Take-Two looks for life beyond 'Grand Theft Auto'

September 21, 2012: 12:31 PM ET

The video game company recently released Borderlands 2, which Take-Two hopes will help plug its financial holes and give it a new star franchise. It might be a long shot.

A scene from Take-Two's Borderlands 2

By Chip Lebovitz

FORTUNE -- 2012 was supposed to be a banner year for video game maker Take-Two Interactive. The spring was supposed to mark the triumphant return of Max Payne, one of the gaming world's traditional heavyweight franchises. But positive reviews, eight years of development, and one of the company's largest marketing campaigns ever couldn't convince gamers to purchase Max Payne 3, the franchise's latest installment.

Take-Two (TTWO) had had a rough go of it lately, and in July the company missed analyst's estimates for the second straight quarter. With no release date in sight for Grand Theft Auto V -- the latest sequel to the company's best-known and most profitable franchise -- Take-Two must rely on space western shooter Borderlands 2, which hits shelves this week.

Take Two is also likely hoping that Borderlands can help the company rely a little bit less on Grand Theft Auto. Despite the lack of updates to the franchise, Grand Theft Auto product sales accounted for almost 14% of the company's net revenue in fiscal year 2012. As of September 2011, Grand Theft Auto titles had sold 20 million more units then the rest of Take-Two's catalogue combined. That's over six times the number of games sold by Take-Two's second most successful franchise.

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This unbridled success has given Grand Theft Auto's in-house developer, Rockstar Games, free reign over the studio's development process. Rockstar takes a considerable amount of time between releasing its games (the latest Grand Theft Auto game was released in 2008), driving up Take-Two's overall development costs.

"[Rockstar] fancy themselves James Cameron in everything they do," says Wedbush Securities analyst Michael Pachter, "Everyone gets a game out in three years; Rockstar doesn't follow these rules…." And while the studio's games are consistently praised, they aren't guaranteed financial successes. Rockstar produced Max Payne 3.

At the very least, the success of Borderlands 2 will make or break Take-Two's second quarter. Pachter estimates that Borderlands sales to account for 54% of the company's quarterly revenue. More importantly though is the Borderlands franchise's potential as another long-term source of revenue for the company.

Borderlands 2's September release date comes a little under three years after the original game was published. The game also has major hit potential. Cowen and Company analyst Doug Creutz sees Borderlands as a potential third anchor franchise for Take-Two, along with Grand Theft Auto and the Red Dead franchises, a series of spaghetti western shooters. "[Last quarter] the focus was on the missing earnings, everyone knows that," Creutz says, "One big hit [Borderlands 2] can pay for everything."

According to the video game research firm VGChartz, Borderlands 2 is on pace to rack up over 1 million United States unit sales in its first week. That's over double the first-week U.S sales of Max Payne 3.

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Part of Borderlands' potential success has to do with its blend of two popular video game genres, first person shooters and role-playing games. "[Borderlands 2] is a very unique title," Take-Two COO Karl Slatoff said on the company's July 31 earnings call, "There's nothing else like it out there. It's a great window for us."

Take-Two's stock has soared over 35% since August 1, reflecting, at least in part, growing enthusiasm about Borderlands. Still, despite its hit potential, Borderlands 2 isn't a perfect fit for a Take-Two turnaround game.

Take-Two teamed up with third-party developer Gearbox Studios to create and distribute Borderlands 2, which lowers its share of the profits, says BMO Capital analyst Edward Williams. That's a smaller slice of revenue for the company at a time when packaged video game profits are already struggling. According to the NPD group, industry sales dropped 20% in August, a dip that's part of a larger trend as gamers wait for a new generation of consoles to hit stores.

Take-Two must also escape the considerably large shadow of Grand Theft Auto. "Take-Two is a Grand Theft Auto company," say Edward Woo, an analyst at Ascendiant Capital Markets. "While the other games are useful, they don't have as much of an impact."

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