Leaks Can't Stop This Video-Game Developer

Media companies love wringing every last drop of value out of a winning franchise...

Rather than dreaming up new concepts, these companies do what they can to keep their biggest successes fresh in consumers' minds. After all, the moneymaking blueprint is already proven...

Just think about the popular book series Harry Potter or a classic comic franchise like Marvel. These beloved franchises have both been transformed into successful movie empires. As soon as one entry is released, anticipation begins for the next one.

Suspense is a key part of keeping fans engaged. They want to look forward to something. And they'll likely spend more money if they're constantly thinking about the series.

So-called "leaks" of details about coming installments can completely ruin this strategy. That's why media companies do their best to keep everything locked down...

Leaked footage or spoiled plot points take the excitement away from consumers. And even worse, the franchise can take a financial hit if the spoilers aren't well-received.

Late last month, video-game maker Take-Two Interactive Software (TTWO) dealt with this problem...

Grand Theft Auto is a 25-year-old video-game series with avid fans. It's published by Rockstar Games, which is owned by Take-Two. Its most recent edition, Grand Theft Auto V, came out in 2013.

It's one of the most popular games in history. It sold more than 11 million copies within the first 24 hours of release. Almost a decade later, it's second on the list of best-selling video games ever.

It's one of only three video games to sell more than 100 million copies. It brought in more than $7.5 billion for Take-Two Interactive Software since its release.

Not long after the most recent version came out, fans started thinking about the next installment. So when Rockstar announced it was working on a new iteration this past February, it generated a lot of buzz.

And then all the suspense was ripped away...

About two weeks ago, an anonymous hacker broke into Rockstar Games' servers. The hacker released videos, images, and key information about the new installment of the video-game series.

The leak was so big that some folks didn't believe it was real. But insiders confirmed it was in fact pre-released footage of the game. Many fans were disappointed with the way the game looked.

That's exactly what any media company wants to avoid.

In a statement, Rockstar Games assured fans the release wouldn't be delayed. But that hasn't stopped investors from worrying.

As-reported numbers make it seem like a leak should be disastrous for Rockstar and Take-Two...

Take-Two's as-reported return on assets ("ROA") suggests it has been barely profitable for years. Returns were only 6% in fiscal year 2022, which ended in March.

Take a look...

Take-Two released Grand Theft Auto V in 2013, which was mostly encompassed by fiscal year 2014. That's the last time the company saw an as-reported ROA bump. Since then, returns have only gradually improved.

So you might assume any lost anticipation could be deadly for the company. If these leaks cause even a few million fans to skip buying the game, you'd expect a huge hit to returns.

But new game releases aren't the only trick up Take-Two's sleeve...

Uniform Accounting tells a completely different story about this company.

It's still true that release year is the best year in terms of returns. But Take-Two makes a lot of money from anticipation. As you can see in the chart below, Uniform ROA climbs as video-game fans prepare for the next hit installment...

The company minted 88% returns in 2014. Since then, Uniform ROA has come down. But it has still been respectable, notching above 20% for the past six years.

The Grand Theft Auto franchise has staying power. And rising anticipation of the next release only seems to be helping – hacker or not. This is why media businesses care so much about keeping the "next big thing" in fans' minds.

Even after these leaks, Grand Theft Auto VI is on schedule. And folks still seem excited. When the game releases, it will likely be a huge year for Take-Two. And the company should keep benefiting as people wait for Grand Theft Auto VII.

Investors shouldn't be too quick to give up on this video-game leader.

Regards,

Joel Litman
October 4, 2022