The Cut Scene - Video Game Blog by Variety

Sam Houser signals that he's cool with EA

It can't be a coincidence that Sam Houser is talking to the Wall Street Journal today about Electronic Arts.

With EA's bid for Take-Two expiring on Friday, Houser is making it pretty clear -- as far as he could  given the circumstances and his reputation -- that he'd have no problem with the deal going through. This is the key part of the story, as far as I can tell:

If EA succeeds in acquiring Take-Two, some analysts believe EA's star developers might demand a bigger share of game proceeds.

Another possible kink: Rockstar's history of autonomy. If EA ends up with Take-Two, Mr. Houser says it's unlikely that he would go so far as to seek EA's approval for game content. Still, he calls Mr. Riccitiello "the real deal" and sees some appeal in an EA alliance, which he says would make Rockstar a "much smaller fish in much bigger pond."

"I'm not someone who has any kind of problem with that," says Mr. Houser, who says EA turned him down for a job in the late 1990s.

As any reporter knows, business executives only talk when they have a good reason (or at least a reason they think is good). Sometimes it's as simple as wanting to publicize a product or themselves. Sometimes they're trying to raise their own profile or that of their company. Sometimes they're looking to push ongoing negotiations in a certain direction. I certainly know most sources don't talk to me out of the kindness of their hearts.

So when Rockstar chief Sam Houser goes on the record several weeks after "GTA IV" launches, but just a few days before Take-Two shareholders have to decide whether to accept EA's $26 per-share offer, and has nice things to say about John Riccitiello, he's telling the world that he's cool with this deal, if not outright endorsing it.

His actual quote may be very mild, but it's his decision to talk right now that speaks volumes. He also speaks about Rockstar's reputation for independence, and the story goes into the label's "bad boy" reputation, which to me is a symbol to investors that Rockstar doesn't intend to change one iota under EA, which is to say they intend to keep making hugely successful "GTA" games just like they always have.

The only question is, what does Strauss Zelnick think of it? The fact that Take-Two COO Gary Dale (who formerly worked with Rockstar) was allowed to talk on the record means that Zelnick must have not fought against the story, at a minimum (Rockstar does have its own very independent PR strategy).

So is Zelnick signaling that he's softening on his resistance to the deal at all now that "GTA IV" is out and a big hit? Will Houser's signal that he and his Rockstar team will be just fine under EA motivate any more Take-Two shareholders to sell? We'll find out by Friday.

PS Too bad the Housers remain so resistant to having images of themselves in public. I would have loved to see one of those classic WSJ sketches of Sam the way he's described: "[sporting] a scruffy beard that stretches to the top of his chest."

Grand Theft Auto IV sells $500 million-plus in its first week

Remember when I reported last month that, according to Take-Two Sources, "Grand Theft Auto IV" was on track to sell over $400 million at retail in its first week? Turns out my sources underestimated by around $100 million.

As I'm reporting in Variety this morning, Take-Two and Rockstar actually sold more than $500 million worth of "GTA IV" units, totalling more than 6 million units. That demolishes the $300 million-plus record that "Halo 3" set in September.

In fact, "GTA IV" broke that record on its first day, selling $310 million, or 3.6 million units on April 29. "Halo 3" sold $170 million on its first day in the U.S. (the game didn't quite have a simultaneous worldwide release)

And to the extent that it matters -- only a bit, in my book, given how different the economic model is -- it's bigger than the closest comparable box office record we could find: $404 million over six days for "Pirates of the Caribbean: at World's End."

Given that huge first week figure and that there's likely to be a surge in sales come the holidays  (at least amongst the more permissive or clueless parents out there), I'd say "GTA IV" has a very good shot at beating "San Andreas'" franchise record of 21.5 million units.

Strauss Zelnick and his team are sure to be happy, since this make's Electronic Arts' case that it can do an even better job with the "GTA" franchise than Take-Two a bit harder to argue. It'll be interesting to see today whether investors had sales this massive built into Take-Two's stock price or if its get a bump.

Bioshock MMO, mobile, or movie; Civilization MMO; everything online... Take-Two muses

As part of its presentation to analysts today, Take-Two Interactive presented a few "potential untapped opprtunities" in markets it hasn't yet entered, including MMO's and mobile, as well as licensing to "traditional" media or, I assume, producing itself.

On a slide that was part of its presentation, which I copied above, it even named some potential names, noting that "Bioshock" and "Civilization" could both make great MMOs and that "Bioshock" and "Carnival Games" could work as mobile games.

These are only possiblities, of course, and not reason for fanboys to start clearing space on their hard drives or buying a powerful new phone. Given the way analyst presentations work, I take it as more Take-Two demonstrating to those in attendance that it can move into these markets if/when it is ready, because it has properties that would translate well. It's not a hint that the "Bioshock" MMO is actually in development.

As for the "Bioshock" movie, that should be a big "duh" to Cut Scene readers. As I wrote last month, "Take-Two has been bombarded with  requests from producers and studios interested in obtaining the rights, agents interested in representing them, etc." The only question is which big name is going to get the rights. And whether Take-Two will try to get commercially/creatively involved itself, possibly investing its own money.

Also of note: Executive Chairman Strauss Zelnick said that online play is becoming increasingly important. "Not all of our games have been multi-player," he noted. "Going forward, the bulk of them will be."

My immediate thought? I can't wait to play "Bioshock 2" online multi-player next year. I want to be the Big Daddy.

Bioshock 2 coming in late 2009

Much more on Take-Two Interactive earnings to come soon, but I had to post right away that the publisher has set a release date for the widely known but never before confirmed "Bioshock 2":  the fourth quarter of its fiscal 2009, which means between August and October of that year.

As expected, it's being made in the recently formed 2K Marin studio up in northern California, which has some transplants from 2K Boston and 2K Australia, which made the first "Bioshock," but not the original game's creative director and public face Ken Levine.

If you thought "Bioshock" was as genius as I did, you're very excited for early fall 2009 and also a bit nervous whether a sequel can live up to the original's greatness, or its awesome level of innovation.

Take-Two also confirmed during the its conference call with analysts that Ken Levine, creative director of the first "Bioshock," "will be working on 'Bioshock 2,'" but also noted that he's working on a new game at his studio 2K Boston and didn't indicate how involved he will be in the sequel. Sounds like it'll just be a consulting gig.

(For the "much more," check out my story on Take-Two's earnings and the latest on Electronic Arts' bid right here.)

Take-Two shareholders don't think a bigger bid is coming

As Reuters reported last night, the dramatic sell-off of Take-Two Interactive stock by two of its biggest share holders -- Oppenheimer Funds and Fidelity Mutual Funds -- means that some very smart people on Wall Street think the company's stock isn't going any higher than the $26 range it hit after EA's bid.

Which means they don't think EA is going to increase its bid, nor is another publisher or a big media company going to come in and offer more.

And also means that, no matter how well "GTA IV" sells, they also don't think Take-Two stock is going to naturally go higher than $26 anytime soon.

Which means the Take-Two board's argument that their company is worth more than the $26 Electronic Arts has offered isn't too convincing to Wall Street right now.

As Pachter said, "[These shareholders] are voting on this deal and they are voting with their feet. They know they have no leverage."

Which means Strauss Zelnick et al will either have to take EA's bid, or prove two of their (formerly) biggest shareholders wrong.

Next up in the ongoing drama: Take-Two earnings coming this afternoon.

What Lost: Via Domus "borrows" from Bioshock

I literally just finished writing my review of Ubisoft's "Lost: Via Domus" and will be linking to it, plus providing lots more thoughts and details, when it goes online later today or tomorrow morning.

But one thing I have to get off my chest right away: Remember that hacking mini-game from "Bioshock?" (see left) Some people found it fun, some thought it was tedious, but it was a substantial and somewhat controversial part of the game.

"Lost: Via Domus" rips it off almost entirely. The only difference is that there's no timer and different pieces alter the voltage of the electricity flow in different ways, which is important to the solution. But the basic experience is remarkably similar, right down to some identical sound effects. Coming so soon after "Bioshock," it's downright bizarre.

Of course, the big difference is that in "Bioshock," the hacking mini-game is a break from the awesome, exciting action. In "Lost: Via Domus," it's pretty much the most exciting thing players do in the entire game. But the review's not posted and I'm getting ahead of myself...

Sci/Eidos cutbacks show it's hard out there for an indie

This week may have been the ultimate proof of just how hard it is for independent publishers -- meaning anyone who doesn't generate around $1 billion per year in revenue or more.

First Take-Two is targeted in an aggressive takeover bid by Electronic Arts, whose CEO justifies it by saying that in the current industry, "the need for scale is becoming more pronounced." Even Take-Two executive chairman Strauss Zelnick admitted that, as an industry trend, "we'll see continued consolidation."

In the wake of that, THQ, Midway, and Atari, all of which are struggling financially in large part because they're just too small, got big stock boosts on Monday following the Take-Two bid, indicating that Wall Street thinks they're going to be acquired.

(Outside the videogame industry, but within media, it's also worth noting the demise of New Line and its integration into Warner Bros. as evidence of this trend.)

Now we have Sci/Eidos engaging in a massive restructuring after it wasn't able to close a deal with any of its potential acquirers. "Our infrastructure is too big and expensive for the scale of the business," CEO Phil Rogers said in a statement. "The cost of delivering world-class games has increased significantly and we must provide appropriate levels of resource to maximize these opportunities."

Translation: The costs of making, marketing and distributing a diverse slate of games has become too big for a small publisher that really has just one hit franchise ("Tomb Raider"). So how is Sci/Eidos going to adapt?

-Changing to a studio structure focused on franchises like "Tomb Raider," "Hitman," and "Deux Ex."

-Create a casual and online gaming division called "Eidos Play."

-Cancel 14 unnamed projects in development. (These are presumably mostly new properties -- the kind that a small publisher can't afford to take a $20 million or $40 million risk on)

-Lay off 25% of its workforce, or about 250 people

Rogers was pretty blunt about Eidos' performance in the second half of last year, during which it lost  $162 million on $145 million of revenue (roughly translated). Losing more money than you take in revenue is, to put it bluntly, dismal.

Close watchers of the videogame industry will notice something about Eidos' plans -- it's remarkable similar to what Zelnick and CEO Ben Feder have been doing with Take-Two in the past year. Take-Two is organized around studios like Rockstar, its sports unit, and now 2K Boston, maker of "Bioshock." It laid people off. It even started a casual division last fall called "2K Play." Couldn't Eidos at least have come up with a more original name?

For more on the problems of independent publishers and the trend toward consolidation, I highly/humbly recommend a story I have on the topic in this week's weekly Variety, which just posted online. There's one quote that seems particularly apt given Sci/Eidos' news:

"The financial pressures of competing have gotten so acute that scale has become critical," says Arcadia Investment analyst John Taylor. "Most of the independents with sales below $1 billion per year are going to struggle."

Zelnick's Take-Two compensation: a fair and balanced appraisal

The Wall Street Journal just posted a good story looking at the much debated issue of ZelnickMedia's new compensation package from all sides.

As an applied ethics expert quoted in the piece says, it's certainly "ethically problematic" that the firm, which includes executive chairman Strauss Zelnick, CEO Ben Feder, and exec VP Karl Slatoff, got a big raise amidst a takeover bid from EA that shareholders didn't know about at the time. Particularly since it gives Zelnick a chunk of shares that are supposed to vest over time but half of which will vest immediately if Take-Two is acquired.

In other words, Zelnick gets a healthy payday if a deal that the management, but not shareholders, knew could happen at the time goes through.

The truly cynical will also note that perhaps Zelnick and his team have said they won't negotiate with EA until at least April 30, the day after "GTA IV" comes out, because that will be after the company's annual meeting where the new compensation package has to be approved.

On the other hand, I think Zelnick makes a very fair case that he has become much more actively involved in the company than he  planned when becoming chairman last spring, thus meriting the raise, which also made him executive chairman. Not to mention the very fact that EA is offering $26 per share, a 50% bonus over current prices, indicates the company is doing pretty well under him.

And while one may complain that in the grand scheme of things giving executives a "golden parachute" when their firm gets acquired is outrageous, it's certainly standard practice.

The only way this will turn out really disturbing will be if, after April 30, Zelnick ends up accepting EA's offer of $26 per share or something close to it. That's pure naked greed just to get his golden parachute. Otherwise, he certainly has a plausible case that he's doing what's best for shareholders.

Strauss Zelnick speaks on EA's takeover attempt

I have a big story in tomorrow's Daily Variety detailing all the machinations in the EA/Take-Two battle today, which I hope you'll read if you're interested in what I think is the most important news in the media business so far this year.

But I thought Cut Scene readers would be interested in more of what Take-Two executive chairman Strauss Zelnick had to say when I interviewed him today. So here's the full transcript, or at least the on-the-record parts. Topics Mr. Zelnick didn't want to discuss publicly included EA's attempt to buy Take-Two last year and whether he has been approached by other potential buyers recently.

On how he views EA's going public with its acquisition offer for Take-Two after it was rejected by the board:

This isn't personal. It's business. I think both parties are conducting themselves in accordance with their own strategic goals and in accordance with what good governance demands.

Does the offer to re-start talks with EA on April 30 (the day after "Grand Theft Auto IV" comes out) after EA's move today?

The timing of this deal is wrong and the value remains insufficient... The timing is out of our control now that it's in the public eye, but the fact remains that the value is woefully inadequate. Of course, as a public company one has an obligation to talk to legitimate interested parties at any time, but one the offer goes public, the tenor changes. We've seen what is on the table and we have already rejected it. There's not much else for us to do right now but listen to our shareholders and the market.

Have you talked to major institutional shareholders about the offer?

Off the record only.

On EA's assertion that global scale in the videogame business is imperative and Take-Two doesn't have it:

Historically, that's more or less case. But we have have made strides and reduced costs. We significantly cleaned up our operations. We put in place strong financing. We have hits other than "GTA." "Bioshock" sold over 2 million units. "Carnival Games" sold over one million. We are proud of those achievements and we are ready to achieve plenty more.

Is the consolidation of smaller publishers like yours inevitable in the near-term?

I have said before that I see consolidation occurring. There are two times when consolidation typically occurs: When an industry is growing rapidly or declining. We're growing and so I do believe we'll see continues consolidation. But we are a very strong company. This isn't about majors vs. independents. Take-Two is hardly a boutique firm.

EA says this is the perfect time to go ahead with an acquisition deal because development and marketing and distribution plans for "GTA IV" must be almost done and are at this point "essentially mechanical." Do you agree?

We are in charge of our own business. No one else. The release is two months away and that's what we need to be focusing on. It's not fully baked and ready to go with the push of a button. To present it as such is a little naive.

THQ, Midway, Atari stocks surge on EA's bid for Take-Two

Looks like I'm not the only one who thinks that EA's bid for Take-Two signifies a period of consolidation coming to the videogame business. Take a look at the performance of several small and mid-sized publishers' stocks Monday, none of whom had any news of their own:

THQ: Up 10% to $9.65

Midway: Up 7% to $2.19

Atari: Up 13% to $1.61

Anybody want to take bets on how many of those companies, along with some European publishers like Eidos and maybe even Ubisoft, will still be independent a year from now?

EA almost bought Take-Two a year ago

Lots more to come on this week's big news, but the most interesting tidbit from EA's conference call that just ended may have been this: According to EA, the same deal almost happened a year ago.

CEO John Riccitiello said that in March and April of 2007, which is just when he was joining the company, EA was "very serious about concluding a transaction" and "got very close to making a proposal." But at "the eleventh hour" Riccitiello said he recommended that the EA board not pursue acquiring Take-Two because it wasn't ready to handle the integration. This is before the publisher restructured itself with four labels, brought in new executives like casual games topper Kathy Vrabeck and sports topper Peter Moore, and acquired Bioware/Pandemic.

"I didn't want EA to drop the ball one execution [and] I purposely waited until late this summer to reach out again after we had established our new stragegy," Riccitiello said. Apparently he then began informal discussions with Take-Two chairman Strauss Zelnick last summer and started formal discussions about an acquisition in December, with Take 2 saying it was uninterested in January and then two official offers coming in February, both of which, as we now know, were rejected.

Haven't heard Take-Two's side of this story yet, but it's interesting to hear that EA almost bought the company just as Zelnick and CEO Ben Feder were starting their jobs. If Riccitiello's version of history is correct, the new management team might have ended up doing nothing more than take over a scandal ridden company and immediately sell it, instead of becoming major industry players as they are now.

Update, 5:35 PM: Strauss Zelnick told me that EA's aborted takeover bid last year came just before he was named chairman. So it looks like if EA hadn't backed out, Zelnick woud never have taken over Take-Two.

EA's bid for Take-Two: Get ready for industry consolidation

I'll have much more to say on EA's attempt to buy Take-Two tomorrow as I do more reporting, but for all the details as we know them now, be sure to read my story in tomorrow's Daily Variety.

As a first reaction, though, I think the proof is now incontrovertible that the name of the game in the videogame biz is consolidation. With a 50% growth rate last year, big media getting more and more involved, and franchises being key, the business is about to go through rapid changes. Basically, we can expect any small publisher to either get bought or die in the next year or two, I'd say.

The acquirers will be EA (clearly hungry to buy franchises and development studios), ActivisionBlizzard, and big media congloms that are getting interested in videogames -- companies like Disney, Warner Bros. and MTV.

So, outside of the Japanese companies and first parties, let's take a look at who else is left and what's their likely fate:

-Take-Two: Obviously a tasty acquisition target, since it's relatively inexpensive but has an ultra-valuable property in "Grand Theft Auto" and a few other decent ones, like its sports line and "Bioshock."

-THQ: Its strength is licenses, but the Nickelodeon titles did poorly last year and it's likely to lose the Pixar license after making its last game in 2011 (it already lost 2010's "Toy Story 3" to Disney Interactive). It's struggling to build some valuable internal franchises, but doesn't have a lot. As such, anyone who wants to get their hands on its internal development studios and name might be able to buy THQ at not too big a premium over its trading price, since future prospects don't look all that bright currently.

-Ubisoft: Doing pretty well and it's protected by tough European anti-trust laws. Probably just a bit too expensive and too much of a burden for anyone to buy. Wouldn't be surprised to see it be the smallest major publisher left standing when the current acquisition wave is done.

-Eidos/Sci: There has been a lot of takeover talk and, like Take-Two, it has one pretty well known property in "Tomb Raider." Despite recent setbacks, somebody will succeed in taking over Eidos, I presume. Could even be Warner Bros., which already owns 10%.

-LucasArts: Privately held and would lose most of its value if separated from "Star Wars" owner LucasFilm. It's not going anywhere.

-Midway: It's been struggling big time for the past few years. It has "Mortal Kombat" and... ummmm.... My guess is new chairwoman Shari Redstone is looking to sell. But will anyone want this underperforming company?

-Atari: Nice to buy for the name, but that's about all you'd get. Not sure why anybody would bother at this point. A more likely fate is something like Acclaim, where a private investor interested in the biz will buy the Atari name to use for a new business plan.

-Codemasters: Goldman Sachs recently invested $99 million in this small British company, which isn't too well known outside of Europe. Probably too soon for private equity investors to cash out, plus it doesn't have any appealing franchises or an appealing brand name for American publishers, I'd guess.

Strauss Zelnick is here to stay

It's well known that Strauss Zelnick has been heavily involved in Take Two's operation since he and his cohorts took over the company last year when the old board and management team was ousted. Zelnick, of course, used to run BMG back when its short-lived interactive division released the first "Grand Theft Auto" from current Take Two subsidiary Rockstar.

On Friday, he got the go-ahead to be officially involved in day-to-day operations by switching from non-executive chairman to executive chairman. What does that mean? Basically, it's now his job to be involved in the company's day-to-day operations along with CEO Ben Feder (whose contract has been extended through 2012). It also means Zelnick, whose career has included music and movies, is dedicating himself pretty whole-heartedly to the videogame biz (at least until some big media conglom swallows up Take Two). And with the kind of growth videogames are seeing compared to other media businesses, who can blame him?

(It's worth noting that executive chairmen are pretty unusual in the business world these days, where if the CEO and chairman aren't the same person, the chairman is usually not involved in day-to-day operations. But two major videogame companies now have one: Take Two and Electronic Arts, where former CEO Larry Probst remains executive chairman.)

Bioshock: the Movie... where is it?

It seems that most every game most every successful video game gets a chance to be turned into a video game, regardless of whether it even has a coherent story.

Which has naturally led everyone to ask: What's up with Bioshock? Not only was it one of the best selling original games of last year, it was critically acclaimed, with specific mention made by many of its cinematic setting, characters, music, and, to a lesser extent, story.

Joystiq reported last month that one production company has been discussing a movie adaptation with "Bioshock" publisher Take 2. But trust me, they're far from the only ones.

From what I hear, you'd be hard pressed to find a production company, studio, or agency with at least one videogame savvy employee that isn't interested in "Bioshock." Take 2 has been bombarded with  requests from producers and studios interested in obtaining the rights, agents interested in representing them, etc.

But so far they're playing it tight to the vest. While Take 2 hasn't closed the door, it isn't ready to make a deal yet. Are they waiting for the right offer? Hoping to parlay it into some bigger alliance with an agency or studio? We'll have to wait and find out. But the lack of a "Bioshock" movie deal certainly isn't for want of Hollywood trying.

Viacom's not making a bid for Take Two

Just spoke to a very good source -- someone who would know -- who told me the same thing that Reuters just recently reported: there's no truth to the rumor on MCV,  subsequent picked up by numerous websites, that Viacom has made a $1.5 billion bid for Take Two.

You can be sure that Viacom, like other big media congloms, has looked at a number of videogame publishers as potential acquisitions. And you can be sure that Take Two, given that it has some valuable properties but isn't nearly as expensive as EA or Activision/Blizzard, is high on the list of potential targets for all of them. But there's no offer on the table from Viacom to buy Take Two.

(If Viacom ever does buy a videogame  publisher, it will be very interesting if it's not Midway, in which Viacom chairman Sumner Redstone has a controlling ownership stake and has his daughter Shari serving as chairman.)