game publishers to easily distribute additional content to gamers who had already purchased a base game. On top of that, game publishers realized that gamers are willing to pay not only for major content additions like new missions, virtual weapons, and so on, but are apparently willing to buy things like new player skins. 

Take-Two Interactive provides a breakdown of its revenue into two buckets: "full game and other" and "recurrent consumer spending." 

Over the last nine months of Take-Two Interactive's fiscal year 2019, 63.5% of its revenue came from full game spending, while 36.5% came from recurrent consumer spending. The difference in the company's most recent quarter was even more pronounced, with those figures tallying to 76.3% and 23.7%, respectively. 

This shows that while Take-Two Interactive does generate a significant amount of revenue from its recurrent consumer spending, the business is still largely dependent on full game sales. To the extent that Take-Two Interactive can make recurrent consumer spending a larger part of its business mix, the smoother its revenue profile will be over time.

TTWO Revenue (TTM) Chart

TTWO Revenue (TTM) data by YCharts

Indeed, looking at the company's trailing-12-month revenue chart above, we can see a massive spike in late 2013/early 2014 thanks to the release of Grand Theft Auto V; the company seems to be enjoying another large spike thanks to the runaway success of Red Dead Redemption 2

Check out the latest Take-Two Interactive earnings call transcript.

Investor takeaway

Take-Two Interactive has a number of incredible game franchises. The company's business is largely console-centric and, at least for now, depends on full game sales for the bulk of its revenue. However, as Red Dead Redemption 2 sales eventually slow, the company's business mix should shift more toward recurrent consumer spending until its next blockbuster release (potentially Grand Theft Auto VI).