Great. I am Doug Creutz, Senior Media Entertainment Analyst at TD Cowen. Thank you all for being here. I'm very happy to have us have with us here today, Strauss Zelnick, Chairman and CEO of Take-Two. Strauss, thanks for being here.
Thanks for having us.
Of course. I thought I'd start by framing a question. Sony had a presentation on their games business last night, and they pointed out that over 50% of their PlayStation Store revenue comes from a relatively small number of franchises, which included in their deck, GTA and NBA 2K. So I thought maybe in that context, you could talk about the health of your big franchises, how they performed in the most recent quarter and so forth.
Well, we had a very good quarter and fourth quarter. NBA 2K in particular, which had been off to a slow start, really picked up the pace in the fourth quarter, and recurrent consumer spending actually was better than expected. And of course, GTA 5 is now sold in about 200 million units, and Grand Theft Auto Online and GTA 5 have seen massive increases in engagement over the prior year. So the big titles continue to perform. And look, the history of the entertainment business is the big and better always get bigger and better, and the mediocre go away. And the stuff in the middle either has to get really, really good or it also goes away. And we're seeing that.
You know, it's not something we were unmindful of because, you know, I and we have been around the block a few times. Our strategy has been tailored for that. Our strategy has and remains to try to be the most creative, the most innovative, and the most efficient company in the entertainment business. Of course, we fall short regularly, but that is our strategy and those are our goals.
Speaking about bigger and better, obviously you guys recently announced that GTA 6 will be launching in fall 2025, which has a lot of people very excited. If you look at the history of the franchise, you go back to the late 1990s with the first two GTA games, they were, you know, I think pretty modest successes. Then GTA 3 comes out in, I think, 2001. And for the next several iterations, I think those games were more or less $1 billion in iteration in revenue for the company. Then GTA 5 comes out in 2013, and we've estimated that that franchise, that that game life to date has done close to $10 billion in bookings. And you can confirm that or not. But.
Well, simple math.
Yeah. Relatively simple.
When you think about GTA 6 and what you've seen, what they're working on, are you confident that this franchise can take another kind of leap forward in terms of its revenue and its reach and all those things?
That is like the, you're lucky we're not in a court of law's definition of a leading question. So, it's.
It's free to answer no.
Tempting as it is to just lean into that. As you know, I try not to be promotional. It is in my nature. I do think the world's a different place than it was when we launched GTA 5. You know, as you point out, what came before at that point was four. We had some downloadable add-on content. There was no online version. It was sort of neck and neck with Call of Duty at that point as the biggest franchise in the business. Here we are and now with five, you know, 10, 11 years later, having done what it's done, you know, we're a real outlier now. We, we are the number one entertainment property of all time across all forms of entertainment. And when Rockstar put out a trailer, the announcement of the trailer basically broke the internet.
And then the trailer had 93 million views on YouTube in 24 hours, which was a record. And that was just the trailer. So the anticipation is huge. One can't deny that. But the question is, okay, that's great. That's a wonderful data point. And yet we still have to deliver an amazing, perfect video game. And unless and until we do that, you know, this is these are all just words. But if we do do that, and certainly that's what Rockstar and Take-Two want to do, the opportunity is huge, really huge. And I, again, I think the backdrop is definitely different than it was when we launched five.
Yeah.
Oh, and by the way, the competitive set is much narrower. You know, look where Take-Two was. Look at the, you know, the our clout in the marketplace in 2013. Now look at Take-Two, we're the number two pure play in the business, you know, our equity market cap and, you know, is whatever $25-26 billion. We're in a very different place as a company than we were in 2013. We certainly have the ability to support a hit title, that is unmatched in the industry.
Obviously, there's a lot of investor anticipation of launch too. Do you think as you talk to investors, do you think that there's anything that they're underestimating about the potential for the title?
Wow, that's also a leading question. You're just setting me up to say things that are immoderate and promotional, neither of which I'm going to do. No, I think everyone shares the same enthusiasm, candidly. I do.
Okay.
I haven't heard anyone say, "Oh, that title, who cares?
Well, really when GTA V came out, nobody had any idea GTA Online was going to be what it was, right?
No, we didn't either.
Yes.
I mean, we really didn't either. Monetization was an afterthought, for example.
You have announced GTA 6 for PS5 and Xbox Series X|S, which, you know, there's some anticipation that it could drive incremental current gen software sales. You haven't announced it for PC. So can you talk a little bit about that decision? Is that set in stone or is that still potentially in play?
Well, the lack of an announcement is not something that could be set in stone near as I could tell. Because the only thing that happens after the lack of an announcement is an announcement, I suppose, or a continuing lack of an announcement. I guess that could happen too. It doesn't seem to me that either would be set in stone. But Rockstar has an approach to platforms we've seen before. And, you know, they'll make more announcements in due time. I do believe that the right strategy for our business is to be where the consumer is. And historically, what this company has done is address consumers anywhere they are, any platform that makes sense over time.
Okay. If you look out and I know we're not even to GTA 6 yet, but thinking about GTA 7. Well, I was wondering if I would be.
I'm not going to go there, but no, no. Well, I look, I feel I imagine a few things are probably true. One, Rockstar would probably not prefer to have another 12-year gap between major iterations of their franchise. Two, I imagine they have really big ambitions for the live service component, which you guys haven't talked about yet, but I'm sure with everything they learned from GTA Online, they're thinking about how they can make it even bigger and better. And three, I would imagine Rockstar probably has other ideas they'd like to work on beyond GTA for the next 10 years. So how do you think about how Rockstar needs to evolve over the next 10 years so they can achieve all the things that that they want to do? Is it is it a resource issue or is it another issue?
It's important to bear in mind it's not like Rockstar put out GTA V and then sat on their hands for 12 years, right? We launched GTA Online and that's turned into this massive, you know, living, breathing ecosystem, which continues to perform and grow to this day. So the label totally transformed from a label that made big, standalone, monolithic games, and not just one, a number of them, to a label that actually is now in the live services business and, you know, on an ongoing basis. And, I do think given the scale of that label, it's a huge company in and of itself that there is much more to be done. But this isn't a situation where, you know, there's a 12-year dearth of product. There's 12 years where Rockstar has been putting out a massive amount of content.
Oh, and by the way, another little title called Red Dead, which has sold in about 65 million units. And Red Dead Online is also really successful and continuing to improve its operations. So, you know, it's amazing that Rockstar's like second best title is the industry's, you know, basically the industry's standard bearer. Right. If you take take GTA as a huge outlier, Red Dead is a massive, massive franchise.
Switching gears a bit, you mentioned in the opening question the trends have improved to NBA 2K24. Can you talk a bit about why you think it was softer earlier? What's improved since then? And I know that it was added to Game Pass and PS Plus, I believe, in late March. And did that have anything to do with some of the improved things?
That definitely helps recurrent consumer spending because it gets the title into people's hands. And some of them do get engaged, and spend, on an ongoing basis. So that's a positive. You're also seeing us get farther and farther away from Gen 8 issues. So the title was not highly competitive in Gen 8. It's highly competitive in Gen 9. So as people are more focused on Gen 9 usage, then, you know, that those headwinds obviously diminish. And we think those headwinds will be meaningfully reduced with the next iteration.
Okay. You recently announced that you're acquiring Gearbox. So you've obviously had a very strong historical relationship with the hit Borderlands and Tiny Tina franchises. Acquiring them, I would imagine part of it was just safeguarding those franchises in the context of a company that was part of a larger company that's going through some pretty serious struggles. Can you talk about what other strategic opportunities or benefits the deal could bring?
Well, the biggest opportunity is to be in business with Randy Pitchford and his team. I think we're bringing over 675 incredibly talented people. And of course, the IP that Gearbox controls is not limited to the two titles you mentioned. They have a number of other successful IPs in their catalog, including Duke Nukem, the beloved Duke Nukem. So, we think there's a wonderful opportunity. You know, Gearbox is unique in that it brings AAA titles to market on a pretty regular cadence. They're not only really creative, they're sort of a definition of efficient. We're thrilled to be closer to Randy and the team. You're right. We had long-term publishing rights before for Tiny Tina and for Borderlands, of course, but ownership and publishing rights are two different things. Yes, there's a safeguarding element, but there's also a margin element.
We were fortunate that there was a moment in time where we could strike a deal that would benefit all all parties.
Borderlands was one of the first franchises that really did DLC in a way that resonated with consumers. Is there, you know, having a 15-year history of that, is there sort of institutional knowledge there that you think could benefit some of the other AAA franchises?
Unquestionably. I mean, we encourage our labels and within our labels, our studios to be highly independent and to pursue their own destiny. Equally, though, in a best case scenario, all of your colleagues benefit from sharing information and working together in a collegial form. So there's a natural tension in what I just said. There's also, if you do it right, there's a benefit in what I just said. And, you know, Rockstar and 2K, for example, they're fiercely independent of each other, but, you know, we share information and we cooperate. So, for example, when one label has success on a monetization scheme, that information would be shared with another label. We have a corporate consumer database. We share all of our consumer data, you know, in a white room sort of sanitized way and certainly a compliant way across our entire corporate footprint.
So, if we didn't do that, there'd be no reason for us to be this big company. It would make more sense for it to be totally scattered and independent. But I think, and I, you know, obviously I'm biased, but I think we strike a very good balance between having independence creatively and co-dependence corporately when it makes sense. And that's what a big diversified entertainment company should do. One of the reasons that some of the big traditional entertainment companies have failed is because they never figured that out. You know, they never found their way to cooperate where they should cooperate and not cooperate where they shouldn't. And so, as someone who's worked in all of those enterprises and led one or two of them, I'm really focused on trying to find the right balance.
And the balance for us is like loads of autonomy where it comes to creativity and loads of cooperation when it's like cookie cutter stuff that the corporation should be handling on people's behalf. And then thoughtful and responsible cooperation in areas that have fallen to the gray that aren't either black or white. And then we do it with a common culture. And that culture is one of transparency, honesty, and mutual respect. And when you put that all together, if you stay on top of it, you can drive a wonderful result of, you know, again, pursuing our three-part strategy, which is creativity comes first. We want to be the most creative company. Innovation supports that creativity. We want to be the most innovative company. By the way, I wouldn't say we are the most innovative company.
I think we try really hard, but it's really hard to be innovative. Oh, and by the way, expensive. And then trying to be the most efficient company and with our most recent round of cost cuts, painful as they are, to implement. I think once again, we can take the position that we're the most efficient company in the business.
So I think we're approaching the or we just passed the 2-year anniversary of closing the Zynga deal. As you sit here today, you know, you had a strategic rationale for the decision. Do you feel like that strategic rationale is playing out the way that you had hoped it would, that you expected it would? When you think about Take-Two, your pipeline, how much weight does the mobile side of your business carry in that pipeline's ability to drive growth?
So did it turn out the way I thought? Definitely not. I mean, as the ink was drying on, you know, my signature, the mobile market fell out of bed for the first time in its 12-year history. And the market was down meaningfully in 2022 and down again modestly in 2023. And now it's flat or growing again. However, it did work out in that the deal was immediately accretive and now it was more accretive and that we were able to achieve and exceed all of our cost reduction goals. And in that, it worked culturally because we've a wonderful team in Zynga led by Frank Gibeau and great connectivity and great cultural fit. It worked in that we were right that the mobile market remains a robust market.
And now, thankfully, we're right that we've been able to create new hits, most notably in Match Factory, thanks to the team at Peak. So it's really worked out well, but it was not without its terrifying moments. And I remain fully of the view that mobile will continue to be the fastest growing part of the interactive entertainment business. And then for this company not to be exposed to mobile means that we couldn't have pursued our, you know, our destiny, which is, you know, kind of where we're at now. You know, we're the number two pure play in the space.
And if, you know, if we are able to achieve the expectations that we've outlined, which is sequential top line growth for this year and the subsequent two years at least, you know, we may be able to improve against that position depending on what the competition does. And while scale at that point doesn't really matter, it sort of matters in terms of your operating margins. And scale does matter in other ways. Your ability to attract talent, your ability to retain talent, your ability to have financial resources that allow you to do absolutely anything. And by the way, anything is a lot in this business. Your ability to withstand the ultimate, you know, the inevitable bad news, which occurs now and then, all of those things are benefited by scale. And we are now a scale player.
But as I've said, and you know, because you followed us for so long, we've spoken so many times. We're not a management team who looks a quarter or a year down the road. We look 5, 10, 15, 20 years down the road. I've been in this seat for 17 years, shockingly enough. When I got to this company, we were, I don't know if we were number 20 or number 30 in the business, but we were left for dead. And no one would have expected we'd be the number 2 pure play company 17 years later. I can tell you we wouldn't have been that if we were looking a quarter or a year down the road, because had we been doing that, what we have done, we would have shut down our sports business.
It was losing $30 million a year, you know, in 2007. We never would have invested in new IP like Borderlands. It was super expensive and incredibly risky. We wouldn't have bought Socialpoint. We wouldn't have been in a position to spend $12.7 billion to buy Zynga. None of these things would have happened. I would argue the company wouldn't be in existence today if we had taken that view. So now what does that mean for the future? It means that we're looking; this team is not looking to the next three fiscal years that Nicole and Lainie have outlined, you know, for all of you here. We're looking for five, 10, 15 years down the road. And we have a vision for what that looks like. Now, obviously, it involves worldwide domination, naturally.
But what it looks like is, you know, taking the position we're in now and pressing that advantage, recognizing that our competitors, they're not standing still. Our competitors are not sitting around saying, yes, have at it. You go do it. Our competitors are trying to figure out what comes next. They're trying to make hits. They're innovating. They're trying to be creative. They're trying to be efficient as well. So what do we have to do to continue to succeed and deliver outstanding returns, which is our history? You know, we've had our ups and downs. But in the fullness of time, our returns have been breathtaking. You know, the answer is we need to check the box of the unknown unknown. We have to recognize this is not a mature industry yet. It's not going to be mature in five years.
I don't think it'll be mature in 10 years. So that means that 10 years from now, we're going to be having, assuming I'm still having these conversations, and I sure hope I am, we're going to be talking about a very, very different business. And if we haven't innovated meaningfully, and if we haven't delivered on our strategy meaningfully, if we weren't willing to take the risk and invest judiciously for that future, then we won't deserve a seat at the table, never mind have one. If we do it right, I'm going to be talking to you about stuff that you haven't even conceived of today because this is such a dynamic and growing space.
Your comments remind me that when I was a very new, senior analyst, I had a vocal short seller call me and tell me that if I kept a buy in your stock, I was going to lose my job.
Here we are.
Thankfully, 17 years later when you were here.
You even have some gray hair now.
You've got to have a few. Yes. Just back to.
I had some interesting conversations along them with myself.
Back to.
I'd remind people we have a liquid security you can sell if you're unhappy.
When you announced the Zynga deal, you talked about the potential for revenue synergies between the two organizations. I think most of us took that to mean, hey, Zynga can help us bring some of our really valuable AAA IP over to mobile. Are you anywhere down the road in that process? Is that part of your multi-year pipeline plan that you've talked about, or is that still sort of on the come?
So you're kind to ask it that way. I mean, what you're really saying is you haven't done that. What happened? And the answer is, and I said it at the time, I said, listen, that is one opportunity to create revenue synergies, but arguably it's not the best one because even mobile titles based on traditional core established IP can fail. And the biggest titles in mobile are, of course, native. Now, what people are really saying, they didn't say it this way, is why don't you just do what Call of Duty Mobile did? But the answer is Call of Duty is a, like, is a superset, never mind a subset, a superset of one. Like, basically everything else has paled by comparison in our space.
So we understood then and still now that the biggest hits in mobile tend to be native to mobile, Match Factory being a great example. That said, I would love to be able to announce a successful mobile title based on legacy Take-Two IP. And I'm pretty sure we'll be able to do it. But you're right that it has been backburned a bit in service of a bunch of other opportunities. So the biggest revenue synergy created among the organizations, now we're one, but we were two, is our direct-to-consumer platform for mobile, which has become really important to us. That was essentially a JV between Zynga and Take-Two, like day one. And now it's a very significant business. And the margin, the incremental margin driven by our D2C business of mobile in and of itself basically ticks the box of our expected revenue synergies.
If you, because revenue you don't care about. It's a margin you care about. So basically the margin driven by that has ticked that box. But would I like to do exactly what you said? Absolutely. Have we done it yet? We have not done it yet. Is it in our multi-year pipeline? It is in our pipeline. But that doesn't mean it'll succeed. It could fail, which case it would be irrelevant. No, worse than irrelevant would actually cost us money because failures cost us money.
But you have to take the bat off your shoulder.
But we have to try, and we will try.
Yeah. So I'm going to ask you a question about AI, but I'm going to do what most tech analysts do and frame it a little differently. If I think about the history of the video game industry, you know, 40 years or so of it being a mass market entertainment industry, there have been a lot of major technological advances. And in that 40 years, the price of making video games has only ever gone up. And that's because it's a very competitive industry. And if you don't make the best product, your competitor will and you'll lose. So when you think about what AI can do, I mean, a lot of investors ask me, is it going to reduce the cost of making video games? My answer is typically, no, I don't think it will.
It may reduce the cost of some aspects of making video games, but that money will get spent elsewhere to make the game better. What it will probably do is expand what's possible in video games. So me having framed the answer, do you agree or disagree with what I'm saying?
I mostly agree, actually. Look, we've been in the AI business since, you know, the beginning of the business, of course. We've seen numerous tools created for our business that yield efficiencies. Despite that, of course, as you said, the cost of making games has gone up. It hasn't gone up because there weren't efficiencies created by those tools. Those efficiencies were created and that allowed us to turn our attention to more complex activities that continue to engage and delight consumers. I'm pretty sure the same thing happens. What happens is generative AI will allow us to do a bunch of things more efficiently. We'll turn our attention to other things. Those other things will probably still be costly and time-consuming.
I can only think of one entertainment business in the history of the electronic entertainment business where new technology actually reduced production costs meaningfully. Anyone want to take a guess? What is it? It's only one that I can think of. Come on, you follow the biz. You don't just follow interactive entertainment, right? You follow entertainment. Recorded music. So when I was in the recorded music business, which was in the 1990s, to create a really high quality studio album costs like basically at least $1 million. And today we could take this room and with probably $2,000 of insulation and equipment, we could create, and obviously a willing artist, we create, could create an album that sounded really, really, really good. And probably the total production cost, if you exclude how much physical production costs would be, I don't know, $25,000-$50,000, really.
So that's a really meaningful change. But I don't, I can't find any other example of that. So for example, you know, animation, film animation used to be all hand-drawn. Today it is not. It's created in computers, but it costs a whole lot more to make a Pixar movie today than it costs to make a Mickey Mouse movie in the 1920s, late 1920s. So, I think the same thing happens here. I also don't think for a minute that generative AI is going to, like reduce employment. That's crazy. It's actually crazy. You know, it's not going to make, you know, people irrelevant. It's going to change the nature of certain forms of employment. And that's a good thing. So the analogy I like to give, and I'll try to make this interactive.
So, 150 years ago, so mid, you know, 1870s, what percent of the U.S. population made its living in agriculture? Anyone? 70, yeah, close. You and I, of course, were around then, but no, it was 65%-70%. What percent of the U.S. population is involved in agriculture today? Now, we feed all of America. We feed a lot of the rest of the world. What percent?
1%.
Between 1%-2%, around 1.5%. When was the last time you ran into someone who said, "It's horrible, I cannot get a job as a farmer?" I mean, I just can't believe it. I've been trying and I'm unemployed, no farming job for me. The answer is we do not want to get our hands dirty farming, or most of us do not. By the way, farmers don't get their hands dirty anymore because it's automated and we have massive farms. So the same thing will happen. You have a moment in time where certain people will be put out of work by AI. An example would be, like, routine call centers, not high, high, you know, high-tech, complex ones. But, for those of you who shop online, a little box opens up and says, "Hi, I'm Bob. How can I help you shop for a couch today?
You do know that Bob is AI, right? That Bob, you're aware that Bob is not Bob, right? So that's, but the person who was Bob, who was three years ago, was sitting in a call center in India, like they're doing more interesting work now because these are competent people who are highly educated and better jobs came along that probably pay them more. So believe it or not, like I'm in a chat, a WhatsApp chat with a bunch of Silicon Valley CEOs and like the conventional wisdom out there is like AI is going to make us all unemployed. It is just the stupidest thing I've ever heard. The history of productivity tools is that it increases employment. It increases value. It increases yield. It enhances growth. All of these things will happen. Or said another way, remember the paperless office? Anyone remember the paperless office?
Guess what? We consume more paper than ever before. Despite the fact that no one here has file cabinets, we consume more paper than ever before.
All right. Well, we're at time. Strauss, thank you so much.
On paper, I guess we're ending there. Thanks.