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Take-Two head likens free-to-play publishing to gambling

"If we're going to play in that space, we need to have some angle that leads us to believe we'll have a different hit ratio," Zelnick says

Take-Two runs a number of successful free-to-play games, but the company isn't in any hurry to switch more of its games over to the business model.

Speaking at the Bernstein 35th Annual Strategic Decisions Conference, Take-Two CEO Strauss Zelnick said he "selectively" believes in the free-to-play model, and that he expects it to co-exist in the long-term with more traditional premium models.

He provided two stats that explain his hesitance in fully embracing free-to-play. First, he said publishers typically monetize less than 20% of the audience with a free-to-play title, and it's costly to serve so many people who aren't actually paying you. But perhaps more significantly, he said that the hit ratios for free-to-play games are incredibly low.

For a well-run company in the movie business, Zelnick (himself a former president and COO at 20th Century Fox) said one could expect about 30% of its films to be successful. In games, it's possible to have that number be somewhere in the 80% to 90% range, as he suggested it was for Take-Two. But in free-to-play specifically, he said only about 1% of games would become hits.

"Between a 1% hit ratio business and going to Vegas and taking that money and putting it on one number in roulette, you would be better served to do the latter"

"Just to put 1% in context, between a 1% hit ratio business and going to Vegas and taking that money and putting it on one number in roulette, you would be better served to do the latter," he said, adding, "The odds are really terribly stacked against you. And if you take that math and say I'm going to spend an average of $1 million, then to buy a hit is going to cost you $100 million. And if you spend $50 million, which is what you probably spend for a mid-core free-to-play title, then we're talking about spending $5 billion. And you can't afford to spend $5 billion on a video game."

He also took exception to the idea that the traditional business model was inherently flawed or obsolete.

"I don't think the issue is whether consoles' economy is compromised," Zelnick said. "We know that economy works. It's working for us. You can see our numbers. It works for our competitors. The issue is, 'Is there a supportable economy in free-to-play that makes sense when you look at the entire landscape of the frontline business, not just the hits?' The problem with the analysis that says, 'Isn't everything going free-to-play and shouldn't you be doing that?' is it's sort of like, 'How's the lottery as a business?' The answer is that if you win the lottery, it's a phenomenal business. But it's not a business. It's not remotely a business."

Zelnick said the answer is not to avoid free-to-play entirely, but to have "a healthy respect" for that hit ratio and perhaps do what Electronic Arts did with Apex Legends, developing the game responsibly with a great team and what he believes was a less-than-AAA budget.

"If we're going to play in that space, we need to have some angle that leads us to believe we'll have a different hit ratio."

The rise of free-to-play wasn't the only industry trend about which Zelnick expressed some skepticism. He repeated his previous doubts about the game-changing potential of streaming, but offered a little more insight into his line of thinking. For one, he's not sure there's a tremendous number of people willing and able to spend $60 to buy Take-Two's games on a regular basis but unwilling or unable to spend the few hundred dollars needed for a console as well.

And if the question is about a streaming subscription service, Zelnick doesn't see how the math works out for both consumers and third-party publishers. For one, people consumer linear entertainment (TV, movies, etc.) very differently than they do games. He said the average household watches 5 hours of linear media a day, and people don't re-watch any of it regularly unless they're under the age of 10.

"[A frontline release subscription model] is not a great deal for consumers and it's a terrible deal for publishers"

"If you're consuming that much, a subscription model makes a whole lot of sense," Zelnick conceded. "Even a few of them make a whole lot of sense... But for video games, the daily consumption is under an hour and a half. It's 45 hours a month or less. And how do people consume video games? They're playing one, two, or three titles a month, and they may play those titles for six months.

"So now if you're paying a $15 or $20 monthly subscription but you're only consuming one to three games a month, it's a pretty terrible deal versus just buying the titles up front. And consumers intuitively stay away from terrible deals. They really do those economics intuitively, very effectively."

The subscription model that actually makes sense is one packed with interesting catalog titles and catering to truly avid gamers, Zelnick said, rather than one where users play big new releases from a multitude of companies.

"Whether you can translate the entire business efficiently into a frontline business seems unlikely to me," he said. "It's not a great deal for consumers and it's a terrible deal for publishers... My view is a frontline subscription model does not make sense."

In running down a list of other trends Take-Two is actively involved in, Zelnick brought up esports and the company's co-ownership of the NBA 2K League. He said its' "still a very small business," and mentioned having to warn people off the esports business previously. The entire esports field is about $1 billion right now, Zelnick said, and that entire pot is essentially split between about three titles.

"I'm not sure team investments are going to turn out very good for many people," Zelnick said. "We'll see. I do think league investments will be excellent as long as they're very narrowly focused on successful properties that people want forever. We think people want basketball forever. We're not so sure they want non-sports titles forever."

As for what the company is big on, Zelnick said it he wouldn't share what innovations it is putting resources into, but did rule out autonomous vehicles, offshore power plants, and virtual reality.

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