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‘Interactive entertainment is the standard bearer of the entertainment business’

Take-Two Interactive CEO Strauss Zelnick on cloud gaming, subscription models and why Red Dead Redemption is like an '80s boy band.

Take-Two Interactive CEO Strauss Zelnick

Take-Two Interactive CEO Strauss Zelnick says anyone trying to learn how to make a hit video game can learn a lot from "Home Alone."

Image: Take-Two Interactive

Strauss Zelnick, CEO of Take-Two Interactive Software, has an ambitious goal for his company.

"[The] mission of the company is to be the most creative, the most innovative and the most efficient entertainment company — not interactive entertainment company, entertainment company — on earth," he said in a recent interview with Protocol.

Perhaps that shouldn't be surprising. Before taking over Take-Two in 2007, Zelnick ran the music giant BMG Entertainment, was president of 20th Century Fox and was vice president for international television at Columbia Pictures. Even while managing Take-Two, one of the world's largest independent video game publishers, as chairman and chief executive, he stepped in as interim chairman of CBS in 2018 as that company was grappling with a difficult set of legal and business problems. (He stepped down after CBS merged with Viacom last year.) Oh, and he also runs a separate private equity firm focused on media and entertainment called ZMC.

The breadth of experience across media and entertainment gives Zelnick a pointed perspective as he navigates Take-Two through yet another major shift in the video game business, just as it's also being fueled by mass quarantines around the world. Take-Two's stock is up almost 28% this year, a bit less than Activision Blizzard's 33% but ahead of Electronic Arts's roughly 18%.

Much of Take-Two's recent success can be attributed to the company's almost uncanny ability to continue to sell copies of Grand Theft Auto V, developed and published by Take-Two label Rockstar Games, a full seven years after its 2013 debut. The company will release yet another version of GTA V next year that is optimized for the new Sony and Microsoft consoles.

"There is definitely a method to Strauss' madness," said veteran game industry analyst Michael Pachter of Wedbush Securities. "Several years ago I asked him, 'Why don't you make GTA Online free?' and he said, 'We have a lot of copies left to sell.' I thought he was nuts, but since then they've sold another 30 million copies, and I'm like, 'Whoa, that was the truth.' "

In a wide-ranging interview last week, Zelnick said that video games are now "the standard bearer of the entertainment business," expressed considerable skepticism about the prospects for cloud gaming, urged caution on Microsoft's new subscription and installment pricing plans, and explained why Red Dead Redemption is like an '80s boy band.

This interview has been edited for clarity and brevity.

Now that we're at the tail end of this last console cycle, what do you see in particular over this generation that has really changed the industry?

The biggest change in the industry over the last seven years is the evolution or — one could argue — revolution reflecting a shift away from a business that used to involve creating something, releasing it, having people like it or not like it. If they liked it, having them experience it for three, four, five, six months and then moving on to the next product. Now we're in a world where we put something out with the ability to do updates much more easily and make adjustments to meet consumers' needs and keep consumers engaged for much longer. And, in certain instances, what appears to be forever.

In the case of GTA IV, one would argue that was a couple-year experience. And in the case of GTA V, now that's been a seven-year experience and it's still going strong. In fact, GTA Online will have another record year this fiscal year for us. And this is obviously not true only for Take-Two; it's true for the entire industry.

You've also seen a transition that's been emphasized by this period during the pandemic. Previously, video games were seen — despite the magnitude of the marketplace — as sort of adjacent to the entertainment business. And now I think people realize that interactive entertainment is the standard bearer of the entertainment business. It is the most important entertainment business. It is the largest, it is the most rapidly growing, and it appeals to a very broad audience. It's become America's pastime and the world's pastime.

So there is this transition to live services, with its longer tail of engagement and monetization. And then we see gaming arriving at the center of the global entertainment ecosystem. To what do you attribute these different changes, which perhaps go together?

So I think it's two things. On the one hand it's the technical quality of what our creative teams have been enabled to do: make these living, breathing experiences that people can not only experience but inhabit.

I think people have also realized it's not just that the graphics are great. It's not just that they're wonderful stories. It's not just that we can get excited about the characters. It's not just that you have this added element of gameplay. They are realizing that through games we also can have a social experience while we're having an entertainment experience. We can talk to our friends. We can talk to communities. And we can do that in real time all around the world.

This industry is particularly interesting because it's become a laboratory for different business models ranging from a packaged goods business selling a product for $60 or $70 up-front all the way to various sorts of freemium and free-to-play forms of monetization. What is it about this industry that has made it so fertile in terms of experimentation on different kinds of business models?

Look, we established what a motion picture is in the 1920s and '30s, and it hasn't changed. Technology has changed and special effects have changed but really a motion picture hasn't changed. It's 90 minutes to two hours. As of 1936, it's in color. It has a soundtrack; it has people talking, and it has special effects in certain instances.

But ever since that time, the last true innovation was color. 3D wasn't an innovation that mattered. And I wouldn't argue that special effects are really an innovation. I'd sort of argue that it's a feature more than anything else.

Television shows haven't really changed much, either. They're effectively a half an hour or an hour including commercial breaks or 22 minutes and 44 minutes without. Perhaps longer. But even as cable television came along and even as Netflix, Amazon and Apple came along, the form factor is more or less the same. That's not criticism. I think that's what this linear noninteractive medium allows.

And I think people have fiddled around with, you know, choose-your-adventure but that's not how linear entertainment works. It's not what compels people.

But in gaming the actual narrative engagement model changes.

Exactly. So the biggest change in motion pictures and television has been distribution models or the ability to time-shift or subscription models. But the actual creativity hasn't changed. In the case of interactive entertainment, it's a nascent industry still. It's only 35 years old, and we haven't hit our stride yet.

The success of gaming generally has clearly attracted a new group of competitors to this business: the large global technology companies. Let's start with Google Stadia and cloud gaming. As a third party-publisher, everyone wants your content on their platforms, and you get to pick and choose which models work for you. What's your overall perspective on Google's entry into this business specifically with Stadia and then cloud gaming more generally?

Any new distribution vehicle that offers high-quality, efficiency and a reasonable price is good for our business because broader distribution is always better in the entertainment business.

That said, there was all this hype for years about VR, and I wasn't very compelled by that. Thankfully, as a result, we didn't waste any money on it. Equally, there was an enormous amount of hype around movement to the cloud for interactive entertainment distribution. There were some parties who were saying there are 130 [million] to 140 million current-gen consoles out there. There are billions of PCs out there. You know, if you can make in a frictionless way console video games available to everyone who has a PC or a tablet or a phone, then your market size automatically would be 20x just mathematically.

Of course that doesn't make any sense at all. Because the implication is you are super interested in video games but you were just unwilling to buy a console. I mean, I'm sure there were people like that, but if they are so interested that they want to pay $60 or $70 for a front-line title, it's hard for me to believe they were unwilling to spend $250 on a console to be able to do it ever in their life.

The second problem is you still have to get into the hands of the consumer. They're beholden to whatever technology exists wherever they live. You may be out on the cloud, but if they're on a phone line, they won't be able to avail themselves of what you're distributing.

So I suspect it will not be transformative. I'm speaking against my own interests, right? We're supposed to paint this picture of nirvana; however, I just don't think it's nirvana. Nirvana is making great hits, and then people will find them.

We've sold 135 million units of Grand Theft Auto V, 32 million units of Red Dead Redemption. I wish I could tell you that there will come a point where various cloud gaming services will mean those numbers are doubled or tripled, but I don't really see it.

Why was your 2K basketball game the right product for making the leap to a $70 price point on the next generation after $60 has long been the norm?

The bottom line is that we haven't seen a front-line price increase for nearly 15 years, and production costs have gone up 200 to 300%. But more to the point since no one really cares what your production costs are, what consumers are able to do with the product has completely changed.

We deliver a much, much bigger game for $60 or $70 than we delivered for $60 10 years ago. The opportunity to spend money online is completely optional, and it's not a free-to-play title. It's a complete, incredibly robust experience even if you never spend another penny after your initial purchase.

Talking about different monetization methods and changing price points over time, is the goal ultimately just to not leave any money on the table?

I know it sounds unlikely, but our goal primarily is not to maximize our revenues. Thankfully things are really good with our revenue. But our goal is to provide the best entertainment experiences on earth. [The] mission of the company is to be the most creative, the most innovative and the most efficient entertainment company — not interactive entertainment company, entertainment company — on earth.

We have a long way to go before we're going to pat ourselves on the back for achieving that, but that's our goal.

So how do you do that?

The quick answer is quality. Unfortunately, it's easy to say, very hard both to define and to do.

And hard to systematize, right?

Well no, actually interestingly, quality is relatively easy to systematize, but it doesn't necessarily mean you'll get hits out of it.

So for example, the first deal we did at ZMC [his private equity firm] was we took over — of all things — a Japanese record company. I don't speak Japanese. While I was a musician as a kid, I'm not an A&R person and never was.

The company had been failing for a really long time. It was a turnaround company called Columbia Music. Well, the Japanese Columbia Music. So the first thing I did, despite the fact that I'm not an A&R person, was obviously listen to all the music. It was terrible. It was objectively terrible. It didn't matter that it was Japanese music. It was terrible. The production quality was horrible.

I asked about what was going on, and the answer was, "We have to cut our costs, and we have to be reasonable here." I said, "Listen, the quality of the production has to be A-plus. We're going to start with that." And we did. We transformed the quality. Now did that mean everything I put out was a hit? No. But as it turns out, within 12 months, we signed and released two massive artists because we had become known for our quality once again. And guess what? Managers were prepared to bring these artists to Columbia, and we turned around the company based on that.

So quality can put a floor on the business.

Yes. You can systematize quality. But you can't systematize hit-creation. When the team and I took over Take-Two in '07, and I was asked what our strategy was, it was boringly consistent: Be the most creative and the most innovative and the most efficient. I remember being asked by an analyst if that was that different than our strategy at BMG and at Fox and at Columbia Pictures. I said, "No, absolutely the same. Totally the same. Unchanged."

So what does make hits if quality isn't enough? The answer is in addition to sort of creative magic and a moment in time, if you look at the history of the entertainment business, the biggest hits are typically the ones you never expected.

As an example, in the motion picture business, one of the biggest hits that the company I ran was involved with was "Home Alone." "Home Alone" was not only unexpected, it was so unexpected that the only reason we had it at Fox is because Warner Bros. put it into turnaround three days into physical production. Never happens, of course.

BMG enjoyed all these hits in boy bands. Boy bands were completely anathema, and then Clive Calder and Clive Davis brought boy bands back to the table and they created enormous hits for BMG.

So at the same time, at Take-Two more recently, before the launch of the first Red Dead Redemption, the perception was Western-theme video games always fail because the only one anyone had ever heard of was called Gun, and it failed.

Of course, everyone was worried about it. Rockstar Games brought out Red Dead, and it was a massive hit. So if you can take the baseline of quality, and then you can encourage your creative teams to pursue their passions — truly to pursue their passions wherever those passions lead them — that seems to be the recipe for generating a disproportionate share of hits.

Well then in that vein, we now see Amazon trying to get into the game business not only at the AWS level but at the content level, with mixed results. As a longtime Hollywood guy who then came into the video game business, do you have any advice to Amazon on how to make a good video game?

Given that Amazon is run by the richest guy on earth, I just have a funny feeling he's not waiting around for my advice. I, however, would be very grateful for any advice he would like to give me.

Look, all kidding to the side, unlimited resources are a great thing to have in pursuing a costly and challenging business like entertainment. Unfortunately, it's not enough.

Their challenge is the same as ours: Make hit titles. Their distribution actually doesn't give them much of a competitive advantage. Because if distribution did give you that vast competitive advantage, then Take-Two wouldn't have [in Grand Theft Auto] the highest-grossing entertainment property ever made of any type ever since entertainment was created.

You mention distribution, which brings us to Apple. What's your overall perspective on the Epic lawsuit and on Apple's overall approach to the App Store?

We're a friend to all. We cooperate with everyone, and we believe in broad distribution. We're in business with Apple, and, by the way, we're in business with Epic and happily so with both.

I have made no secret of the fact that I believe that distribution costs will have to decline. But I do believe there's a role for a third-party distribution. It's appropriate to charge a fee for that third-party distribution. Now we can just argue about what that cost is. The more market dominance one has, the more judicious one has to be about pricing in those circumstances.

Having discussed Google, Amazon, Apple, what's your overall perspective on how Microsoft and Sony are approaching this new console generation and launch?

So far it looks to me as though they're both approaching this launch very aggressively. We've always worked happily with both parties. We would like to see both be very successful. In certain parts of the world, as you know, Sony had a preferred position last time around. I think Microsoft is working very, very hard to see that that's not repeated. I think it will be a challenge in Asia, where Sony's dominated.

But if I had to guess, I think Microsoft is going to do very well.

How is Sony being aggressive at the moment when it seems like they're saying very little?

I think you're going to see that they will be very aggressive on the content side and on the marketing side. They are going to focus, as they always do, on aiming at an advantage on the content side. But Microsoft's trying to do the same thing; as you know, Microsoft has bought some studios. There's a lot of stuff that they own and control. Perhaps they'll do more of that. They have a great balance sheet.

How important is the installment pricing that Microsoft is going to be allowing at either $25 or $35 where you get not only a new box but also a subscription to Xbox Game Pass?

Let's put it this way: I would say I know pretty much for a fact that there will be certain important front-line titles that will not be available on a subscription basis. Those are very much the titles that people buy these platforms for.

Front-line products are incredibly valuable, and Take-Two's front-line products are frankly and actually the most valuable in the business. We have the highest hit ratio in the business. We have the best-performing titles in the business, and we will be selective about what business models work for us.

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