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The Cost of L.A. Noire for Take Two Interactive

By Perry H. Rod, Published: April 25th, 2011 11:21 PM CDT

Take Two (TTWO) Interactive, Inc. [NASDAQ:TTWO] has had its fair share of CEO’s come and go, from stock option criminal Ryan Brant to board takeover leader Strauss Zelnick.  But one leadership role has remained the same for over ten years – the producers at Rockstar Games.

Every few years investors begin to worry about the same question: will Grand Theft Auto producers Sam and Dan Houser remain at Take Two or will they exit and take Rockstar leaders with them to a new studio?  In 2008, it was big news that Take Two had made an agreement for them to stay on until at least early 2012.  At this point, however, a new question needs to be raised: who is really in charge of Rockstar Games?  Some evidence suggests Rockstar Games, a subsidiary of Take Two, is actually calling the shots when, for example, the Grand Theft Auto franchise takes a back seat to Rockstar's lesser known franchise, Max Payne.

The latest evidence of Rockstar doing what they want has to do with upcoming title, L.A. Noire.  This game has been in Rockstar’s hands for at least five years and has been in development for eight years.  Sony gave away the troubled and expensive development of the title to Rockstar Games in exchange for exclusive rights to future Rockstar title Agent, according to a past report.

Rockstar Games had success with its most recent major release, Red Dead Redemption, which was labeled a ‘Grand Theft Auto in the West’.  Indeed, the Rockstar Games’ Grand Theft Auto formula has been the developer’s claim to fame.  Outside of that formula, Take Two hasn’t seen any big profitable returns at all since the console transition in 2005.

But Rockstar Games seems to live up to their name and do what they want.  In this case, they wanted to partner with an outside developer (whose producers apparently are close friends of Rockstar Games’ leads), on a title with a formula with no past precedent for success.

When Red Dead Redemption sales exploded, investors expected a spectacular earnings report.  What they found out was how far Rockstar Games was willing to go with pouring development expenses onto an unproven franchise.  That gamble payed off with Red Dead Redemption.  But L.A. Noire looks like a bigger gamble, having no multiplayer aspect and not including a 'free roam' aspect, like Grand Theft Auto.  Take Two is steadfast, however, with a television ad campaign that has started four weeks in advance of release.  Five years of development by a team of over 100 with the aid of Rockstar Games’ developers might very well be another budget north of 75 million, not including marketing.  That would suggest a breakeven point for the title to be well over 3 million units.  Take Two investors were shell-shocked by how much sales were needed to make Red Dead Redemption a success.  If this title does not break out in a big way, investors should be prepared for another shocker.

Related: TTWO

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