Why the Take-Two needs to 'Red Dead' to stay alive


So far, the biggest video games this fall have started with a strong start. But in today's gaming business, it's not enough.

Note how investors responded to the two most important launches of the year.

Activision Blizzard

ATVI -12.39%

published "Call of Duty: Black Ops 4" on October 12, and the publisher's share price has plummeted by 29% since then.

Take-Two Interactive Software

TTWO -5.11%

triggered "Red Dead Redemption 2" on October 26, and its share price has since plummeted by nearly 6%. "Red Dead 2" and "Black Ops 4" generated revenues of around $ 725 million and $ 500 million, respectively, during the opening weekends. To make a comparison, Hollywood's biggest film opening came to just over $ 250 million.

Selling on the news is not unheard of following a great exit. But part of the reaction, this time, can be traced back to a palpable concern of investors about the longevity of these new games. In today's video game market, big launches are now simply a starting point for a sustainable flow of revenue from in-game sales, expansion content, subscriptions and advertising. And the market has become even more competitive lately, with "Fortnite" continuing to attract a lot of attention from players despite signs that its popularity may have peaked.

Activision is also dealing with other problems that have made the selloff worse. The company's third-quarter report on Thursday afternoon included a disappointing outlook, as weakness in other big games like "Destiny 2" and "Overwatch" could offset some of the gains provided by "Black Ops 4." Analysts are also concerned that the Blizzard company may not see growth next year, as the only major launch planned so far seems to be a mobile version of the "Diablo" series of the division, rather than a complete sequel of the popular PC game. Activision shares slipped 12% on Friday following the report.

For Take-Two, longevity is a pressing question as the publisher relies on a relatively smaller portfolio of games. The company is launching its "Red Dead Online" at the end of this month, and the initial strong success of "Redemption 2" bodes well for that service. Also Take-Two has a solid experience in this sector, given that its "Grand Theft Auto Online" service continues to be an important source of income even five years after the last major sequel of the franchise.

But the Take-Two still hit a conservative tone in its second quarter of fiscal gains on Wednesday, with CFO Lainie Goldstein calling "Grand Theft Auto" as "a decidedly unusual circumstance." Analysts have followed that direction and expect that while Take-Two has adjusted its net revenues will increase by 50% for the fiscal year that will end in March on the strength of the launch of "Red Dead 2", whose number will fall 4% the following year.

They are probably too cautious, since Take-Two should be able to keep "Red Dead" alive for some time to come.

Write to Dan Gallagher at dan.gallagher@wsj.com



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