E3: Strauss Zelnick dishes on Wii U, Zynga and why foie gras tastes better than chewing gum

June 9, 2011

Take-Two Interactive occupies a massive booth at the Los Angeles Convention Center, where it’s showing off its new games and serving beer at the elaborate sports bar it constructed on the show floor.  Under its CEO, Strauss Zelnick, Take-Two has been showing renewed financial health in recent quarters. In February, it posted its first profitable year in nearly a decade without a new release of its blockbuster video game franchise “Grand Theft Auto.”  Zelnick sat down with Reuters for an in depth chat touching on everything from Nintendo’s new console to Zynga’s business model, and the difference between foie gras and chewing gum.

Reuters: Are publishers on board more than ever before with Nintendo on the Wii U?

Zelnick: Well, It’s hard to know, right? At E3, there’s always a great deal of enthusiasm, as there should be. It remains to be seen what the releases schedules look like. We do think it’s pretty interesting. What they are doing with one display in your hands and the other display that’s wireless in front of you and the ability to have them work independently as well as together, creates a lot of interesting creative opportunities and that’s what we’re looking for. We’ll see how our creative teams feel but right now it looks pretty interesting.

Reuters: Will the touchscreen appeal to the mass market?

Zelnick: It all depends on the execution. You can take that product and execute a kid’s game that’s simple or take that product and do something that’s very complex. It remains to be seen. And that was what was exciting about the Wii. We supported the Wii in the beginning. If you recall, we did “Carnival Games” for the Wii and we also did “Manhunt 2” for the Wii, so we did do an adults-focused title. As it turns out, the Wii turned out being more interesting from a family and kids point of view. It remains to be seen how the Wii U plays out but obviously it’s interesting. We support it. We love all our children equally and we support everyone.

Reuters: You launched a new franchise recently, “L.A. Noire” and a year ago you launched another entirely new franchise, “Red Dead Redempion.” How hard is it to launch new intellectual property in this landscape?

Zelnick: At the end of the day it’s always hard to make a great property and a franchise has built-in good will. For example, you know you love Grand Theft Auto and we’re going to come out with a new Grand Theft Auto (!). There’s a built-in audience for a franchise. When you’re launching something brand new, you have to create that desire and create that awareness so there’s natural skepticism. I’m a big believer that the biggest hits in the entertainment business are the unexpected ones. And that could play to the benefit of new IP. In the case of “Red Dead Redemption,” the conventional wisdom was, ‘oh, Western’s never work in interactive entertainment.” In a way, that almost helped us because it was so great, especially in the context of conventional wisdom. We love the fact that we’re building franchises, that’s our goal. At the same time, we try to balance the execution of franchises with the introduction new intellectual property. Since 2007, we’ve launched at least one new piece of intellectual property a year that’s sold over 1 million units and we’re really proud of that track record. If you’re not constantly refreshing your portfolio, over time, you’re going to have an issue.

Reuters: What are some other risks of launching an entirely new game?

Zelnick: The risk profile of launching new intellectual property is greater than a franchise by definition. But the risk in the interactive entertainment business is mitigated by the fact that we sell on a one-way basis to retail and it’s very different than the motion picture business where you create a motion picture, you spend all your money on marketing and when you launch it on Friday, literally no one might show up. In the interactive entertainment business, we pretty much know what we’re shipping out a few months before release and that mitigates our significant financial exposure. All that said, when we invest a lot of money in a new IP, we could lose a lot of money.

Reuters: Where does Take-Two stand on free-to-play models for games?

Zelnick: We are also exploring it. We are launching “Civilization: World” for Facebook and that’s in closed beta now. It looks very good. Everyone is excited about the expansion of the market that Zynga has really led. My own view is, let’s not forget, that Zynga has enormous expertise in direct marketing. They appeal to a different audience—largely female and middle aged, not a hardcore audience and thirdly, it’s a different interactive entertainment experience. Chewing gum and foie gras are both food but let’s not confuse the two.

Reuters: If Zynga goes public, does that help video game stocks? Do investors view Zynga as a video game stock or more as a Linked-In type stock?

Zelnick: Zynga is a direct marketing enterprise whose product is entertainment. Take-Two is an interactive entertainment company that operates with some direct marketing metrics but that’s just factual. Zynga’s business is based on acquiring a customer, at an expense, extracting value from that customer and then seeing that customer churn away. Those are core direct marketing metrics. Take-Two doesn’t really acquire a customer. When we sell a product to you in the store, we may never know who you are, or if we’ll upsell to you again so we really don’t acquire you as a customer. We do have Rockstar: Social Club with email addresses and people engaged with us, but it really isn’t about customer acquisition. The bulk of most entertainment businesses where you’re selling an individual property is not about customer acquisition. Zynga’s entire model is about customer acquisition, lifetime value and churn.

Reuters: The $65 billion global video game industry is growing but certain parts of it are contracting. What is your outlook on the video game industry?

Zelnick: It’s the only growth area in the entertainment business and the wind is at our back because every year that goes on, a broader demographic is more interested in interactive entertainment. Not every pocket in it is going to be successful but the sector as a whole is rapidly growing and that’s gives us an enormous opportunity. Some sectors have good and bad parts. We’ve threaded that needed reasonably well, not perfectly but it’s our aim to continue doing so. It’s tricky but it’s a tricky growth business and terrific growth business. It doesn’t mean you can’t lose money though. We have competitors who have gone out of business like Midway Games. That’s just a fact.

Reuters: What do you think of cloud gaming like OnLive?

Zelnick: While we believe in consoles, we also believe that cloud gaming has to happen. We believe in OnLive. If you believe in the ubiquity of tablets, and I do, then you have to believe there’s going to be an interactive entertainment experience available on tablets and that’s almost certainly an open platform.

Reuters photo: Strauss Zelnick on E3 show floor in front of Take-Two’s elaborate sports bar display

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