Take-Two Stays in the Game

Today's studio buy shows the company isn't conceding the sports title market to Electronic Arts.
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Electronic Arts

(ERTS)

is still the undisputed champion of the sports video game market, but

Take-Two Interactive

(TTWO) - Get Report

clearly intends to stay in the ring.

On Tuesday, Take-Two announced that it has acquired from

Sega

the video game studio behind the ESPN line of sports titles the two companies co-published. The announcement came one day after the Major League Baseball Players Association said that it and Take-Two had

reached an agreement in principle for Take-Two to license the rights to players' names and likenesses.

The one-two punch followed a similar flurry from EA. Many thought the video game industry giant had delivered a knockout blow to Take-Two's sports aspirations when it signed long-term, exclusive deals with the

National Football League and

ESPN. Those deals took the legs out from under Take-Two's most popular sports title --

ESPN NFL 2005

-- and took away the brand it had placed on its sports line.

While EA representatives on Monday shrugged off the baseball deal, analysts on Tuesday were cheering Take-Two's moves. Take-Two paid about $24 million in cash to acquire Visual Concepts Entertainment and its subsidiary Kush Games. That's a cheap price to pay for a talented studio, said Michael Pachter, an analyst with Wedbush Morgan Securities, in a research note on Tuesday.

"We view this news as positive for Take-Two (and goes along with yesterday's MLB players license news)," Pachter wrote, adding that he expected the sports deals to contribute to the company's earnings over the "longer term."

(Neither Take-Two nor EA has been a recent investment banking client of Wedbush Morgan.)

In addition to purchasing Visual Concepts and Kush, Take-Two acquired all of the intellectual property associated with their sports games and the rights to the "2K" brand. All of the sports titles developed by Visual Concepts had the present year in their name.

As part of Take-Two's deal with Sega, the two companies will work together to develop arcade games based on Visual Concepts' sports titles. The two companies are also working on a separate deal whereby Sega will publish and distribute the sports titles in Japan and other areas of Asia.

In a regulatory filing last month, Take-Two

acknowledged that it was mulling buying Visual Concepts and Kush. But many analysts questioned whether Take-Two would go ahead with the acquisition after EA's deals with the NFL and ESPN.

Take-Two jumped into the sports ring with EA last year, teaming up with Sega to market Sega's line of ESPN games. Although those games had received critical success in the past, their sales were a fraction of those of EA's rival titles.

But Take-Two was able to land some punches early by offering the ESPN line for less than half the price of EA's games. Within the first two months of its debut, sales of the

ESPN NFL

game

outstripped sales of all the other non-EA NFL games from the previous year.

That price war forced EA to

slash the prices of its own titles. That move helped shore up EA's market share, but many analysts fear it also resulted in a

disappointing holiday quarter for EA.

Many analysts have viewed Take-Two's efforts in the sports arena as a crucial step toward diversifying away from its core products of violent, adult-themed games such as

Grand Theft Auto: San Andreas

. While the sports games have added to the company's revenue, they have done little for its bottom line because of their discount prices. But analysts believed that the company would eventually be able to raise prices after drawing customers to its products.

In recent trading, shares of both EA and Take-Two were on the rise. EA's stock was up 72 cents, or 1.3%, to $58.39, while Take-Two's was up 83 cents, or 2.5%, to $34.28.