Take-Two Interactive (NASDAQ:TTWO) delivered record net bookings last quarter, but some investors might have been too focused on the stellar headline numbers and missed a major catalyst on the horizon.

During the company's fiscal 2021 first-quarter conference call, CEO Strauss Zelnick hinted that price increases are likely coming for some games on the next-generation consoles. Here's what he had to say and what impact it could have on Take-Two's profits.

A man sitting on the couch and playing a video game.

Image source: Getty Images.

Price increases are long overdue in the video game industry

In June, Take-Two quietly noted in its announcement release for NBA 2K21 that it was increasing the price for the game on Sony's PlayStation 5 and Microsoft's Xbox Series X from the usual $60 to $70. 

During the fiscal first-quarter conference call in August, Zelnick was asked if this price increase is specific to NBA 2K or coming to other titles. Zelnick responded that Take-Two is "definitely announcing pricing on a title-by-title basis." That answer certainly leaves the door open for further price increases.

Another clue that management is planning to increase the prices for its frontline titles is that Take-Two has already announced there will be a stand-alone version of Grand Theft Auto Online coming in the second half of calendar year 2021. Take-Two says this new version will be available for free exclusively for PlayStation 5 owners during the first three months after release, which suggests players will have to buy it thereafter. It's a bold move since Grand Theft Auto Online is currently included with the base game and is the main draw for the 135 million players who have purchased a copy of Grand Theft Auto V

There hasn't been a price increase for video games in years, but with the cost of producing games on the rise, it's long overdue. The cost of making games will only continue to rise with the advanced graphics capabilities coming to PlayStation 5 and Xbox Series X. 

Other than offsetting costs, the price increase reflects the potential for untapped pricing power across the industry, which the top video game companies have never really taken advantage of, but Take-Two's move might change some minds.

Video games offer great value relative to other entertainment options

Zelnick noted that the increased demand for quality gaming experiences in recent years justifies a price increase. "We believe we're delivering the highest quality titles in the business," he said. The results from the last quarter back up that claim.

Prior to the launch of NBA 2K21, Take-Two had just reached a milestone with NBA 2K20 achieving $1 billion in net bookings since its release last year. Red Dead Online grew its average monthly active users by 50% year over year last quarter. Other titles, such as Borderlands 3 and The Outer Worlds, also outperformed expectations. 

Take-Two's net bookings in the last quarter grew 136% over the year-ago quarter, with recurrent consumer spending comprising about two-thirds of total net bookings. Take-Two is planning more content for its top titles, which management expects to support further growth in engagement and recurrent consumer spending. 

Over the last decade, as the industry shifted to a digital distribution model allowing for continuous game updates, players have been spending more time with the same games for longer periods of time. One reason for this is that video games offer tremendous entertainment value per dollar spent. Grand Theft Auto is like a virtual playground that has enough content to keep players entertained year-round, but the game only costs $30. The title's replayability only increases as more add-on content is released. 

Higher profits

A Barclays analyst expects the price increase to improve Take-Two's gross margin by 2 percentage points. But all of the incremental increase in gross profit dollars should drop to the bottom line, creating a larger impact on earnings growth.

If Take-Two raises prices on other titles besides NBA 2K21, it could lead to higher margins. The same analyst expects that more than a third of Take-Two's titles will see a price increase next year.

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