Analysts Examine Worth of GTA Franchise

February 07, 2006 | By: James Brightman

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SIG analysts Jason Kraft and Chris Kwak value the GTA franchise at nearly $900 million over the next 5 years. That's nearly 80% of Take-Two's market value and is a shocking reminder of how dependent the publisher is on the franchise. More within...

With all the speculation about a possible buyout of Grand Theft Auto publisher Take-Two Interactive, many might be wondering how much their money making franchise—45 million GTA units have been sold worldwide—is actually worth. Analysts Jason Kraft and Chris Kwak at Susquehanna Financial Group (SIG) did some legwork to come up with a reasonable answer to that very question.

The report first makes some assumptions. Kraft and Kwak believe the release cycle for the franchise will change for next-gen, but that an increase in releases on PSP is likely. "The upcoming GTA cycle (CY06-CY10) could differ materially from the current one (CY01-CY05) in two respects. First, we believe the franchise may see two unique next-gen console iterations versus the three current-gen titles. Second, there is potential for up to six PSP titles (five, post Liberty City Stories) over the next five years."

The report continues, "More powerful portable platforms also offer opportunities for franchise expansion. Sony's PSP provides an outlet for mature games, which fits perfectly with GTA. Sony PSP offers something Nintendo does not. Take-Two could develop unique PSP games between major next-gen console releases or ports of existing titles. Shorter development cycles on PSP enable Take-Two to release PSP titles more frequently. The regularity with which Take-Two releases GTA titles on PSP will be critical to the franchise's revenue growth in the next-gen cycle and underlies our revenue growth forecast."

Kraft and Kwak expect console GTA units actually to decline 36 percent to 27.3 million units during CY06 - CY10, but they also think that additional PSP SKUs and higher next-gen ASPs on the console versions will offset any chance of total revenue decline. Also factoring into their analysis is that they believe gross margins on GTA "reside at the high end of the industry's console game gross margin range of 40-60%." In addition, Kraft and Kwak see PSP operating margins generally being higher than console margins, which could encourage Take-Two to release more GTA on the PSP.

Ultimately, the report bases the value of GTA for the next five years on the following: six titles on PSP (including Liberty City Stories), three for PC, two on next-gen consoles, and one on a current-gen console (PS2 only).

The result is that GTA is worth just shy of $900 million ($12.71 per share), which is amazingly 78 percent of Take-Two's current market value. Other analysts and industry experts have criticized Take-Two for being too dependent on its GTA games, and Kraft and Kwak's report certainly underscores that.

And while it's hard to blame Take-Two for its reliance on a blockbuster franchise, eventually gamers are likely to tire of the GTA formula, or the games will no longer feel fresh when placed side-by-side with titles that perhaps improve on that formula. To be fair, Take-Two has made attempts to diversify itself through acquisitions and new IP, but the publisher's value right now is heavily dependent upon GTA and that could be a double-edged sword for potential suitors, or investors in general.