Friday, July 22, 2005

The Future of the Grand Theft Auto Franchise

Shares of Take-Two Interactive (TTWO) shed more than 5% yesterday after racy scenes in its popular Grand Theft Auto: San Andreas game led the Entertainment Software Rating Board to change the title's rating from Mature to Adults Only. As a result, Take-Two will stop producing the game, recall any copies from retailers who no longer wish to sell the current version, and ship a new version later this year that blocks access to the infamous sex scenes.

The ESRB found that players can download a file off the Internet -- the so-called hot coffee mod -- to view sex scenes on the disk. Thus, the board assigned the game its uncoveted adults-only rating. According to the ESRB's official definition, the AO rating means that the game "should only be played by persons 18 years and older and may include prolonged scenes of intense violence and/or graphic sexual content and nudity." On the other hand, the M for Mature rating has “content that may be suitable for persons ages 17 and older.” Sounds pretty similar, right? But the AO and M ratings are different in one big way: Most major chain stores will not carry AO-rated games. By contrast, M-rated games aren't even separated from games bearing the T for Teen and E for Everyone ratings.

Major video-game retailers wasted no time responding on Thursday. Citing company policies that prohibit the sale of "adult only" rated titles, Wal-Mart (WMT), Best Buy (BBY), Circuit City (CC) and GameStop (GME) all said they would pull San Andreas from their store shelves.

Consequently, Take-Two predicts earnings will come in 30 cents to 40 cents lower than expected and projects a $50 million shortfall as the company braces for the massive returns. For fiscal 2005, the company is looking to earn between $1.05 and $1.12 a share, while analysts were expecting $1.44. But investors differ on the longer-term meaning for the company.

Are these recent “missteps” actually a good thing for Take-Two? There’s no doubt the company has received plenty of free press over the last few week; albeit negative. But current GTA gamers should remain unaffected by the recent negative press. In fact, the Grand Theft Auto should rise to an even higher cult status with all the buzz surrounding the company. While this crimping of distribution could hit sales, the company might actually benefit from the publicity, reducing the hurt. I believe that the ‘Adults Only' rating, particularly for people over the age of 17, may actually increase sales for future installments. With Grand Theft Auto: Liberty City Stories due out later this year, we could get the answer sooner than later. The game has been expected to be a big part of Take-Two's revenue and earnings this year.

Who was responsible for this modification? Last week, Take-Two denied that this came from any internal employees suggesting that the modification was created by outsiders. Although Take-Two executives seemingly had no knowledge of the hidden content, the source was most likely the work of a naughty programmer (remember the old Disney cartoons when bored animators included explicit messages?).


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