The medium of video games has come a long, long way in the last three decades and the business of games has evolved along with it. Investments from major publishers in AAA projects are skyrocketing and the risks have never been greater. At the same time, however, when a game strikes it big, the rewards are also bigger than ever.
"That's the nature of a mature entertainment business," Strauss Zelnick, CEO of Take-Two Interactive tells me at E3. "The really good people do really, really well and then have the assets to invest to do really well again. And those who don't do well... they stumble and then they don't have the resources to take the big risks again and then they're not even in the game - that's what happened with THQ, that's what happened with Midway. Will it happen with anyone in our current lineup? I don't know, we have a pretty well capitalized group of competitors who make pretty good products but it could happen."
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Even in the last 5-10 years there's been a significant change in the way the games industry operates, Zelnick notes. "I'd say the business has been transformed from one where we had these big spiky releases; consumers either bought or didn't buy the product and then over time it would hit our catalogue and they would either buy it or not buy it. And now for the past 5 years we've had an opportunity for consumers to stay engaged after the initial release. If the initial release isn't very good then they're not going to want to stay engaged anyway, but for a company like ours which has the highest quality levels in the business it means more often than not people want more of what we have," he explains.
With many top-rated titles receiving year-round DLC updates, Ubisoft CEO Yves Guillemot previously argued that in some ways generating steady revenue is easier, that the business has actually become more dependable overall. Zelnick doesn't fully agree.
"...we're making fewer, better titles and better is challenging.... But when you do do something great, you do have a better shot at keeping customers engaged longer and...increasing your revenue per paying customer"
"We give them more and then we can monetize that to delight and engage them and that's a very good thing for us. Is that easy? I wouldn't say it's easy at all; I think in many ways the bar is even higher because we're making fewer, better titles and better is challenging. But I think what Yves was saying which I agree with is that when you are able to achieve that, when you do do something great, you do have a better shot at keeping customers engaged longer and have a better shot at increasing your revenue per paying customer," Zelnick says.
"With our cash... and the highest metacritic ratings in the business for quite a long time and a stated strategy of encouraging creative types to pursue their passion to make the most creative titles in the business, I think we're as well positioned as one can be to succeed - the opportunities are greater but I don't believe the word easier fits anywhere in there."
Speaking of creative types, former Rockstar North studio head Leslie Benzies made a splash in April by suing Take-Two and Rockstar for $150 million. The publisher quickly countersued, and while Zelnick wouldn't discuss ongoing litigation of course, he reiterated that the company has done "phenomenally well" since Benzies left on sabbatical in September 2014 and that during Zelnick's 30 years in the entertainment industry "I've never once lost a piece of creative talent that I didn't want to lose."
On the flip side, Zelnick clearly is happy about the talent he gained by opening Hangar 13 a couple years ago. With LucasArts veteran Haden Blackman leading the charge on Mafia III, Take-Two has high hopes for the title, which is being developed in collaboration with 2K Czech. In fact, Take-Two is so happy with Mafia III that it made its entire E3 booth into a replica of a '60s New Orleans bar to reflect the game's setting. Zelnick says Take-Two is happy to grow its studio system organically or via acquisition as needed.
"We've shown a willingness to buy studios when they come with intellectual property. We bought what is now 2K Czech, and much of the company was originally aggregated through acquisition... So we wouldn't rule out the possibility of buying a studio that's tied to a quality IP and we've also shown a willingness to start studios like Hangar 13 and others. We want to make sure we bring in only the most capable people who are passionate about what they're working on and that they're working on something really great so we can bring a hit to market. So we have absolutely grown our development overhead and headcount and we expect to grow our headcount very selectively," he continues.
"You don't get paid for being the first to market, you don't sell more units. The installed base is too small"
Take-Two is known for big franchises like Grand Theft Auto, Borderlands, BioShock, NBA2K, Mafia, Civilization and others, but it's not a company you'd associate with smaller projects. The competition has made strides with smaller titles, like Ubisoft's Child of Light or Valiant Hearts or EA's Unravel, and Take-Two may be on the verge of something similar to the EA Originals program. Details are thin, and Zelnick isn't ready to disclose the scope just yet.
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"We do have an indie program. We haven't given it a name but we're working with some independent studios on some independent properties. We've doing it about a year. The way we tend to do things is we're quiet until we have something to talk about," he says.
Corporate communications chief Alan Lewis adds, "We really haven't talked about the structure but I think what it speaks to is our interest in creating a variety of entertainment experiences... We'll have more to share in due time but clearly we think there's some very talented independent developers who are out there whose work would complement what we're already doing."
Virtual reality is another area that Take-Two is exploring but that it's certainly not jumping into headfirst. Zelnick has previously made it known that he's lukewarm on VR, and even with VR having a sizable presence at E3, he isn't yet convinced that the market will take off. And he's not the only one - just this week veteran venture capitalist Mitch Lasky talked about how scary VR is for investors.
"If we see there's an audience that is anxious to have our products in VR formats, we're in R&D mode and we'll be ready to be in the market by the time there's any moderate installed base; you don't really want to be in the market before then anyway. Almost certainly anything we would do in VR would be related to existing intellectual property, so the R&D that we're doing is to be technically capable of doing so," he explains.
Unlike Ubisoft, which has jumped onto the VR bandwagon, Zelnick doesn't see any advantage in supporting a new technology so early on. "You don't get paid for being the first to market, you don't sell more units. The installed base is too small," he says.
Zelnick asks me if I know the name of the first movie to feature sound. I do not. As it turns out, it's The Jazz Singer starring Al Jolson in 1927.
"The first sound movie was a successful movie but it wasn't the most successful movie of all time and it didn't soak up the market. You don't know what it is because it doesn't matter. It's an interesting piece of trivia. It's not like 'Oh my God, will we miss the opportunity to make a sound movie?' Everyone else made sound movies within a year. It's the same thing [with VR]... When an entire coast of our country spends billions of dollars pursuing something and claiming victory before dollar one of consumer money has been spent, I'm questioning. I could be wrong and if I'm wrong it will be great for our company," Zelnick continues.
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Before taking the reins at Take-Two, Zelnick was the president and CEO of BMG Entertainment and 20th Century Fox. He's got a long history in the film business, so it's surprising then that he hasn't leveraged his relationships to pursue more game-based movies with Take-Two's top IP. There was a failed attempt at producing a BioShock movie, of course, and more recently Borderlands was signed by Lionsgate and Avi Arad, but it's not hard to imagine movies being made from IP like GTA, Mafia, Red Dead Redemption, or XCOM. It's a trend that we're seeing more of now in the games industry, as notable franchises like Assassin's Creed, Ratchet & Clank, World of Warcraft, God of War and others prove that Hollywood is hungry for gaming IP. If anything, though, it's Zelnick who's actually taken aback by the seemingly reckless investments his competitors are making in movies.
"It's not a slump, it's intentional. [Nintendo comes] to market, they do really well, and then they sort of exit the market for a period of time"
"We're not going to make movies with our own balance sheet. It's a challenging [business]... it's not what this company does. I was in the movie business very successfully and I think I understand it very well. It's a challenging asset class. I'm surprised that certain of our competitors are actually investing fully in a movie off of their balance sheet and then are planning to fully invest in the marketing as well when they don't do motion picture distribution," he notes.
"But it remains to be seen how that does. For us to license motion pictures, we have been very selective because the economic opportunity is limited and the creative risk is meaningful. Said another way, if a bad movie is made it may hurt our underlying intellectual property, and if a good movie is made the actual value of those license fees is not enormous. So we have to be very, very selective."
Being selective in general is a philosophy that has worked well across Take-Two, whether in selecting talent, making partnerships, or supporting new technologies. The company is riding high as its stock has climbed over the last 5 years to an all-time high of more than $40. One new technology that Zelnick is already excited about is Nintendo's NX, but just as with VR it's unlikely that Take-Two will be there first. That said, Zelnick hasn't lost faith in Nintendo despite its Wii U struggles.
"We're believers. We never want to count Nintendo out. They do it over and over and over again. So we feel pretty enthusiastic actually," he remarks.
Zelnick even counters my assessment of Nintendo's position in the console race. "It's not a slump, it's intentional. They come to market, they do really well, and then they sort of exit the market for a period of time. They've been doing it for like 150 years, and that company has been doing the same thing... They're really thoughtful, they come to market with something they really think is going to work, more often than not it really works, it blows up and then eventually they let it decline and they move on to the next thing. They don't mind having time in between," he explains.