Free Grand Theft Auto!

Oh, now this is cool. Rockstar Games has released their huge hit Grand Theft Auto as a free download... of course it's a Windows-only game, and uses DirectX.

This is just a really smart thing to do. I've heard grumblings from people already that "Yeah, that's nice but Carmack released the entire quake engine under the GPL license".

Yes he did, and yes that was equally cool, but the two companies were in very different situations when they released their stuff. Id software was fairly far down the line with their Quake II series, which used a completely different engine that was light-years ahead of the Quake I engine. It wasn't as though there would suddenly be a ton of games coming out that competed graphically with the best stuff they had on the market.

GTA is made by Rockstar, which is owned by Take Two Interactive. It is only available for the playstation platform, and then after awhile gets ported to the PC. Because it is really targeted at the Playstation 2, the engine is pretty heavily customized for it and instead of having huge rewrites where they improve everything they have tweaked it and upgraded it. IE, when their game for the Playstation 3 comes out using a whole new engine, giving their old source away would be more viable. It isn't now.

You have to first understand how successful the GTA franchise is to understand why this is a cool thing to do. Caveat: I do own some TTWO stock. TTWO is an odd stock to own, to be honest. Gaming has shown to be relatively recession-proof, in that game sales have still shown growth, and stocks of game companies have done fairly well. Most notable are Infogames, Activision, and Electronic Arts. Electronic Arts is the 800lb gorilla in the gaming world by far.

All of these stocks trade at a fairly high price/earning ratio (the share price divided by earnings), but TTWO's is very, very low compared to the others. For example, Electronic Arts currently has a P/E ratio of ~22. TTWO has a P/E of ~10, so Take-Two is trading at less than half of the P/E ratio of Electronic Arts and some other game companies. If it's P/E matched EA's, for example, it would be trading at twice it's current price (~$40).

When you just take a cursory look at TTWO, this is a bit confusing when you realize how successful their GTA franchise has been. GTA has consistently been in the top-10 bought games listings for a long time, and their follow up, GTA : Vice City has not only been the number one game for several quarters, the gap between the number of copies it is selling and the number of copies the #2 title is selling is huge. Ie, it is like saying the Mac is the #2 desktop platform, and realizing it only has 3% of the market. Huge seller, huge profits, and demand hasn't settled down much especially when you realize it is only available for the Playstation 2. Sony loves this game.

This gets more confusing when you actually take a loot at TTWO's financials, which are very, very healthy. They're showing huge earnings growth quarter after quarter, and will be branching out into more kid-friendly games pretty soon. So why, if this company is seeing such huge profits and growth is it's P/E so low compared to others?

There are two reasons really:

A bit back TTWO restated financial earnings for some previous quarters, and there is an on-going FEC investigation
While the GTA franchise came out of no-where to be the game franchine to have, it remains to be seen if TTWO can keep up it up, or top it

The first reason is important, and not to be trifled with, but not that big of a deal. They already restated their earnings, and while the investigation is on-going it has been going on for a long time with no word one way or the other, which often means nothing huge has been found.

The second reason is the important one: Before GTA, Take Two Interactive had some good selling games (they're also developing the upcoming Duke Nuken Forever) but nothing near GTA. How the hell do you top a game which has broken record after record? They probably can't, and wallstreet wants huge quarter-after-quarter growth, and they know this. In their most recent earnings statement it looks like as though they are trying to take as many write-downs as they can to try to downplay exactly how much money they're making, which is an odd position to be in.

If for some reason the GTA franchise died tomorrow, Rockstar would be right back where they were before it... nothing steller, with an odd-ball assortment of games. But if they are able to use the huge profits from the GTA franchise to successfully move into other genres and to create more franchise titles, watch out.

That's sort of the conundrum with them, the stock has already shown interesting spikes whenever the market rallies, the last one being a large ride over the $31 mark, whereas now it seems to be hovering with a ceiling of $19.50. If they can show they can keep the franchise fresh, and growing its revenue they'll do well. If they can show they can do the former, yet use the revenue to increase their hit titles so they aren't dependant upon GTA they'll do steller.

Which is why releasing GTA as a free (albiet huge) download for the PC market is such a great move. The first GTA sold great on the Playstation, and great on the PC, but in reality its marketable life is about over for the PC. But, the followup to GTA, GTA : Vice City is in development for the PC platform with a release coming up.

Those who wanted to buy GTA for the PC probably already have, but by giving it away for free on the PC now, before the release of their sequal, means a heck of a lot more people will be giving it their attention (reviewers, editors, etc) and potentially a lot more people could get hooked on the game play, making GTA : Vice City a much bigger seller when it is released for the PC, increasing the viability of the franchise at the cost of minor sales.

It seems to me that they're showing good, solid management of their franchise rather than trying to milk it to death, which seems like a really smart move and makes me a heck of alot more comfortable in my investment.