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Take-Two's Bad Call

Video-game publisher Take-Two (TTWO - Get Report) is wedged between a rock and a hard place.

Take-Two has long faced criticism for its inability to produce a string of hits and its excessive dependence on a single, best-selling game series, Grand Theft Auto. Not surprisingly, the company's new management indicated that it will strengthen its unprofitable sports division, 2K Sports.

This sounds like a reasonable plan: Sports games have a strong fan base, and Take-Two has been working on building up the division as part of its diversification plan.

But scratch deeper, and some analysts say that Take-Two may just be setting itself up for another big mistake. Sports games were about 20% of the company's publishing revenue and pulled in about $150 million in 2006, nearly double the previous year's take.

Still, 2K Sports continues to lose money, and the road ahead seems rough. In an update to analysts and investors earlier this month, Strauss Zelnick, Take-Two's new chairman, warned that the company's sports division is unlikely to emerge from the red this calendar year as expected and that profitability may be pushed out to 2008.

And even that is unclear. Instead, the company might be better off focusing on building its portfolio in other game genres, such as strategy and action.

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