Hello folks. I’ll talk more about my role at VentureBeat soon. In my transition to this new job, I haven’t weighed in on Electronic Arts‘ $2 billion bid for Take-Two Interactive. Bear with me as I draw a connection between this and Facebook gaming. The issue is whether EA should grow organically or by acquisition. I don’t think it’s easy to do both well.
Maybe EA is trying to score Take-Two on the cheap before its anticipated big hit, Grand Theft Auto IV, debuts on April 29. I hardly ever play that kind of game — the violence gets a little too over the top, even for me. But I’ve seen Grand Theft Auto IV, and it rocks. It looks so realistic that I really can’t wait to give it a whirl.
If video gamers feel the same way, then maybe Take-Two’s stock is worth even more than what EA wants to pay, which is a 64 percent premium on Take-Two’s Feb. 15 closing price.
The New York Times correctly points out that EA could bankroll 100 new $20 million games for that amount of money. Analysts say the value of GTA IV is baked into the Take-Two price. But Take-Two has been hitting bigger homers than EA lately.
I consider the bid to be a distraction for EA. John Riccitiello, CEO of EA, has set his sights on getting EA to $6 billion in sales in three years, almost double its current sales.
He said at the company’s analyst meeting that he could get there organically by growing EA’s four mainstay groups. But he also said he could get there faster with acquisitions. Jeff Brown, head of corporate communications at EA, says this is “smart M&A” and that Take-Two has been part of the plan for a long time because Riccitiello has a great deal of respect for the talent that makes great games at Take-Two.
A couple of weeks ago, Riccitiello was a patient man. He mentioned that he shook off pressures from investors and decided to delay EA’s big game, Spore, by more than a year. He was the model of patience, but he could afford to be, since EA had more than 24 million-unit hits last year.
Now he’s in a rush. EA doesn’t want to lose its title as the No. 1 independent publisher of video games to Activision Blizzard, which is in the midst of an $18 billion merger. The Take-Two folks said they would consider a friendly offer on April 30, a day after GTA IV ships. But EA couldn’t wait. Brown said EA got the same answers months ago as well as recently when EA appraoched Take-Two again.
Take-Two CEO Ben Feder said in the San Jose Mercury News today that rejecting the bid was not just about the price but the timing too. There are consequences to going forward with a hostile offer. For one, the talent in any game company could walk out the door. EA’s own culture has historically been against everything that Take-Two’s largest division, Rockstar Games, stood for. Rockstar does mature-rated games. Larry Probst, former CEO of EA, once killed a game called Thrill Kill, which had the kind of cop killing that you see in the GTA games, because it was gratuitously violent.
Ricciteillo said in this interview with GameSpot that Thrill Kill was a different era, with different management and a different philosophy about publishing mature games. Ricitiello notes that he greenlighted the mature-rated Godfather game at EA and the mature DefJam games.
The Godfather is probably tame compared to what you can do in GTA IV. But as much as Riccitiello wants to use his willpower to instill this change in EA to modernize its thinking, you can’t change the stripes on a tiger.
EA and Rockstar don’t mix. Well, the EA Games label and Rockstar mix a little. Brown said that Sam Houser, one of the founders of Rockstar, gave Riccitiello advice about forming a label-oriented organization some time ago. With the label structure, EA can allow studios to function in a more decentralized fashion as “city states.” The EA Games label is producing mature-rated games such as DeadSpace, coming this Halloween. But Rockstar would likely have to be its own label, a fifth division. And even then, it will stick out like sore thumb. A lot of EA’s games don’t have blood. Many Take-Two games are drenched in red. Brown says EA is prepared to do what is good for business.
EA has talented and edgy people too. But the Rockstar folks are gritty. They rebuilt New York city in its entirety in the form of the fictional “Liberty City” for GTA IV. The game’s main character is an Eastern European immigrant who happily runs missions for all sorts of bad people. It is an open world, with realistic looking asphalt on the roads, humorous billboards, and all sorts of mini games.
I watched a scene that mixes story-based cinematics with game play. In it, you could take a girl out on a date to a bowling alley and actually bowl an entire game with her. You take her back to her home, never opening doors for her, but she cheerfully says she will stay in contact with you, as long as you don’t blow her away.
You see, in these games, you have the will to make the character do whatever you want. It is a massive virtual world with a lot of missions that direct you along your road as bad-ass American immigrant.
My take is that the new GTA IV, despite its mature rating and extreme violence, is going to have wide appeal. Analysts have projected that GTA IV would sell eight million to 12 million units on the PlayStation 3 and Xbox 360 this year. At $60 a piece, that’s $720 million at retail. Colin Sebastian, an analyst at Lazard Capital, has said that GTA IV’s sales are baked into the stock price already and Take-Two really has to come up with more hits to justify a higher valuation.
EA might spend a lot of time in a hostile fight for Take-Two in the same way that Microsoft will spend a lot of time going after Yahoo. In the meantime, you have to ask, what is the opportunity cost? A very small example is, what will EA do in an area that is one of the most exciting, fast-growing attention grabbers: Facebook games. Sure, there is no real money in this. At least not the kind that gets EA executives excited. But EA is paying attention to this category. They don’t want it to slip away from them. They made that clear at their recent analyst meeting.
Kathy Vrabeck, head of the EA Casual Games division, showed several slides that mentioned Facebook gaming during the company’s analyst meeting this month. EA has licensed casual brands such as Hasbro so that it can take a bigger share of the market for fast-growing casual games, defined more or less as games for the rest of us, not hardcore gamers.
Facebook would be a way for EA to promote its hardcore and web site games that exist beyond the current gamer community. A case in point is the big game EA has coming on Sept. 7. Spore will be played on PCs, consoles and other gamer platforms such as the Nintendo DS. It is a game where players can create their own creatures, from single-cell microbes to planet-wide civilizations to galaxy-conquering races.
Will Wright, the game’s creator, said the company will release the creature-editing tool weeks before the formal game launch. Players will be able to create creatures that can be used inside the Spore universe with those tools. A primary feature of the tools is that gamers will be able to share the creations with their friends. That is most likely where Facebook comes into EA’s plans. You will likely be able to share creations inside Facebook. (An aside: you can even post videos of your creatures directly to YouTube from inside the game).
Despite that, others wonder whether EA is taking Facebook seriously enough. By the time Spore comes out, the Facebook gaming companies will have gone through several cycles of release and development. If EA waits too long, it may find that the Facebook gaming companies have a huge amount of traffic. That means the purchase price for a Facebook gaming company could climb well above $100 million. Since EA’s attention is focused on a takeover of Take-Two Interactive, it may not have the appetite for that kind of acquisition price.
The last time this movie played, the results were horrible for EA. When current CEO John Riccitiello first joined the company in 1997, the dotcom boom was in full swing. EA invested more than $400 million in EA.com, where it aggregated its online gaming businesses. With the dotcom bust and some dud games, EA.com fell apart. Riccitiello is sure to remember that scenario as he considers new investments in a sector with hyper-fast growth.
It would be a shame if EA thought that Take-Two was the real prize and ignored its own chance to organically grow an exciting business on Facebook. Clearly, Facebook isn’t the only place where EA can invest organically. It is just one example of something they could pass by if they set their sites on a hostile bid.