Take-Two CEO: Being No.1 isn't crucial

In advance of next week's big E3 Expo GamesIndustry.biz had a chance to get on the phone with Take-Two CEO Strauss Zelnick. While the company isn't holding its own press conference like other publishers and platform holders, Zelnick is exceedingly optimistic about the state of Take-Two and its potential for growth. The publisher often comes under fire for being too reliant on Grand Theft Auto, but Zelnick believes Take-Two has already put those concerns in the past.

"The way the company has been evolved, the product line has really been diversified. We're blessed by any number of massive franchises. We have more than 10 franchises that have sold more than five million units on an individual basis, and we have more than 45 franchises that have sold millions of units with an individual release. And our results reflect that diversification... Now we've had a number of very good years and some are better than others, which is driven by our release schedule, but our goal over time is to be so diversified and have such a great array of hit titles that we can indeed deliver terrific results more often than not, subject to the variability of being a pure play entertainment company," he noted.

"You actually don't get a lot of benefit from having number one or number two market share. You get benefit from delivering hits over and over again, and that's our job"

Some investors have expressed dissatisfaction or impatience with Take-Two in the non-GTA years, but if anything Zelnick stressed that his company has done right by its shareholders. "In terms of what investors demand, they demand value creation reflected in the share price, and before we took this company over, I think the shares were trading around $11, and now they're trading around $27 today and there's this little matter of the global financial crisis in between; so that's a good story and frankly compared to our peers it's a very good story."

Speaking of Take-Two's peers, Zelnick commented at a recent Cowen and Company conference, that he feels Take-Two is "blessed" by the way the AAA field has shaken out in recent years. He ranks Take-Two third among four big publishers, but in our discussion he didn't seem the least bit concerned with accelerating the company's growth in order to chase market share.

"We tend to focus on the task at hand. I think strategy is a once-a-year proposition, execution is daily. Our strategy is to be the most creative company in the business, the most efficient and the most innovative," he said. "And so what does that mean to us? To be the most creative would be to have the highest average Metacritic ratings, which I believe we have had for some time as a third-party publisher. We've launched one new IP every year since 2007 and we hope to do that again this year with Battleborn. To be the most efficient, just operating our company not only with the lowest cost base in the business but also driving extraordinary distribution and marketing efficiencies. And to be the most innovative would be reflected in the fact that GTA IV brought out the first downloadable add-on content. I think this company has been a real leader in creating a longer life cycle for AAA properties, whether that's through online multiplayer opportunities, downloadable add-on content or the like."

He continued, "And today digital distribution represents over 30 percent of our revenues and recurrent customer spending is about half of that - last year it was about 18 percent of our net revenue. So our business has really been transformed through innovation. I think if we keep pursuing that three-card strategy we should keep seeing continued success... We tend not to think about the competitive landscape because in the entertainment business, unlike say the turbine business, you actually don't get a lot of benefit from having number one or number two market share. You get benefit from delivering hits over and over again, and that's our job. We also believe that if we continue to deliver hits, to operate efficiently and innovate within distribution channels and geographies, then the likely scenario is we will continue to succeed disproportionately. Do that over a long enough period of time and we'll see market share growth."

"We like to rest our IP in between releases because we believe that's what keeps it fresh and permanent. We don't want to burn off our franchises"

For Zelnick, one of the key differences that separates Take-Two from the other publishers is its careful, deliberate approach. While franchises from other publishers (e.g. Assassin's Creed, Call of Duty, Battlefield) are sure bets every year, Take-Two would rather avoid any risk of fatigue.

"I think the biggest distinction between us and some of our competitors is we don't annualize our non-sports titles, and that's for a couple reasons. One is we want to have the highest quality in the business and that takes time, and two, we like to rest our IP in between releases because we believe that's what keeps it fresh and permanent. We don't want to burn off our franchises. It's an unusual strategy, I think we stand alone with that strategy, but it's really paying off. Obviously it takes a while because creating a new IP takes some time, and then you don't always have the biggest success initially as you would with a subsequent release. It's a long-term strategy but history says we're doing well. In 2007 we had net revenues of $700 million and this past fiscal year it was $1.7 billion, all organic," he explained.

One franchise that was added to the stable at Take-Two this year was Evolve. It was announced during the fiscal call that the title had sold-in 2.5 million copies. There have been other AAA releases from competitors who've sold more than that and have barely been able to break even on the project, so is Evolve a worthwhile investment for Take-Two? Zelnick certainly think so.

"We were just talking about the initial release," he said of Evolve's numbers. "The good news is we've had 27 million game sessions already, and we certainly see it as a profitable title and a permanent IP for us."

Interestingly, Take-Two's approach to development is a lot more open than you might think. Zelnick is not really a gamer, and he doesn't want to get in the way of his creative leads.

"We have a very flat structure and we have very open communications. We all work together and have very little hierarchy. Our watch word in order to be the most creative company in the business is to hire the most creative people and encourage them to pursue their passions. And it's important to do so in a way that's rational in a business context. ... If you have the right kind of open communication you never get to a 'who's in charge?' question because it's not necessary. The best decision making is done where the activity exists, and I try really hard to make that happen and to encourage that. The best scenario is where I'm in the back seat and not in the front seat. Of course I'm willing to grab the wheel when necessary," he offered.

"The nature of good management is there's a conversation, there's a socratic dialogue and we try really hard to get a multiplicity of opinions and views. This is not a situation where people come in and present to me and I cogitate and give an answer - that's not how we operate here. We operate in an exceedingly collegial way."

Zelnick has made it abundantly clear in recent discussions that he's not yet fully sold on VR - after all, there's no consumer market yet, and it's hard to know what exactly a successful VR game will look like. That being said, the buzz around VR is reaching all-time highs. If his studios have as much autonomy as he says, would they be able to pursue a VR game if they had the desire?

"Potentially. I think we all need to see what the format looks like. There remains a concern about how it feels to play a first-person game with a VR headset on. It remains a question how long you want to have a VR headset on, and what the controller is going to be like. In the same way that I don't think anyone could have necessarily predicted what a successful smartphone game would look like, I'm not sure anyone yet can predict what a successful VR game would look like. I do think we can predict that there will be an interactive entertainment industry that avails itself to VR hardware. And for that reason we're very engaged in R&D," he noted.

"We don't necessarily need to be the first ones out of the gate, because only we can execute against our own IP and we have an extraordinary collection of owned intellectual property. So it wouldn't necessarily hurt us to see how the business unfolds before we get to market. But I'm not necessarily saying we'll do that either. I think the point is we're open minded but we're very focused... I have to admit, there's no question there's already feedback from people having a lot of discomfort playing interactive entertainment with a headset on. I think what will solve it is it's not going to be the same product, which is fine. A smartphone game is not the same product as a console game - it's totally fine."

VR is still in the embryonic phase, but the mobile gaming market is monumental and still growing. Take-Two has released some games on smartphones, but it's hardly a major focus for the company. As mobile devices get more powerful, Take-Two will be more likely to look to the space, but for now the company has only dabbled in it.

"One thing I like to say around here is 'we know what we know, we also know what we don't know, and arrogance is the enemy of continued success'."

"We don't think the issue is whether something is mobile or fixed. We think the issue is screen size and processing power," noted Zelnick. "Our core DNA is in these big, immersive experiences that are big entertainment opportunities. Our experience is less in small, lite, free-to-play or cheap-to-play smartphone games, and in fact the industry's experience is checkered because the hit ratio in the smartphone business is very, very low indeed, even for the most successful companies in the business.

"So that's a cautionary tale for those of us who don't have that DNA. One thing I like to say around here is 'we know what we know, we also know what we don't know, and arrogance is the enemy of continued success.' I guess that's a long-winded way of saying we're in the space, we're excited about the space, we know there are consumers who love the space. But when it comes to launching new IP solely for the smartphone or tablet experience we want to be very selective."

As for E3, which is about to dominate industry headlines for the next week, we have to wonder how valuable it still is to a major publisher like Take-Two. E3 is historically a retail-driven event; it's a chance for the big companies to show their products to retail buyers, but when so much of the business is headed in the digital direction, does E3 carry the same weight? As Superdata analyst Joost van Dreunen said in a recent report, "Since digital distribution is much less seasonal in terms of consumer spending, how will E3 maintain its position as a platform for publishers to announce their upcoming titles for the holiday season?"

Zelnick acknowledged that digital continues to grow rapidly but he also sees plenty of value in a show like E3 today. "We're there to show our product, and our distribution strategy is to be everywhere the consumer is. So I think we want to show our product to all our business partners we have whether they are in digital distribution or physical distribution. Physical is still the lion's share of our business, still more than two-thirds of our business and will be an important part of our business going forward," he said.