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THE BENEFITS OF EMBRACING THE RISE OF INTERCONNECTIVITY 1

The Benefits of Embracing the Rise of Interconnectivity

Take-Two Interactive Software, Inc. (TTWO)

Corpus Christi College of Business


Prepared by: Alexzandria Hancock, Christina Vela, Peyton Larkin, Samson Salas, Justin Vu

Nguyen, and Stephanie Becerril


Table of Contents

I. EXECUTIVE SUMMARY

II. BACKGROUND

III. EXTERNAL ANALYSIS

A. Macro Environment

B. Competitive Analysis

IV. INTERNAL ANALYSIS

A. Finance

B. Value Chain

C. VRIO Analysis

D. SWOT Summary

V. STRATEGY FORMULATION

A. Vision, Mission, Goals, and Objectives

B. Market Demands

C. Strategy Formulation Options

D. Recommendations

VI. STRATEGY IMPLEMENTATION

A. Metrics and Histories

B. Implementation Issues

REFERENCES

APPENDIX A

APPENDIX B

APPENDIX C


EXECUTIVE SUMMARY

Key Elements:

This research paper is intended to analyze the external and internal environment of the US video

game production industry as well as formulate recommendations for the firm Take-Two

Interactive Software Inc. (TTWO). Specifically this report aims to answer the following

questions:

What is the external environment of the US video game production industry?

What is the internal environment of the US video game production industry?

What are the recommendations; and implementation issues for Take-Two Interactive

Software, Inc.?

The U.S market is influenced by “big deltas” such as changing face of America,

Interconnectivity increasing and increased dominance of Asian power. The big delta has affected

the U.S market for over 3 to 5 recent years; and they continue to show effects in today life. The

U.S. has seen an increase in internet usage, urban households, customer expenditure on leisure

and recreation, and women in the workforce. The U.S. video game industry is part of an

attractive and highly competitive market with low to moderate entry barriers posing threats to

larger companies. This leads to high competition in product differentiation, brand name, and

multiple distribution channels. Suppliers are not critical to a firms’ survival and a high amount of

buyers play a vital role in the success of the companies within the industry. International video

games and move theatre tickets are attractive product substitutes. The rivalry in the industry are

relatively heterogeneous with moderate fixed costs, switching costs and a low exit barrier.

Electronic Arts, Inc. being the largest U.S. game producer ahead of Take-Two Interactive, Inc.

Activision-Blizzard Inc. and Glu Mobile Inc. has strategies that help developers keep gamers in


mind and to focus on game development for mobile platforms. Activision-Blizzard Inc. is widely

known for the success of leading franchises such as Call of Duty and World of War Craft. The

smallest competitor, Glu Mobile Inc. develops and publishes its games to online mobile

platforms such as tablet devices and smartphones.

A value chain is offered in this paper, showing primary activities ranging from negative to

positive. The Resource-Based View Analysis (VRIO) consists of the Grand Theft Auto

franchises, library Top “Hit” franchises, relationship with NBA, and other game franchises. The

SWOT table consists of Internal and External environments and its strengths, weaknesses,

opportunities, and threads. In the strategy formulation, the Take-Two Interactive Inc. mission

statement is stated, comparing its consistency to the SWOT table. An elastic market industry

with a narrow market breadth and a focused low cost generic strategy leads into the critical

issues the firms must face in the industry. Several strategic alternatives are offered in addition to

the Take-Two Interactive Inc. current strategy with implementation issues, strategic

recommendations, and the metric measures and histories of the firm.


The Benefits of Embracing the Rise of Interconnectivity

Take-Two Interactive Software, Inc. (TTWO) Background

Headquartered in New York City, Take-Two Interactive Software, Inc. (TTWO) is a leading US

video game producer for customers around the world. It creates, markets, and sells its video

games through its entirely owned labels Rockstar Games and 2K. Take-Two is an active

participant in the US video game production industry alongside Electronic Art, Inc. (EA),

Activision Blizzard, Inc. (ATVI), and Glu Mobile, Inc. (GLUU).

The company’s mission “is to capitalize on the popularity of video games by developing

and publishing high-quality interactive entertainment experiences across a range of genres”

(Take-Two International Software, Inc., 2015). Take-Two creates, markets, and distributes

popular video games to consumers with the help of a highly skilled workforce.

Take-Two sprouted in 1993. Its founder Ryan Brant, is the son of Peter Brant, co-owner

of Interview magazine. Ryan attended Wharton School of Business and earned a degree in

economics May 1992. “Through family and private investors the 21-year-old entrepreneur was

able to raise $1.5 million and establish Take-Two in the fall of 1993” (International, 2002). It

began as a video game producer in search of a hit. “In March 1995, Take-Two was established

enough to negotiate a four-year licensing arrangement with Sony, allowing it to develop games

for Sony's popular PlayStation game console” (International, 2002). Take-Two went public April

1997 with stock priced at $5 per share and netting approximately $6.5 million. In 1999 it began

building an online presence. Take-Two currently has 84,368,648 common shares outstanding

with a price of $24.93 as of February 2, 2015.

The firm generates its revenue by leveraging top selling titles cyclically throughout the

year. This creates spikes and dips in their revenue from year to year depending on the select title


its marketing, funding; and sculpting to fit the current demand from consumers and suppliers.

According to Take-Two Interactive Software, Inc.’s Securities & Exchange Commission Form

10-K, “revenue is primarily derived from the sale of internally developed software titles and

software titles developed by third-parties for our benefit” (Take-Two International Software,

Inc., 2015). Gross profit for the firm as of March 2015 is $288,071,000.

Discussion

The findings of the study will be presented in four categories: external analysis, internal

analysis, strategy formulation, and strategy implementation.

External Analysis

Trends that have defined the world within the last three to five years are

interesting to note. Some major effects are recent spending cuts; this paper focuses on America’s

public debt, education spending, and military spending. US public debt is slowing down while

disposable income and customer expenditure on leisure and recreation is increasing. Technology

continues to grow as observed in the continued growth of internet subscribers and possession of

broadband enabled computers. America’s disposable income is growing to support a change in

sociocultural trends such as households, urban households, and higher education. The

demographic makeup is changing as well with narrowing baby boomer population and growing

Generation Y. Globally, external debt is declining while market capitalization and internet

subscribers is increasing.

Environmental drivers suggested by the previous data are an increase in interconnectivity,

an increasing dominance of Asian powers, and the changing face of America. The subsequent

data will present the average change in the growth rate between 2008 and 2011 as well as


between 2011 and 2014 as a percent CAGR over a three year period for six categories: political-

legal, technological, demographic, sociocultural, global, and economic which will serve to

further analyze the impact of the major environmental drivers “big deltas.” See Appendix A for

data on 6 categories.

Macro Environment

Political-Legal. The average change in the growth rate of US public debt between 2008

and 2011 was 18.3 percent CAGR, 9.3 percent CAGR between 2011 and 2014 over a three-year

period. US education spending increased at a rate of 0.7 percent between 2008 and 2011 and

decreased 0.8 percent from 2011 to 2014. Also, the average change in growth rate between 2008

and 2011 was a 4.6 percent increase for US military spending and a decrease of 5.1 percent from

2011 to 2014.

Technological. The technological category in the macro analysis shows that US internet

subscribers grew from 2008 to 2011 3.2 percent CAGR and from 2011 to 2014 increased 2.9

percent CAGR. US possession of broadband enabled computers grew 6.5 percent between 2008n

and 2011, 3.9 percent between 2011 and 2014 CAGR over a three-year period.

Demographic. The demographic segment of the macro analysis covers elements such as

population size, age structure, and geographic distribution. The average change in the growth

rate of US baby boomers, age 39 to 57 measured between 2008 and 2011 was -0.3 percent and

between 2011 and 2014 was -0.5 percent CAGR. The demographic segment also covers

elements of ethnic mix. For US generation Y, Age 21 to 38 there was an increase in 2008 to

2011 of 0.4 percent and then in 2011 to 2014 an increase of 1.3. When it comes to US

generation Z, age 3 to 20 between 2008 to 2011 there was no available data but between 2011

and 2014 there was a decrease of -0.3 percent CAGR. Lastly the demographic segment


discusses income distribution. The US annual income growth rate had an increase in 2008 to

2011 of 1.8 percent and an even bigger increase between 2011 to 2014 of 3.5 percent CAGR.

Sociocultural. The sociocultural segment of the macro analysis covers elements

regarding women in the workforce, workforce diversity, and attitudes about the quality of work

life. The average growth rate of US households between 2008 and 2011 was 0.5 percent and

then grew in 2011 to 2014 to 1.2 percent CAGR. The result of US urban households was 0.9

percent from 2008 to 2011 and then grew 1.5 percent in 2011 to 2014 CAGR. The US higher

education growth rate was 4.8 percent in 2008 to 2011 and then suffered a major decrease in

2011 to 2014 of 0.5 percent CAGR.

Global. In the global segment of the Macro Environmen,5y3 the critical markets from

around the world include the United States, China and India. China has no external debt showing

0 from 2008-2011 and remaining 0 from 2011-2014. The US external debt showed a 4.7 CAGR

from 2008-2011 and decreased during 2011-2014 to a 3.0 CAGR. India’s external debt had a

14.5 CAGR from 2008-2011 and decreased to an 11.9 CAGR from 2011-2014.Market

capitalization also showed significant changes in the macro environment. The US market

capitalization for 2008-2011 had a 10.9 CAGR and increased to a 19.0 CAGR 2011-2014.

Chinas market capitalization for 2008-2011 had a 20.9 CAGR and increased during 2011-2014

22.5 CAGR. The usage of internet subscribers also increased around the world. US internet

subscribers had small growth in 2008-2011 with a 3.2 CAGR which decreased during 2011-2014

to 2.9 CAGR. Chinas internet subscribers had tremendous changes in 2008-2011 with a 19.4

CAGR but decreased during 2011-2014 to a 9.3 CAGR. India also showed tremendous growth

with its internet subscribers from 2008-2011 with a 20.3 CAGR and also showed a decrease in

growth during 2011-2014 to a 5.4 CAGR.

THE BENEFITS OF EMBRACING THE RISE OF INTERCONNECTIVITY

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Economic. The United States disposable income during 2008-2011 had a 2.3 CAGR and

increased during 2011-2014 to 3.5 CAGR. The United States external debt for 2008-2011 had a

4.7 CAGR and decreased during 2011-2014 to a 3.0 CAGR. The United States consumer

expenditure on leisure and recreation during 2008-2011 had 0.5 CAGR and increased to 4.0

during 2011-2014.

Big Delta. “Big Delta” which can be defined as patterns cross at least three

environmental driven categories like demographic, economic, political/legal, sociocultural,

technological and global, drives macro environment. “Big Delta” ‘s effects need to be occurring

from three to five years period, and still happening to today. “Big Delta” produces and is

produced by large ripple effects. In today’s U.S market, changing face of America

Interconnectivity increasing and increased dominance of Asian power are the “Big delta” drive

the U.S’s macro environment.

Interconnectivity increasing is a big delta, which resulted from the increasing percentage

of people using the Internet, urban household and customer expenditure on leisure and

recreation. Usage of the Internet increased and is an outstanding technological trend, which

resulted from an increase of 2.9 percent of people using the Internet in 2011 to 2014 [Passport

GMID], compared with an increase of 3.2 percent in 2008 to 2011. Another technological trend

is possession of broadband enabled computers, which is documented by a 3.9 percent increase

from 2011 to 2014 [Passport GMID], versus a 6.5 percent increase from 2008 to 2011.

Urbanization is a sociocultural trend in the United States, which resulted in the number of urban

household increasing by 1.5 percent from 2011 to 2014 [Passport GMID], versus 0.9 percent

from 2008 to 2011. Customer expenditure on leisure and recreation grew 4 percent from 2011 to

2014, versus 0,5 percent from 2008 to 2011.


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Changing face of America is demonstrated by the increasing number of women in the

work force displayed by a 1.55 percent increase from 2011 to 2014 [Passport GMID], versus a

negative 1.44 percent from 2008 to 2011. In the demographic sector, a change in disposable

income between males and females is evident by a 2.6 percent increase in male’s disposable

income from 2011 to 2014 [Passport GMID], versus a 2.9 percent increase in female’s

disposable income from 2011 to 2014. Increase government expenditure on Healthcare is an on-

going political topic, which resulted in an increase of 1.6 percent over the course of 2011 to 2014

[Passport GMID], compared to 4.5 percent increase from 2008 to 2011.

Figures suggests a growing dominance of Asian powers. From 2011 to 2014 US gross

domestic product rose 3.4 percent with a previous 1.8 percent rise from 2008 to 2011. India’s

gross domestic product increased 12.4 percent from 2011 to 2014 and 16.7 percent from 2008 to

2011. China also experienced growth in their GDP with an increase of 9.6 percent from 2011 to

2014 and another 15.2 percent increase from 2008 to 2011. Interconnectivity increased, US

Internet users went up 7.9 percent, India users increased 21.0 percent, and China’s increased 9.4

percent from 2011 to 2014. From 2008 to 2011 US internet users went down 1.1 percent, India

users increased 34.2 percent, and China’s increased 19.8 percent. Defense spending as a

percentage of GDP increased 4.5 percent from 2011 to 2014 in the US, India increased 7.6

percent, and China increased 3.8 percent. From 2008 to 2011, US defense spending as a

percentage of GPD increased 0.9 percent, while India increased 6.3 percent and China 10.1

percent.

Industry

Porter's Five Forces of Competitive Position Analysis suggests the US video game


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production industry is moderately competitive and serves an attractive market. The industry has

low to moderate barriers to entry, which pose a threat to the big players in the industry. Capital

costs necessary to enter the industry are $19,555,000 for the smallest competitor. Product

differentiation and brand loyalty are very important for the success of industry companies.

According to company SEC 10Ks, brand name is important to 4 out of 4 of the top firms in the

industry. Access to distribution channels is high with 3 out of 4 firms in the industry distributing

gaming content through unique multiple distribution channels. The client firm delivers its

products through physical retail, digital download, online platforms and cloud streaming

services.

Supplier power is moderate in the US video game production industry. Product

significance is moderate subordinate to suppliers not being critical to a firms’ survival. Relative

concentration consists of 4 firms versus moderate suppliers noted in 4 of 4 10Ks. The console

suppliers in this industry are: Nintendo, Microsoft, & Sony as well as third party digital

platforms: Stream, Microsoft’s Xbox live & Sony entertainment. The threat of forward

integration is moderate with $19,555,000 capital costs. Switching costs are low, none noted in

Take-Two’s 10k.

The power of buyers in this industry is high. There is concentration of 10 buyers in the

industry who purchase high volumes of the industry’s total outputs. Large retail customers

include GameStop, Wal-Mart, and Best Buy. According to Take-Twos 10K, the five major

buyers GameStop, Microsoft, Sony, Steam and Walmart contributed to 64.6 percent of its net

revenue 2015. The threat of backward integration is high with a low $19.5 million in capital

costs. The larger retailer buyers are perfectly capable of entering the industry by purchasing the

clients firm or one of its 3 competitors.


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Threat of product substitutes is low to moderate. Attractive product substitutes are the

international video game production industry and the movie theatre industry. The average cost of

and international video game is $80 compared to a US video game priced at $60. The average

movie theatre ticket is $8.40 as of 2014. The higher price alone makes the international video

game less attractive in turn decreasing the threat of that substitute. The U.S Video Game

Production Industry has an industry growth rate of 3.4 percent between the years 2011 to 2014.

International video game production has slowed down from 2011 to 2014 with an industry

growth rate of -17.2 percent. The movie theatre industry is a moderate attraction for US video

game customers, movie theatre industry rose 4.0 percent from 2011 to 2014. The inflation rate

within the same set of years is 1.7 percent for the US.

Rivalry among existing firms is moderate in the industry. Revenue range between firms is

18.5 percent with the industry compiled of relatively heterogeneous firms. The 3.4 percent

industry growth rate is much higher than the 1.7 percent current inflation rate. Fixed costs are

moderate, Take-Two Interactive Software, Inc. has a reported 48 percent of their finances as

fixed costs. Customer switching costs are moderate and strategic stakes are low because 4 of 4

firms are growing. Exit barriers are low, none were noted in the 10k.

Competitive Analysis

Electronic Arts, Inc. is the largest US video game producer ahead of Take-Two

Interactive, Inc., Activision Blizzard, Inc., and Glu Mobile, Inc. Ceteris paribus competitors

attract their share of the market through innovative marketing and developing “hit” titles. The

following analysis provides a brief overview of the industry’s competitive dynamics.

Electronic Arts, Inc. Electronic Arts, Inc. (EA) develops, markets, publishes and

distributes video game software and services for game consoles such as Sony’s PlayStation 3 and


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PlayStation 4, Microsoft’s Xbox 360 and Xbox One; and personal computers, mobile phones and

tablets. EA generated $3,575 million in 2014. They currently have a market cap $21.4 billion

granting them 50.4 percent of the market. EA follows three core strategies (1) players first, (2)

commitment to digital, and (3) one EA. The first strategy is to help developers keep gamers in

mind. The second strategy is to focus on developing games for the emerging digital mobile

platform. The third strategy is to remind EA to remain flexible and able to evolve in the rapidly

changing industry.

Activision Blizzard Inc. Activision Blizzard, Inc. (ATVI) is a developer and publisher of

games for PCs, video game consoles, smartphones and tablets. Activision generated $4.4 billion

in net revenue 2014. Currently Activision has a market cap $18 billion allowing it 42.3 percent

of the market. Activision’s strategy is to focus on proven game franchises and genres, cost

discipline, and to capitalize on the development of online digital revenue. A large part of their

success is due to its leading franchise Call of Duty generating $11 billion since its launch in

2003. Activision is currently developing sequels and additional content for the Call of Duty

franchise.

Glu Mobile, Inc. Glu Mobile, Inc. (GLUU) is the smallest competitor in the US gaming

industry. It develops, publishes, and markets a library of games for mobile platforms such as

smartphones and tablet devices. The games are sold through digital storefronts such as the Apple

app store, Google Play store, and Amazon app store. Glu’s 10K states the company claims to

have the leading position in four online tablet gaming genres: action, casual, racing and sports.

They generated $223.1 million in total revenue for 2014. They currently have a market cap of

$746.1 million permitting Glu 1.8 percent of the market. Glu Mobile plans to continue their

strategy of developing and publishing games for smartphones and tablets.


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Internal Analysis

Take-Two Interactive Software, Inc. (TTWO) is a leading video game developer. Revenue is

primarily derived from the sale of internally developed software titles and software titles

developed by third-parties for their benefit. The leading firm in the industry, Electronic Arts, Inc.

(EA) will be used as a comparative firm throughout this paper.

Finance

Take-Two Interactive Software, Inc.’s financial performance is affected by the timing of

its product releases and of the commercial success of those titles. The firm earned revenue of

$1,537,530,000 in 2008 and fell 9.6 percent in 2011 to a revenue of $1,136,876,000, in 2014 the

firm shot back up 27.4 percent to $2,350,568,000. The US video game production industry

generates revenue cyclically due to the schedule of game releases. The following ratios were

found using financial statements of the client firm found on Mergent Online, see appendix C.

Capital provided by owners and lenders to the firm does not make up an amount too great for the

firm to handle, the firm’s debt to equity ratio at 1.2 versus a 1.4 ratio for the leading firm in the

industry, Electronic Arts, Inc. which we will use as a comparative firm throughout this paper.

The client firm has a proportionate amount of income that can be used to cover interest expenses

in the future with a times interest ratio of 11.1 versus 0.3. The client firm’s short term liquidity is

expressed with a quick ratio of 2.9 versus 1.3. Its ability to pay short term obligations is

expressed in a current ratio of 2.9 versus 1.3. According to financial management ratios, Take-

Two is successful at managing the firm’s finances, assets, and debt. Average tenure of top 5

executives is 9 years versus 10 years. One amendment to their SEC 10K has been discovered

within the last three years versus two amendments found within the last three years for

Electronic Arts. Take-Two’s top management has not been recently fired or jailed. According to


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the Wall Street Journal, “For fiscal fourth quarter 2015, GAAP net revenue grew 54 percent to

$300.1 million, as compared to $195.2 million for fiscal fourth quarter 2014. GAAP net loss was

$242.8 million, or $2.99 per diluted share, as compared to $30.8 million, or $0.40 per diluted

share, for the year-ago period” (Business Wire, 2015). Barron’s Best Hedge Funds reports their

number two spot going to Richard Mashaal of Senvest Partners “who registered an annualized

gain of 44 percent on the strength of selections like DepoMed (DEPO), which makes pain-

management drugs; videogame maker Take-Two Interactive Software (TTWO), publisher of

Grand Theft Auto; and Howard Hughes (HHC), a real estate developer whose portfolio includes

the South Street Seaport in New York” (Uhlfelder, 2015).

Take-Two Interactive Software, Inc. has been steadily growing the past few years and

will continue to grow. The firm’s SEC 10K states that “Growth is expected to be

driven by continuing increases in the installed base of traditional consoles, along with the

growing popularity of games played on emerging platforms such as tablets and smartphones, and

online including through social networks” (Take-Two International Software, Inc., 2015).

Value Chain

A value chain analysis of Take-Two Interactive Software, Inc. versus Electronic Arts,

Inc. follows.

Primary activities for the client firm range from weaknesses to strengths for the firm. A

strong primary activity for the firm is outbound logistics with inventory being turned over at a

rate of 62.9 versus 12.9. Operations are healthy, operation costs for the firm is 82 cents per dollar

versus 99 cents per dollar for EA. Marketing & sales is another strength for Take-Two with

money invested in advertising generating a 9.8 percent return versus 8.7 percent return for

Electronic Arts, Inc. Inbound logistics and service are neutral due to a lack of data. The

http://quotes.barrons.com/DEPO

http://quotes.barrons.com/TTWO

http://quotes.barrons.com/HHC


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following figure illustrates the results of the value chain analysis.

Figure 1. Value Chain Analysis. Source: Original

Support activities for the client firm are largely helpful for Take-Two. Its infrastructure

(finance, organization, culture) is relatively healthy. According to Value Line, Take-Two’s

financial strength is a B plus. Capital provided by moneylenders for the firm is relatively

proportionate to their equity, the firm’s debt to equity ratio at 1.2 versus a 1.4 ratio for the

leading firm in the industry, Electronic Arts, Inc. Take-Two has a fair amount of income

available for interest expenses in the future with a times interest ratio of 11.1 versus 0.3. The

firm’s quick ratio of 2.9 versus EA’s quick ratio of 1.3 displays the firm’s decent liquidity. Take-

Two’s current ratio of 2.9 versus EA’s 1.3 current ratio demonstrates its respectable skill of

meeting its current financial obligations. The average tenure of top 5 executives at Take-Two is 9


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years versus 10 years at Electronic Arts. Within the last three years 1 amendment was discovered

on Take-Two’s filings with the SEC versus 2 amendments for Electronic Arts. Recently, there

have been no significant legal issues with the firm’s management. Human Resource

Management is an asset, Take-Two employs approximately 2,840 full time employees and each

employee produces around 828,664.79 versus Electronic Arts, Inc. employees generating

$425,595.24. Its technological development is a strong point. For every dollar the client firm

invests in research and development it generates $17.40 in revenue versus Electronic Arts, Inc. at

$3.28. Take-Two’s weakness in procurement of materials is demonstrated by every dollar of

revenue creating 60 cents per dollar for COGS versus 38 cents per dollar at Electronic Arts. This

indicates that EA spends less on procuring materials giving them a competitive edge and the

client firm’s weakness.

Resource-based View Analysis (VRIO)

Grand Theft Auto Franchise. The Grand Theft Auto franchise is a valuable resource

generating 28percent of the client firm’s 2015 net revenue. The franchise is rare because no other

firm in the industry has a similar storyline game as successful as Grand Theft Auto. The resource

is not costly to imitate because a competitive firm can imitate the Grand Theft Auto franchise

within 3 to 5 years with the expectation of a reasonable return. The Grand Theft Auto franchise

is incessantly exploited by the client firm because it is the client firm’s top revenue generating

game. The Grand Theft Auto franchise offers a temporary competitive advantage for Take-Two

Interactive Software, Inc. bringing in above average to average returns.

Library of Top “Hit” Franchises. The client firm’s library of top “hit” franchises

includes a number of highly praised, multi-million unit selling franchises such as: “BioShock,

Borderlands, Carnival Games, Evolve, Mafia, NBA 2K, Sid Meier's Civilization, WWE 2K and


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XCOM Enemy Unknown, Grand Theft Auto, L.A. Noire, Max Payne, Midnight Club, and Red

Dead” (Take-Two Interactive, 2015). These franchises alone do not generate as much revenue as

the Grand Theft Auto franchise. The “hit” franchises can be bundled together to create a strong

valuable resource accounting for approximately 69 percent of Take-Two’s net revenue for 2015.

This library of “hit” franchises is rare because all games in this library are licensed and are also

considered to be “hit” franchises. These games are “internally-owned under copyright, patent,

trademark and trade secret laws as well as through contractual restrictions on disclosure, copying

and distribution” (Take-Two Interactive, 2015). Other competitors can create a library of top

“hit” franchises within 3-5 years and expect a reasonable return. Take Two’s library of top “hit”

franchises represents a temporary competitive advantage and could bring in above average to

average returns.

Relationship with NBA The client firm’s relationship with the NBA is a valuable

resource. NBA 2K has been one of the highest ranked NBA basketball video game for a

consecutive 14 years (Take-Two Interactive, 2015). This resource is rare because this

relationship allows our firm copyright, patent and trademark licenses to use the NBA name in the

client firm’s game. Take Two Interactive Software Inc.’s wholly owned franchise 2K has

secured a multi-year license with the NBA. The resource is not costly to imitate and competitors

may have similar games within 3-5 years and expect can be able to expect a reasonable return.

Take Two’s relationship with the NBA represents a temporary competitive advantage and brings

in above average to average returns.

Other game franchises. This resource is valuable because it allows the client firm to

experiment with different genres of games and maybe produce the next “hit” franchise. This

resource is not rare because competitors also have numerous amounts of video games that they


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produce and sell but are not considered “hits”. Other game franchises are exploited by the firm

because without the sales and revenue generated from the sales of these franchises the company

could experience a significant loss in revenue and sales. This resource provides a competitive

parity and brings in average returns.

The following diagram (Figure 2) depicts the results of the resource based view analysis

Figure 2. Resource Based View Analysis. Source: Original

Strengths Weaknesses Opportunities Threats (SWOT)

Strengths. Take-Two Interactive Software, Inc. has many strengths. The firm’s

infrastructure; Finance, organization, and culture are a few. Capital provided by owners and

lenders is low with the firm’s debt to equity ratio at 1.2 versus a 1.4 ratio for the leading firm in

the industry, Electronic Arts, Inc; which we will use as a comparative firm throughout this paper.


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The client firm has a proportionate amount of income that can be used to cover interest expense

in the future with a times interest ratio of 11.1 versus 0.3. The client firm’s short term liquidity is

expressed with a quick ratio of 2.9 versus 1.3. Its ability to pay short term obligations is

expressed in a current ratio of 2.9 versus 1.3. The organization of the firm has a positive effect

on the firm. Average tenure of top 5 executives is 9 years versus 10 years. One amendment of

their 10K has been discovered within the last three years versus 2 amendments. Culture of the

firm is a strength. Take-Two’s top management has not been recently fired or jailed.

Human Resource Management is a significant environmental driver. Take-Two employs

approximately 2,840 full time employees, with each employee producing around 828,664.79

versus Electronic Arts, Inc. employees generating $425,595.24. Technological Developme nt is a

strength. For every dollar the client firm invests in research and development it generates $17.40

in revenue versus Electronic Arts, Inc. at $3.28. Operations have a positive effect on the firm.

The client firm’s operating costs per revenue is 82 cents per dollar versus Electronic Arts, Inc. at

99 cents per dollar. Outbound Logistics are healthy. The client firm sells and replaces its

inventory at a rate of 62.9 versus Electronic Arts, Inc. at 12.9. Marketing & Sales generates a

healthy portion of revenue. For every dollar the firm invests in advertising it generates $9.75 in

revenue versus Electronic Arts, Inc. generating $8.75.

Resources. Take-Two’s strongest resources include the valuable Grand Theft Auto

franchise which generated 28 percent of the client firm’s 2015 net revenue. The franchise

brought in approximately $303.2 million and offers a temporary competitive advantage. The

resource plays a critical role in the survival of Take Two. A library of top “hit” games is also a

strong resource when bundled together. The bundle accounted for 69 percent of Take Twos 2015

net revenue generating $747.2 million. It offers a temporary competitive advantage critical to the


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client firm’s survival. One of the “hit” games in the bundle is the NBA2k video basketball game.

The client firm has established a multiyear contract with the NBA and has developed an award

winning game 14 years running. The relationship with the NBA has offers’ a temporary

competitive advantage and is critical to the success of the client firm.

Weaknesses. Take-Two shows weakness in the procurement of materials. For every

dollar of revenue the firm generates $.60 goes to COGS versus $.38 at Electronic Arts. This

indicates that EA spends less on procuring materials giving them a competitive edge and the

client firm a weakness that needs to be addressed.

Opportunities. Some of the big deltas are opportunities for Take-Two Company.

“Changing face of America” is one them, which resulted from the U.S’s growing disposal

income, increased 3.5 percent from 2011-2014, compared to 2.32 percent from 2008 to 2011.

Another opportunity is distributed from “Interconnectivity increase” – one of the big deltas. This

opportunity allows Take-Two access to new customers, which can be reflected by its revenue,

increased 21.50 percent from 2011 to 2014, compared to 10.59 percent increased from 2008 to

2011.

Some opportunities come from the U.S video game itself. Low to moderate level of

rivalry with industry growth rate 3.4 percent compared to current inflation rate of 1.72, and

moderate customer switching costs, low strategic stakes, exit barriers create an “not so cutthroat”

competitive environment of the U.S video game industry. Low to moderate level of substitutes

with attractiveness of substitutes from International video game production -17.2 percent and

movie theatres 4.0 percent, is an opportunity for Take-two. Consumers have the tendency to

choose video games over the other types of entertainment.

Threats. Big deltas can bring threats to the company. “Changing face of America” is an


23

opportunity; yet also a threat. Competitors are able to take advantage of the growing income to

increase sales and revenue. Revenue of Electronic Arts increased 2.83 percent from 2011 to

2015. “Interconnectivity increasing” is another threat which allows competitors’ access to

consumers. “Increased dominance of Asian power” creates threats from oversea competitors.

The industry comes with some threats itself. Low to moderate level of entry barriers with

a low capital costs $19,555,000 makes it easier for new competitors to enter the industry. It is a

condition for creating threats, which is from new firms. Another threat is from high level of

backward integration from buyers since there are major buyer’s purchases of a large number of

the industry output. Buyers increase competition within an industry by forcing down prices,

bargaining for improved quality or more service; and playing competitors against each other.

The following SWOT chart identifies the firm’s strengths, weaknesses, opportunities, and

threats. See Figure 3.

Figure 3. SWOT Analysis. Source: Original

Strategy Formulation


24

Vision, Mission, Goals, and Objectives

As stated in Take-Two’s mission statement, “Our core strategy is to capitalize on the

popularity of video games by developing and publishing high-quality interactive entertainment

experiences across a range of games” (Take-Two International Software, Inc., 2015). When

compared to the SWOT analysis, Take-Two’s strength in technological development has shown

that its mission statement is consistent. The Grand Theft Auto Franchise, which has generated 28

percent of the company’s net revenue in the fiscal year ended March 31, 2015. Top “Hit”

Franchises such as Grand Theft Auto V, NBA 2K, and WWE 2K14 has proven that the company

develops and publishes high-quality interactive entertainment by an increase in Net revenue of

$1,136.1 million for the fiscal year ended March 31, 2014 in comparison to the previous year.

The increase was due to the Grand Theft Auto franchise popularity by accumulating an increase

of $1,481.5 million in sales and higher sales of 139.5 million from the October 2013 release of

WWE 2K14 and higher sales of the NBA 2K franchise.

Market Demands

The Market Elasticity in the industry is considered to be Elastic. This is because of a

fixed price of $60 per video game and most consumers will buy the game and it will be high in

demand. So in order to increase revenue, companies must increase quantity. Market Breadth for

Take-Two is narrow because gamers are a small segment of an entire population. The elastic

market and narrow breadth determines a focused low cost generic strategy. Because the industry

is highly competitive, many firms must face critical issues that can affect business operations.

Electronic Arts, Inc. is the first mover in the mobile platform market with a mobile revenue of

$524 million in 2015 and $452 million in 2014.

There are also large and small competitors such as Electronic Arts, Inc. and Glu Mobile, Inc.


25

who have become established in the industry, bringing in competition with more resources and

market share. In order to stay competitive, firms must be able and willing to adapt to rapid

changes in technology, which can affect the development of future software.

Strategy Formulation

Strategy Formulation Option 1. The first proposed option is “maintain status

quo.” Maintain status quo means to keep things the way they are. Take-Two will continue to

engage in what they have been doing all along; their strengths will remain unchanged as well as

their weaknesses. The advantages to maintaining status quo is that it would continue to leverage

its Rockstar Games and 2k franchises. Next advantage is this option has minimum risk and

minimum investment. The disadvantages to maintaining status quo is that it does not address

increased competition from substitutes.

Strategy Formulation Option 2. Take-Two Interactive Software, Inc. will leverage

technological development to exploit interconnectivity which will increase sales and profit. Pros:

It expands its position in the emerging mobile platform market. “Games played on emerging

platforms such as tablets, smartphones, and virtually (including social networks) is projected to

bring in annual sales of approximately $87.3 billion in calendar year 2019” (Take-Two

International Software, Inc., 2015). Cons: Take-Two may not be successful due to a high level

of competition in the virtual gaming arena. The firm would incur higher costs and risks

associated with the transfer of software from console-friendly to virtual delivery. In addition,

there is no guarantee that Take-Two will be able to attract a sufficiently large sum of customers

or recover the costs incurred from developing and marketing these new products and services.

Strategy Formulation Option 3. The client firm will leverage its marketing and sales as

well as technological development to address growing Hispanic marketing to increase sales and


26

profit. According to Simmons, Hispanics are 32 percent more likely than non-Hispanics to

consider video games their main source of entertainment. In addition, Hispanics are 54 percent

more likely to buy a video game the day it’s released than non-Hispanic gamers. Take-Two

Interactive Software, Inc. should target Hispanic gamers by leveraging marketing and sales as

well as technological development. This option also comes with a down side in the long run. By

focusing on better marketing and creating games toward to Hispanics audience, the plan will not

address increased competition from substitutes. Substitutes like domestic movie theater and

international video game industry are not included in this strategic plan. The company would

need to create another strategic plan solely for the threat of substitutes increasing.

Recommendations. Our analysis supports strategy formulation option 3. Take-Two

Interactive Software, Inc. will leveraging technological development to exploit interconnectivity

in order to increase sales and profits. The console market is decreasing and the firm should

implement a strategy that addresses as well as seeks to exploit the rise of interconnectivity by

delivering its products virtually. With this strategy, the client expands its position in the

emerging digital platform market as well as increase its revenue. This strategy will impact the

client in ways that can benefit and create drawbacks that might affect the value of the company.

The client must face the challenge to deliver its content digitally by transferring software from

console-friendly to online. This includes access to skills and services necessary to transfer the

software from a physical format to digital delivery. Moving into the digital market will benefit

the client in ways that an increase in revenue will ensue and keeping a competitive advantage by

staying in the forefront of the industry.


27

Strategy Implementation

Metrics & Histories

When reporting financial results, Take-Two Interactive uses metric measures such as an

Income statement in addition to other financial statements to determine the financial performance

of the company. For the fiscal year March 31, 2015, net revenue decreased $1,267.6 million in

comparison to the previous year. This decrease was caused by a decline in sales ($1,315.3

million) from the Grand Theft Auto franchise, which also includes previous year's results when

Grand Theft Auto V was released on Sony's PS3 and Microsoft's Xbox 360 console platforms.

For digital online channels, net revenue increased to 42% of total net revenue for fiscal year

March 31, 2015 in comparison to 15.8% for fiscal year March 31, 2014. For fiscal year March

31, 2015, Net revenue that was earned in other countries accounted for 42.5% of the total net

revenue in comparison to 53.5% the previous year.

The following table shows the income statement within the last three fiscal years (in

thousands of dollars)

Stock trade is another metric measure used by Take-Two interactive (TTWO) to determine the

financial performance of the company. The company symbol is listed as “TTWO” on the

NASDAQ Global Select Market.


28

The following table shows the Highs and Lows of Take-Two's sale prices for common stock

in fiscal years

March 31, 2015 and March 31, 2014.

In January 2013, the Board of Directors permitted the repurchase a limit of 7,500,000

shares of common stock. During the fiscal year March 31, 2015, Take-Two did not repurchase

any shares of common stock as part of the program. This program “permits the company to

purchase shares from time to time through a variety of methods, including in the open market or

through privately negotiated transactions, in accordance with applicable securities

laws....repurchases are subject to the availability of stock, prevailing market conditions, the

trading price of the stock, the company's financial performance and other conditions.” (pg. 26

Take-Two 10K) During the fiscal year March 31, 2014, the company repurchased around 4.2

million shares of its common stock in the open market for around 73.3 million.

This includes $0.04 million in commissions as part of the program.


29

As of March 31, 2015, up to 3,283,000 shares of Take-Two's common stock is available to be

repurchased under the share repurchase authorization.

Implementation Issues

With the rise of digital distribution services such as Steam and Amazon Digital Services

in the video game industry come many challenging issues concerning implementation of the

recommended strategy. A few challenges faced by implementing strategy formulation option 3

are (1) it is challenging to transfer to new market; challenging to transfer software and

challenging to transfer into a highly competitive market, (2) challenging to market and sell in the

new market. One challenging issue is a great number of data formats that are incompatible

through which the content is delivered. This can restrict the device being used or data

conversion. By requiring an internet connection to gain access to the content through streaming

services such as Steam, there may be some restriction to be able to store content locally. This

issue can be addressed by coordinating with third party distributors and acquire the rights

necessary to avoid many complications within this strategy.

There is also a challenge with entering a highly competitive market where there are

already established players. Companies who have already entered the digital market are typically

first-movers and are usually the ones who profit the most. In 2014, Entertainment Arts, Inc had

non-GAAP net revenue of $1,793 million in digital downloads. This includes Full-game

downloads, extra content, subscriptions, advertising, and mobile. This issue can be addressed by

being a fast follower. Sometimes, a company can gain an advantage by allowing the first-mover

to invest in the high cost of developing digital content and the 2nd-mover can follow after.


30

References

Business Wire. (2015) Take-Two Interactive. Wall Street Journal. Retrieved from

http://www.wsj.com/articles/PR-CO-20150518-910199?cb=logged0.4059083385155796

Cannon, William. (2014). Hispanic buying power: Study finds group purchases and plays more

video games than general market. Retrieved from

http://www.latintimes.com/hispanicbuying-power-study-finds-group-purchases-and-

plays-more-video-games-general-203557

Euromonitor International. (2015). Passport GMID. Retrieved from

http://www.portal.euromonitor.com/portal/magazine/homemain

Gamboa, Ana. (2015). Why the Gaming Industry should care about Latinos. Retrieved from

http://newamericamedia.org/trending/2014/08/why-the-gaming- industry-should-care-

about-latinos.php

Harland, Bryant. (2014). What you need to know about diversity in the US video game industry.

Retrieved from http://www.mintel.com/blog/technology-market-news/video-game-trends

Hispanic Gamers. (2015). Retrieved from www.hispanicgamers.com

International Directory of Company Histories, Vol. 46. St. James Press, 2002. Retrieved from

http://www.fundinguniverse.com/company-histories/take-two-interactive-software- inc-

history/

Mergent Online. (June 2015). Company Analysis. Retrieved from

http://www.mergentonline.com.manowar.tamucc.edu/companydetail.php?compnumber=

91266&pagetype=synopsis

Passport GMID. (June 2015). Statistics. Retrieved from

http://www.latintimes.com/hispanic

http://www.portal.euromonitor.com/portal/magazine/homemain

http://newamericamedia.org/trending/2014/08/why-the-gaming-industry-should-care-about-latinos.php

http://newamericamedia.org/trending/2014/08/why-the-gaming-industry-should-care-about-latinos.php

http://www.mintel.com/blog/technology-market-news/video-game-trends

http://www.fundinguniverse.com/company-histories/take-two-interactive-software-inc-history/

http://www.fundinguniverse.com/company-histories/take-two-interactive-software-inc-history/

http://www.mergentonline.com.manowar.tamucc.edu/companydetail.php?compnumber=91266&pagetype=synopsis

http://www.mergentonline.com.manowar.tamucc.edu/companydetail.php?compnumber=91266&pagetype=synopsis


31

http://www.portal.euromonitor.com.manowar.tamucc.edu/portal

Saylor, Erica. (2012). Latinos drive video game sales. Retrieved from

http://blog.viacom.com/2012/11/latinos-drive-video-game-sales/

Take-Two International Software, Inc. (2015). Form 10-K 2015. Retrieved from

https://bb9.tamucc.edu/bbcswebdav/pid-1441135-dt-content-rid-

19878197_1/courses/50702.201506/TTWO.pdf

Uhlfelder, Eric. (2015). Barron’s best 100 hedge funds: 2015 List. Retrieved from

http://online.barrons.com/articles/barrons-best-100-hedge-funds-2015-list-1431743877

http://www.portal.euromonitor.com.manowar.tamucc.edu/portal

http://blog.viacom.com/2012/11/latinos-drive-video-game-sales/

https://bb9.tamucc.edu/bbcswebdav/pid-1441135-dt-content-rid-19878197_1/courses/50702.201506/TTWO.pdf

https://bb9.tamucc.edu/bbcswebdav/pid-1441135-dt-content-rid-19878197_1/courses/50702.201506/TTWO.pdf

http://online.barrons.com/articles/barrons-best-100-hedge-funds-2015-list-1431743877


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Appendix A

Macro Analysis Data

All data presented in Compound Annual Growth Rate (CAGR) unless otherwise noted

Table 1A

Political-Legal Macro Analysis

Political-Legal 2008-2011 2011-2014

US Public Debt 18.3 9.3

US Education Spending 0.7 -0.8

US Military Spending 4.6 -5.1

Source: Passport GMID, 2015, Statistics

Table 2A

Technological Macro Analysis

Technological 2008-2011 2011-2014

US Internet Subscribers 3.2 2.9

US Possession of Broadband

Enabled Computers

6.5 3.9



33

Table 3A

Demographic Macro Analysis

Demographic 2008-2011 2011-2014

US Baby Boomers, Age 39-57 -0.3 -0.5

US Generation Y, Age 21-38 0.4 1.3

US Generation Z, Age 3-20 N/A -0.3

US Annual Income 1.8 3.5


Table 4A

Sociocultural Macro Analysis

Sociocultural 2008-2011 2011-2014

US Households 0.5 1.2

US Urban Households 0.9 1.5

US Higher Education 4.8 0.5



34

Table 5A

Global Macro Analysis

Global 2008-2011 2011-2014

US External Debt 4.7 3.0

Germany External Debt 1.7 0.6

China External Debt None None

India External Debt 14.5 11.9

US Market Capitalization,

US$

10.9 19.0

Germany Market

Capitalization, €

4.6 16.3

China Market Capitalization,

CNY

20.9 20.2

India Market Capitalization,

INR

19.4 20.2


Germany Internet Subscribers 1.8 0.4

China Internet Subscribers 19.4 9.3

India Internet Subscribers 20.3 5.4



35

Table 6A

Economic Macro Analysis

Economic 2008-2011 2011-2014

US Disposable Income 2.3 3.5

US External Debt 4.1 3.0

US Consumer Expenditure on

Leisure and Recreation

0.5 4.0



36

Table 7A

Asia Pacific Macro Analysis

Asia Pacific 2008-2011 2011-2014

US Gross Domestic Product 1.8 3.4

India Gross Domestic Product 16.7 12.4

China Gross Domestic

Product

15.2 9.6


India Internet Subscribers 20.3 5.4

China Internet Subscribers 19.4 9.3

US Military Spending as a

Percent of GDP

-1.4 4.5

India Military Spending as a

Percent of GDP

6.3 7.6

China Military Spending as a

Percent of GDP

10.1 3.8



37

Appendix B

Industry Analysis Data

Table 1B

Entry Barriers Industry Analysis

Capital Costs Low, $19,555,000

Product differentiation/brand loyalty Moderate

Access to distribution channels Moderate

Overall threat Low to Moderate Power

Source: Take-Two International Software, Inc. (2015). Form 10-K 2015.

Table 2B

Suppliers Industry Analysis

Video game hardware systems critical to

industry

High

Relative concentration Moderate

Threat of backward integration

$19,555,000

Low

Switching costs, none noted Low

Overall threat Moderate Power



38

Table 3B

Buyers Industry Analysis

Relative concentration

10 Buyers

High

Threat of backward integration

$19,555,000 capital costs

High

Purchase of output

Buyers purchase large portion of outputs

High

Overall threat High Power


Table 4B

Substitutes Industry Analysis

Switching costs, none noted International Video Game

Production Industry

Movie Theatre Industry

Costs of substitutes

Cost per unit $60 per game

Low, $80 Moderate, $8.40

Attractiveness of substitutes

Industry 3.4% (11-14) CAGR

Low, -17.2 Moderate, 4.0

Overall Low Moderate

Overall threat Low to Moderate Power



39

Table 5B

Rivalry Industry Analysis

Size and homogeneity Revenue range 18.5, relatively heterogeneous

Product demand growth Attractiveness of substitutes

Industry 3.4% (11-14) CAGR

Inflation rate 1.72%

Relative portion of fixed costs 48%

Customer switching costs Moderate

Strategic stakes Low, 4 of 4 firms growing

Overall threat Moderate Power



40

Appendix C

Value Chain Analysis

Ratios Calculated with Mergent Online Financial Statements for Take-Two International

Software, Inc. & Electronic Art, Inc. (2014)

Table 1C

Operations

Take-Two International Software, Inc. Electronic Art, Inc.

Operating Costs/Revenue Operating Costs/Revenue

.82 .99

Source: Mergent Online, 2015, Company Analysis.

Table 2C

Outbound Logistics


Total Revenue/Inventory Total Revenue/Inventory

62.85 12.90


Table 3C

Marketing & Sales


Revenue/Advertising Revenue/Advertising

9.75 8.72



41

Table 4C

Procurement


COGS/Revenue COGS/Revenue

0.60 0.38


Table 5C

Technological Development


Revenue/Research & Development Revenue/Research & Development

17.43 3.28


Table 6C

Human Resource Management


Revenue/Number of Employees Revenue/Number of Employees

827,664.79 425,595.24

Net Income/Number of Employees Net Income/Number of Employees

127,325.70 952.38


Inbound logistics neutral due to lack of data

Service neutral due to lack of data


42

Table 7C

Financial Management


Debt to Equity Debt to Equity

1.24 1.36

Times Interest Expense Times Interest Expense

11.08 0.27

Quick Ratio Quick Ratio

2.88 1.29

Current Ratio Current Ratio

2.94 1.31


Table 5C

Organization


Tenure of Top 5 Eecutives Tenure of Top 5 Eecutives

9 years 10 years

1 amendment of Form 10-K within last 3 years 2 amendments of Form 10-K within last 3 years


mgmt4388 ttwo 7

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