Analyst: Take-Two DLC Strategy Won't Pay Big In 09

Despite the fact that it met its fourth quarter forecast and turned overall profits of $97 million on the year, Take-Two drastically reduced its outlook for the coming year, and its shares have fallen almost 20 percent in response. On the company's results call yesterday, Board chairman Strauss Zelnick sought to reassure investors that the company's well-placed for 2009, emphasizing the long-tail potential of downloadable content strategies. Take-Two plans to release two downloadable Grand Theft Auto IV episodes in 2009, with Lost & Damned slated for February and the next one planned for the fourth quarter. But Wedbush Morgan analyst Michael Pachter suggests the company might be relying too heavily on the revenue potential of these episodes, which will cost $20 each, considering the install base of GTA IV -- the disc, after all, is required for purchase of the episodes. "We estimate that around 7 million copies of the GTA IV disc (required for the download) were sold on the Xbox 360, and believe that no more than 5 million of these were sold to members of Microsoft’s Xbox Live service," says Pachter. Of course, the availability of the DLC has the potential to reinvigorate sales of the GTA IV disc, but as it stands, according to Pachter, "the addressable market for the downloads is less than half the addressable market for the game itself." Assuming 2.5 million downloads of both episodes -- although Pachter acknowledges it could be much greater -- Take-Two takes home only $14 of each purchase, as the rest goes to Microsoft for royalty. Moreover, Microsoft has already advanced the company $50 million on those royalties, so Take-Two must first "earn" that back before it can begin to profit from the DLC. "Take-Two will receive no cash from sales of downloadable content until each download generates approximately $35 million in sales (around 1.75 million units," says Pachter -- which means that for the coming year, Take-Two's financials will decline. "The cash burn is made even more tenuous by the company’s release schedule during the year," adds Pachter, "with the bulk of its new releases coming in the last half of the year."