Take Two's New GTA Game Sells Well; EA: “Nothing Has Changed”

Take Two (TTWO) knew they were going to have a hit on their hands with their new game. The strength of the Grand Theft Auto brand, and increased market expectations caused by development delays, insured it. The expectation was already set for a record breaker. The question was – by how much would the bar be raised?

Microsoft’s (MSFT) Halo sold $300m in its first week on the market and was available for just one console (Xbox 360). How much bigger a return could GTA IV do with the added PS3 audience? And to follow up on that: on the Richter scale of gaming, would it be enough to impact Electronic Art’s (ERTS) pending take-over offer? Would it push them past the more than 60% trading pricing premium in their original offer? Looking at it by the numbers:

The Retail Results: Actual and Comparative
Wednesday, the first hard data arrived. The game is big. $500 million big according to Take Two. In the first week on the market, 6 million copies were sold worldwide at an average price of $83 a game (international pricing is higher in many markets than the US $59.99 price). Those results represent an unquestionable success both by gaming or general entertainment standards. They’re measurement of a blockbuster.

Comparatively, in the film industry, Spider-man 3 generated a worldwide opening box office return of $381.70 million at the theaters ($151m, or about 40%, was domestic (via Box Office Mojo)). At last year’s average U.S. average ticket price of $6.88 per ticket, that meant the movie was seen by approximately 55.48 million people in its debut.

In the book world, Harry Potter and the Deathly Hallows sold 8.3million copies in the first 24 hours (U.S. market only) at a cover price of $34.99. At full retail, that translated to $290.4million in revenue and a customer reach of more than 8 million (assuming each customer bought just one book).

On some levels, these book and film to video game comparisons are a little bit Apples to Oranges. A movie ticket is a onetime purchase and a small price point. A book is often read just once. A game, in contrast, is a repetitive entertainment medium but costs $60 or $90 a pop, in this case, plus prior investment in the console. Still, the sheer dollar returns the gaming industry is generating are massive, and the comparisons provide a benchmark for how people spend their entertainment dollars (even given different cost factors). As a measure of reach, it’s also telling.

Taken with no price adjustments, the book reached 8 million (U.S.), maybe 18m globally (counting only English language markets). The movie reached 55 million. There’s not much comparison. But adjusting for the same average entry price, $83 a play (e.g. if a movie ticket cost 83 dollars, or likewise the Harry Potter book), it’s a different story. On an adjusted basis, Harry would have reached an audience of 3.5million people in the U.S. market (7.4million globally). Spiderman 3’s worldwide debut would have reached 4.6m people. GTA IV hit 6 million.

EA’s TAKE
That GTA IV would be a hit was a given, a foregone conclusion. The other part of the question was whether the sales would be dramatic enough to influence EA’s offer. Were they going to exceed expectations by a landslide?

The $500m opening surely sounds impressive. It sounds like it's big enough on the surface. At closer look, however, it’s not as outrageous as it may sound. Some facts:

•While GTA IV’s numbers are a record, the previous record holder, Halo 3, was only available on a single console (Xbox 360). Follow up retail data being reported is estimating about 60% of the opening sales for GTA IV were for the Xbox 360 platform. Separating out the consoles and comparing on a similar basis with that data would put the debut in an almost dead heat with Microsoft’s Halo 3 Debut (60% of sales represents approximately $300m gross or the same result as Halo 3).

• Another factor: within the GTA franchise, 2004’s San Andreas edition is the current best seller. It’s sold approximately 21.5m units to date. 2002’s Vice City Edition sold 17.5m. (Data via Take Two). To do much better than either of those titles at retail will be difficult. The installed user base of existing consoles (number of consoles in the market) acts as a ceiling for growth. A range of 17 to 23 million is probable with the high side of that range being a stretch.

•Last, Halo 3 moved about 5 million copies during its opening week in late September 2007. 98 days later, as of January 3, worldwide sales totals reported were at about 8.1 million units. Mathematically, the opening represented 62% of the estimated 3 month total sales. If a comparable pattern of an opening surge and subsequent slowdown happens with GTA IV’s 6million unit debut, three months out, totals will be about 9.72million units. From then on, similar to movies in the theaters, there is going to be a further deceleration of sales over time (time decay or “theta” to analysts). Games start with a surge, and then decelerate over time as more and more of the core audience has been reached (as a reference for that penetration, the sales of Microsoft’s Halo title in January were at 8.1million. That represented approximately 46% of the installed user base for the console at the time).

Most analysts covering the space, along with EA’s own number crunchers, had the data on Halo 3 available for their analysis. They were able to use that data to build sales models long before GTA IV hit the market. Assuming they made adjustments for the single console offering (Halo) as compared to the dual console release (GTA IV), chances are, the data here was no surprise.

Analyst Michael Pachter, as one example, had previously forecast sell-through for the game of 18million units. In press comments, he’s holding fast to that estimate even in light of the new numbers. He is also saying that by his metrics, the fundamental valuation for Take Two, inclusive of GTA IV sales, still falls in the $20 to $22 range – the same range he previously forecast.

At EA it’s the same thing. EA spokesman Jeff Brown said “nothing has changed.” The company remains committed to their existing offer (though they do say they’re willing to negotiate).

Come May 16th, the final day of EA’s offer, things may take some twists and turns. It’s possible, and wouldn’t be a surprise, if EA upped their offer to as high as 27.50 to get the deal done, but it’s by no means foretold nor does the impressive sales rate of GTA IV appear likely to have any underlying financial pull on shifting it.

Comments

[Mark Berger]

When you write an article, you should do your own homework. Your next should be titled: Why is TTWO not given a similar multiple valuation as ERTS & ATVI? Get up one morning, pour over the numbers - and realize it just doesn't add up. And here's a tip, don't listen to Michael Pachter. He's the worst analyst on the street - bar none. You and Michael will be proven dead wrong on this one.

Nice hack job though!

[gaucho420]

I agree with Mark. This is the same Michael Pachter who had TTWO rated as a hold back when it was in the mid teens. He's been wrong all along. Personally, I don't see how EA can afford not to buy TTWO. What does EA have that's so great?

Madden sold less than last year, as did FIFA, NBA Live, NHL, etc...TTWO NBA2k8 gets better reviews and sells better than EA's own product. EA doesn't have a baseball game, TTWO does. There's only so many Godfather and Harry Potter games EA can make. James Bond now belongs to ATVI. Rockband is 50% owned by VIA. Medal of Honor is COD's bitch.

Overall, EA needs a boost in the arm and the GTA franchise, along with the rest of TTWO (Bioshock, Midnight Club, Bully, NBA & MLK 2k8, Carnival Games), would certainly do that and it would really broaden their scope as a company, to better compete with ATVI.

If EA doesn't do this deal and at a significantly higher price than what its offered, EA losses out much more than meets the eye and is the permanant #2 behind ATVI, until TTWO over takes it, a few years down the road.

[Joe Botley]

By your estimates and Michael Pachter's valuation model, ERTS must be worth at most 1/3 of its current market value.

[Seth]

Take Two is a company with a strong pipeline of games and a very loyal fan base. Invariably, EA's pending hostile offer is going to rankle some members of that group. A hostile takeover is, after all, by definition hostile.

Here, the initial three comments on this article, and the negative tone in a few of them, seems to reflect some of that frustration. It's clear at least two readers believe Take Two is not getting a fair valuation and that analyst Michael Pachter is not held in their high regard. Fair enough, but directing those criticisms to this article is off base.

This was not an article about valuation, nor Pachter. Nowhere does the article discuss whether EA's offer is fair, or reasonable. Nowhere does it discuss what Take Two might be worth. Nowhere did it take a position on whether Pachter is likely to be right or wrong.

Quite simply, this article was about two things: 1. Adding perspective to GTA IV sales data; and 2. looking at whether or not those sales results are likely to influence EA's current bid.

The research and analysis provided address just those two points. The reference to Pachter in context, as case in point, was an example of how analysts modeled for GTA IV sales before the retail release and how even the stellar sales results isn't changing their opinions. The point wasn't whether his analysis proves accurate but that the analysis didn't change despite GTA IV's sales performance.

[DanielJacome]

I thought it was a good article and useful data point to think about -- esp the fact on console # serving as a sales ceiling.

Thanks. This isn't the first time I've seen a sell sider get bashed hard in an article that was never originally about him/her : )

[Joe Botley]

Please point out where Michael Pachter ever estimated TTWOs valuation at $20-$22? Up until the day of the EA bid for TTWO he had a $12 price target on TTWO. Yes, $12.

The same goes for his supposedly accurate estimates on GTA 4 sales. He conveniently upped those estimates right before the game launch and still said it didn't change anything with regards to his valuation for TTWO.

He was clearly 2 million copies off and $100 million dollars off in his most optimistic first week estimates.

[Kapurnickus]

I'd have to agree with all that. So far this year Pachter is showing himself to be quite a contrary indicator.

He's blown calls all over the tech corridor including TTWO and NFLX.

His analysis means pretty much nothing to me.

[Peter Kruger]

Please stop quoting Michael Pachter. If you have followed his analyst work over the years, you'd realize that he has recently started writing and speaking as if he was in EA's back pocket. Ever since EA announced the deal, he has been consistantly, (and incorrectly, to the point of lying) bearish on TTWO.

Anyone who crunches the numbers and looks at the quality of product TTWO puts out knows that EA is trying to take TTWO for about 30% of its true, current value.

As a TTWO shareholder, I find it frustrating when I see see Michael Pachter quoted in so many places, when he is nothing more than a manipulative shill for EA and the ones with interest in EA acquiring TTWO. Hopefully the investor community is smart enough not to fall for his poorly disguised efforts at market manipulation.

[garfy01]

There seems to be an over abundance of interest in the media trying to convince people that TTWO is already at or above a fair price for EA to aquire.

Are you analysts and journalists on crack?

There's no benefit for TTWO or TTWO shareholders to sell to EA at this price point. If EA can add so much value, then how come they have never had a game even fractionally as successful as GTA IV?

EA is the only party to benefit from this transaction. Shareholders who have benefited from the "pop" the EA offer has provided have already cashed out.

Few people are gonna wanna bail on their TTWO at 25.74 when that is less than the current market value.

Hang on to your TTWO shares. EA's bid only serves as an artificial ceiling. Once it dissapears, you've got a company with huge upside potential.

One that has repaired management problems, has developed multiple million unit IPs (midnight club, bioshock, etc.) beyond GTA IV, is on the verge of a turnaround from going negative EPS to positive EPS this year, is the only alternative sports game vendor to EA, is trading at a low multiple (16 as opposed to 24 to 30) in while its growth potential is much larger than its competitors, and will be the first HIGH QUALITY video game to movie transition (bioshock will set a new standard rather than cheesy adaptations like resident evil, tomb raider and hitman)

TTWO should be selling at 35 to 40 bucks at minimum to be at par with ERTS and ATVI.

Watch what happens after ERTS reports less than spectacular results. They will have no option but to up their bid to acquire TWO becuase they need to account for the growth they promised their shareholders and to justify their overly high multiple. The only reason they keep saying their offer is full and fair is to try to bluff their way into a better deal by containing the stock price.

I'm guessing their recent billion dollars in secured financing will be used to up their bid for TTWO when May 16 arrives. THIS WILL NOT BE A 2 BILLION DOLLAR sale but much for more.

[Take Two]

I’m impressed that Mark Berger was able to overcome illiteracy, so I won’t hold him accountable for directing his frustration towards the article itself. Better luck next time Mr. Berger.

[User 192370]

Great article- glad to see a few who get it. And a well addressed, smart comment in response to those who don't...
Well done.

[garfy01]

Actually, looking purely at the points in the article, it makes very few relevant points.

Basically we're looking at whether or not GTA IV impacts stock price of TTWO. EA is attempting to downplay over 6 million units sold and revenue already over 500 million by saying yah we already knew it and its built into the price. By year end, GTA IV will have generated nearkly over 900 million...almost half of the amount EA is offering for all of TTWO...so nice try.

All the comparisons to Halo are completely irrelevant. It's about the money not about breaking records. I don't care what platform its sold on, X360 or PS3, its sold a lot and TTWO has high profit margins on it because GTA IV was developed internally unlike Halo.

As for platforms serving as a ceiling for sales, that's partially true, but you are also forgetting that GTA IV drives console sales as well so the ceiling is being raised. The other upside is episodic content and music sales on top of the existing base of GTA IV sales. EA fails to factor in the incremental revenue streams from episodic content to those 6 million owners of GTA IV as well as music sold via the Amazon link to those users.