Activision Blizzard’s (NASDAQ: ATVI) Call of Duty Modern Warfare 2 recently dethroned Take Two Interactive's (NASDAQ: TTWO) Grand Theft Auto 4 for having the biggest opening week worldwide of any video game in history. One glaring difference between the business models behind the two franchises is that one comes out with a core sequel each year while the other is taking at least three years to release. It represents a significant difference in the corporate culture of each of their respective publicly traded publishers.
From a financial perspective, Activision has shown the right way to do things with Call of Duty. They doubled and tripled the size of the development teams and studios working on the franchise, they poured a ton of resources into all aspects of marketing, they took few risks and made it an annual franchise that comes around the same time each year. Also, they threw in different levels of expensive collector’s edition packaging along with affordable downloadable add on content at a price owners are willing to pay.
Now, turn around and look at Take Two Interactive: they have the same studio of similar size building Grand Theft Auto and working on it for at least three years; they put teams on risky projects like downloadable content exclusive to only one console and that are at price points that have never worked in the past; they worked on other riskier titles such as Grand Theft Auto on the Nintendo handhelds, Agent, Red Dead Revolver, Bully, Beaterator, and others, including an unannounced project in which the Rockstar executives will own the intellectual property.
From a gamer’s perspective, it’s no question which company is more on the side of fun and games. But from a financial perspective, if a company like Activision owned the Grand Theft Auto franchise, they would have immediately turned it into an annual franchise, with several new teams from other studios assigned to the franchise. Grand Theft Auto 4 would have been hyped up with expensive collector’s edition and an unprecedented marketing campaign. The following year, rather than a $20 downloadable episode, Activision would have made the same offering a full priced packaged Christmas offering. This year, we would have had a full priced hyped up GTA: Ballad of Gay Tony offering for Christmas. Activision would be all over every dollar they could find.
But maybe Take Two Interactive is doing the right thing in not pursuing every safe dollar out of the Grand Theft Auto franchise. They certainly don’t try to upsell the consumer at every turn as is the case with Activision. Instead, they offer 95 rated titles for a $20 download. Activision, meanwhile, makes everything about their top names slick and expensive. The question: is Take Two actually diluting the hype of their brand name when instead of making it expensive, they offer it up as a cheap simple digital transfer of information? Do people have respect for digital downloads like they have respect for sexy looking gift wrapped items that they go to the store to pick up? Do people have respect for $20 and $40 game offerings at all?
Activision makes their titles appear expensive while Take Two tries to play fair. But doesn’t that risk Grand Theft Auto feeling a bit cheaper, a bit less important?
Take Two’s current Grand Theft Auto release is $40 for two “episodes” from the original Grand Theft Auto 4 map. It was released without a significant marketing effort, despite high reviews. What kind of strategy is it when instead of hyping up the brand, you bring it down and make it seem to the consumer that the $60 original game offer was overpriced? Compare that to Halo ODST coming at full retail and selling very well yet not being the core hyped Halo release, or compare it to the way Nintendo puts out everything Mario at a premium.
What can be said about Take Two is that they have a management that has done more of the same. They have allowed Rockstar employees to continue to lead and do what they want to the detriment of the publisher and its shareholders. Those Rockstar executives just don't seem to be as focused on making money. They want to do what’s best for the gamer. But at some point one has to wonder, is what they’re doing actually best for the gamer or is it actually hurting their own franchise?
Meanwhile, Call of Duty is smashing records as we speak and milking every dollar. Look at the Tony Hawk franchise. They milked that for years and now it's a low rated mediocre offering. If you told someone in 2002 that Tony Hawk would be garbage in 2009, they would assume that Activision would be dead at this point. But that was years of profits and they did the right thing from a business perspective in milking it for what it was worth and reaching out, grabbing and enhancing Call of Duty as a result, pouring resources into the next big thing. Activision and Take Two were similar sized companies years ago and now Activision is 15 times bigger.
This is, of course, the entertainment business, a fast paced hype business. The Academy Award winners are not necessarily the best selling movies. Perhaps it makes a difference that Activision is headquartered in Los Angeles while Take Two is in New York. Activision benefits from attracting real entertainment executives who understand how to sell entertainment rather than just making quality entertainment and taking their sweet time.
One major thing I've learned about investing in corporations is to look at them more like a bureaucracy than a dynamic person. From that perspective, I don't expect them to change without some amazing visionary genius at the top. That means when I look at Take Two, i forever see it like a small Hollywood studio that makes very high rated movies (like Miramax, which was later bought out by Disney). But it will never be like Activision, which knows how to make the sale, milk profits and move on (like Disney). Currently at retail, however, while Call of Duty breaks records and World of Warcraft continues to generate profits, Activision’s third pillar, the Hero music franchise, is dying at retail despite heavy marketing efforts. So don’t be surprised if Activision actually walks in and buys out Take Two Interactive sometime soon in order to take care of that problem. Otherwise, in the long term, Take Two management will likely continue to sacrifice potential profits of their own company, so that the gamer can save a few bucks to buy Call of Duty.
Disclosure: author is short ATVI; long TTWO
