Take-Two Interactive Software Inc. is starting a new act.
The video game publisher best known for the bestselling Grand Theft Auto series is poised for a high-level shake-up Thursday when shareholders are expected to elect representatives of activist investor Carl Icahn to three of its eight board seats.
It was only three years ago that a team led by Chairman Strauss Zelnick, the former president of record label BMG Entertainment and movie studio 20th Century Fox, took over a company that was being investigated by the Securities and Exchange Commission, the Internal Revenue Service and the New York district attorney's office.
He and Chief Executive Ben Feder have put the taint of scandal behind Take-Two but have not solved its long-running financial problem: It has been able to make a profit only in years when a major new Grand Theft Auto game was released.
In the company's fiscal 2008, when Grand Theft Auto IV was released, Take-Two reported net income of $97 million on $1.54 billion in revenue. In 2009, it lost $138 million on $969 million in revenue. It is projecting a smaller loss for this year.
"We have a worldwide distribution and publishing footprint, and in a GTA year that cost basis is fine, but in a non-GTA year it's too high," Zelnick said recently in the midtown Manhattan office of his management company, ZelnickMedia. "We need to get bigger."
At the same time, it is locked into a costly video-game licensing deal until 2012 with Major League Baseball and the Major League Baseball Players Assn. that is projected to lose $30 million to $35 million this year alone.
And many on Wall Street are still smarting over Zelnick's decision in 2008, just before the stock market's sell-off, to oppose a $2-billion takeover bid from Electronic Arts. Take-Two's market value Monday was $919 million.
"There's no doubt they regret not having taken the EA offer," said Ben Schachter, an analyst with Broadpoint AmTech.
Icahn rapidly acquired Take-Two stock in November and December, signaling that the onetime scourge of Time Warner Inc. and Yahoo Inc. had found another media company in which he wanted to take an active role. Rather than risk a public fight like the one he's waging with Lions Gate Entertainment Corp., Zelnick agreed in January to give nearly half his company's board seats to an investor who owns less than 15% of its shares.
Among those nominated to represent Icahn on the board is his 30-year-old son, Brett, who has led his father's firm's interest in Take-Two. People familiar with the situation expect him to express opinions about how the company operates, especially regarding how games are produced.
As with any Icahn investment, the investor is also betting on the possibility for Take-Two to be acquired, either by a larger video-game publisher or a media conglomerate looking to expand into the video-game business.
Take-Two has not been bereft of hits. The dystopian action series Bioshock has sold more than 7 million units from the 2007 original to the sequel released in February. Last fall's post-apocalyptic role-playing game Borderlands sold 2 million units and has seen a strong response to downloadable follow-ups.
"They have managed to establish two new franchises that appeal to core gamers, which is a very tough thing to do in the current environment," said Joe Minton, president of Digital Development Management, an agency that represents game development studios.
Take-Two is also one of the few U.S. publishers to create a successful family game series on Nintendo's Wii and DS in Carnival Games, which has sold a total of more than 6 million units for the two consoles.
And while recent baseball and hockey video games have not been particularly successful, last year's basketball video game, NBA 2K10, shipped more than 2 million units.
Outside of sports, however, the company has struggled to keep its games on schedule and on budget.
Two upcoming new games from Rockstar Games, the largely autonomous label that produces Grand Theft Auto, have been in the works for five and six years, respectively: the Old West-theme game Red Dead Redemption and stylish crime drama L.A. Noire. The typical video game takes two to three years to make.
Bioshock 2 was one of three major games pushed back from Take-Two's last fiscal year, which ended Oct. 31, to the current one.
The company hasn't released a sequel to Carnival Games since 2008, though Zelnick said one who is in the works.
Other publishers such as Activision Blizzard Inc., meanwhile, produce sequels to successful games annually in order to maximize revenue, though critics say such a rapid pace can burn out a brand quickly.
"We can make quality video games and release them in a somewhat more orderly fashion than we have done historically," Zelnick said. "We'll stop short of a strictly annual schedule, however, because I think that is the enemy of pushing the envelope creatively."
Quality is a matter of pride for Zelnick, who points to the company's relationship with top talent, including brothers Sam and Dan Houser, who run Rockstar, and Bioshock creator Ken Levine, who was freed from working on the sequel in order to produce an original title that could become another franchise.
Among the key titles still to come out this year are Red Dead Redemption, for which Zelnick has particularly high hopes, cultural simulation sequel Civilization 5, and crime game Mafia II.
Even if those sell well, however, analyst Schachter said the company can succeed only if it produces its games in less time and for less money.
Zelnick maintains it's a doable goal and that he can satisfy investors, including the noisy one soon to be represented on his board.
"The barometer is when we are profitable in a non-GTA year," he said. "I think we can get there. I certainly aspire to it."