BusinessWeek

Matt Vella, April 8, 2008

The latest title in Rockstar's blockbuster video game series is playing a key role in the takeover drama surrounding parent Take-Two and EA.

Inside the posh New York headquarters of Rockstar Games in a SoHo loft, there's a buzz of round-the-clock activity. It's only weeks before the company releases its much anticipated video game, Grand Theft Auto IV, and employees are scrambling to deliver the finishing touches. "It takes a lot of work to make a crap game," says Dan Houser, Rockstar's co-founder, as he dips into a bowl of candy, "and just a little more to make a great one."

Houser has good reason to debate the difference. Grand Theft Auto will appear on Apr. 29 to high expectations and even higher stakes.

Already, game analysts are forecasting that the fourth installment of the go-anywhere, commit-any-crime game, which will be available for Microsoft's (MSFT) Xbox 360 and Sony's (SNE) PlayStation 3, will be the biggest seller of 2008, with an anticipated 13 million units sold.

The three previous versions of Grand Theft Auto have been huge hits, selling a combined 32 million units and pulling in $1.24 billion, according to market researcher NPD Group.

But more than money is at stake. Rockstar is finishing up GTA just as its parent company, Take-Two Interactive (TTWO), is under siege. Last month, games giant Electronic Arts (ERTS) made a hostile takeover bid for Take-Two, offering $2 billion, or $26 a share. Take-Two Executive Chairman Strauss Zelnick rejected the bid, calling it "inappropriate, unfortunate, and opportunistic." He says Take-Two wants to delay any negotiations until after the Grand Theft Auto debut, when the expected strong sales of the game could force EA to increase its offer.

Timing is Key

EA doesn't want to wait. The company wants to strike a deal before the game's release, in part so that it can count the Grand Theft Auto revenues as its own. EA also wants to stop Take-Two from plowing the profits from the game back into its sports games and other titles that compete with EA's own products. The battle could come to a head in the next week. EA set a deadline of Apr. 17 for Take-Two shareholders to decide on its bid. "If we can't close the deal in time to market their titles in the '08 holiday, the value diminishes for EA," says Owen Mahoney, EA's senior vice-president for corporate development.

Although most analysts expect the deal to go through, it remains to be seen exactly how the negotiations will play out. If shareholders agree to EA's conditions at their Apr. 17 meeting, Take-Two will probably replace its board and hire a slate of executives that will green-light the sale. Shareholders could, however, decide to hold out for a higher price, giving Zelnick a bigger bargaining chip and delaying the deal until after copies of GTA start flying off the shelves.

Even the boardroom drama can't match that of the latest Grand Theft Auto. The basic plot is of Eastern European immigrants pursuing gangster glory in a pre-Giuliani New York. Gritty and detailed, the game's city teems with realistic life. In Midtown, grumpy fashionistas crowd the sidewalks, and a high-definition recreation of Times Square pulses with hundreds of satirical billboards. Rather than rote objectives and levels, as in many other games, players can pursue almost any path they wish. They can build relationships with digital characters through bowling, pub-crawling, or other social activities.

They can make phone calls and punch out text messages on mobile phones. They can even surf a fake Internet with hundreds of tongue-in-cheek Web pages.

Net Benefits

The game is tied into the real Internet, too. The company has set up a new online social network dubbed the Rockstar Social Club. The digital misadventures of GTA players the globe over will be fed into the network, creating a continually updated map of the virtual high crimes and misdemeanors perpetrated by gamers around the world. Players will also be able to download songs heard on the in-game radio through the real-world Amazon.com (AMZN). Such features "really set this game far apart technologically," says Greg Ford, managing editor of Electronic Games Monthly magazine.

Analysts expect all this pixelated mayhem to be worth billions over the next two years. Michael Pachter, an analyst at Wedbush Morgan Securities, says sales of GTA could be worth nearly half a billion dollars in revenue and at least $175 million in profit by the end of fiscal 2008.

Rockstar could use some redemption. The company has weathered one public relations disaster after another in the past five years. A sexually explicit mini-game hidden in the code of its last GTA release earned the company the ire of parent groups and Washington politicians, and eventually cost it millions when the game was pulled from store shelves. Take-Two has fared even worse, with Securities & Exchange Commission investigations and a string of management shakeups stretching back to 2001. Early last year, former Take-Two Chief Executive Ryan Brant pleaded guilty to filing false financial documents as part of an options-backdating investigation.

The Mayhem Won't Change

All the controversy has done little to dampen players' interest in Grand Theft Auto. "GTA may have become a cuss word on Capitol Hill," says Leigh Alexander, news editor at games blog Kotaku.com, "but to gamers, Rockstar is like the cool upperclassman pulling pranks on the principal: They get the joke."