New contract deals with profit sharing

The creators of “Grand Theft Auto” are sticking with publisher Take-Two in an unprecedented deal that includes a cut of the profits and full ownership of future games.

Ending months of speculation about whether top talent at Rockstar Games, the Take-Two label that makes the ultra-successful “GTA” and other franchises, would remain when their contract expires in February, the publisher has signed them to a new three-year contract through 2012.

Deal includes Rockstar co-founders Sam and Dan Houser and Leslie Benzes, president of the Scotland development studio that makes most “GTA” games.

Though Wall Street welcomed the news, Take-Two stock plunged 19% in after-hours trading Wednesday as the publisher unveiled lower-than-expected guidance for 2009 amid the weakening economy.

Compensation under the new contract comes primarily through profit sharing for the Rockstar label, which contributes nearly half of Take-Two’s revenue. Though videogame creators typically receive royalties based on sales of specific titles they make, Rockstar talent are believed to be the first to get a major stake in overall profits.

Pact also includes an equity grant of Take-Two stock that will vest over three years.

Most significant part of the deal, however, is that the Housers, Benzies and other Rockstar team members will establish an independent company to develop new videogames that they will fully own. Take-Two has agreed to fund development in exchange for exclusive distribution rights.

Intellectual property ownership by creators is rare in the videogame industry and unprecedented for those who are employees of major publishers.

In an interview, Take-Two chairman Strauss Zelnick said the Housers and Benzies will spend most of their time working at Rockstar and continue to create games for that label, along with sequels to existing franchises, while also working on new games for their independent company.

“This is a team that has been responsible for the top-selling IP in the business and has a uniquely successful creative culture,” Zelnick told Daily Variety. “It’s terribly important for us to be in business together with them, and we’re proud to align the interest of our colleagues with our company and stockholders.”

April release “Grand Theft Auto IV” has already sold more than 10 million units worldwide. In addition, Take-Two has high hopes for a downloadable expansion pack to the game that will be released in February and a spinoff for the Nintendo DS coming out in March.

However, Rockstar games have been selling modestly so far this fall as the videogame business has slowed down along with the economy.

On a conference call with analysts, Take-Two CEO Ben Feder said “GTA IV” has performed only “OK” leading up to the holidays. He characterized initial sales for Rockstar’s car racing game “Midnight Club: Los Angeles,” released in October, as “slower than expected.”

Take-Two’s overall performance for the quarter ended Oct. 31 was in line with previous guidance, as the publisher lost $15 million on $323.4 million in revenue. That’s up from a $7.1 million loss on $292.6 million in revenue last year and was driven primarily by “GTA IV,” “NBA 2K9″ and the company’s successful “Carnival Games” family franchise.

However, Wall Street was disappointed by Take-Two’s conservative guidance for the current quarter and the fiscal year ending next October. Though the company always suffers in the year following a major “Grand Theft Auto” release, investors didn’t expect revenue guidance to dip from more than $1.5 billion to between $1.1 billion and $1.25 billion, as Take-Two now says it will due to the ongoing recession, which has already impacted competitors including Electronic Arts.

“It’s important to remember that consumers of interactive entertainment are as affected by the economy as other shoppers,” Zelnick noted. “We’ve taken a hard look at our forecast for the next 12 months, and we’ve significantly reduced our expectations.”

Take-Two stock closed up a fraction at $12.07 Wednesday before earnings and the Rockstar deal were announced.

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