Companies operating in hit-driven industries like big-budget movies and video games are difficult to manage from a business perspective. A big hit or lack of one can make or break an entertainment company's entire fiscal year. Movie studios have tried to solve this problem through diversification: Release dozens of movies each year and hope that a few land.

A spray-and-pray model may work for some game developers as well, but for Take-Two Interactive (NASDAQ:TTWO), its approach has been to develop other streams of monetization for its existing releases -- effectively a "cheat code" (gamer jargon for a character chain that changes a game's behavior) for its business model.

A boy sitting on the floor of a room holding a game controller

Image source: Getty Images.

Recurrent spending has taken off for Take-Two

Before gaming platforms connected to the internet, game developers generated all their revenue when people purchased their titles at the retail store. Microsoft's Xbox online store and Sony's PlayStation Network created online environments where publishers could connect directly to the gamer and sell additional services online.

With an online connection, publishers can now not only sell games as direct downloads (skipping the retail store) but also sell additional content for purchased games. For example, a game maker can sell additional levels, new characters, or gameplay modes for direct download online.

Take-Two refers to this add-on content as recurrent spending, and the company has seen it take off over the past five years. Sales from recurrent spending have risen to over $1 billion per year and now represent 40% of total company revenue.

Metrics 2017 2018 2019
Revenue from full-game sales $1.320 billion $1.046 billion $1.597 billion
Recurrent spending revenue $458 million $746 million $1.070 billion
Total company revenue $1.780 billion $1.792 billion $2.668 billion

Data source: Take-Two Interactive.

Recurrent spending has a few benefits from a business standpoint. Because it is less onerous to create an expansion pack to an existing game versus developing an entirely new game, publishers can release game add-ons at a greater frequency. This helps stabilize a publisher's earnings between game releases. Recurrent revenue also tends to be higher margin because it requires less resources to develop.

And recurrent revenue can help create a more engaged fan base because it encourages gamers to play a game long after it is released. Engaged fans are more likely to buy a game's sequels and be interested in related activities like esports.

Grand Theft Auto Online

You can't discuss Take-Two's business model without discussing its massive success with Grand Theft Auto Online.

The most recent installment of the game, Grand Theft Auto V, was released in 2013, yet it remains a large contributor to Take-Two's financial results due to healthy recurrent in-game spending. In fiscal 2019, Grand Theft Auto (GTA) generated $685 million in revenue -- not bad for a 6-year-old game!

The company's secret to maintaining GTA's relevancy and earnings potential has been a steady drip of new content. GTA's game studio has released new downloadable content for the game every year since its release.

For 2019, the Diamond Casino & Resort update was released. This featured the opening of a casino in the Grand Theft Auto Online world, which enabled players to wager on casino games such as roulette and on horse racing, purchase new clothes for their character, and buy a high-end penthouse. The update also features a casino-heist level where groups of players work together online to rob a casino, similar to something out of the movie Ocean's 11.

The game's latest update was very popular and helped deliver those strong results for fiscal 2019.

The future of gaming

The video game development business is a tough one within the tech industry. Games are expensive to make and require years of planning, development, marketing, and support. The complexity of games is only increasing as players demand more content and features.

Take-Two's strategy of pushing recurrent revenue feels like an effective cheat code. Adding on content post-release of a popular game is a convenient way to extend the game's life while the company buys time to make the next release even better.

Perhaps this means that entire new games will be released less frequently. Fans appear to be fine with that as long as they are still having fun with the current crop of games.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.