Analyst wonders if recent contract change is right move

Take-Two Interactive has good reason to continue relying on Rockstar Games financially; the Grand Theft Auto series has generated an unheard of amount of profit for the company, and there's every expectation the series will continue to perform record breaking numbers during its eventual next-generation debut.

Still, analyst Michael Pachter at Wedbush Morgan Securities wonders if the company is fumbling in their contract negotiations. A recent filing with the Securities and Exchange Commission reveals a new contract with the teams behind Grand Theft Auto through February 2009, granting increased royalties and $25 million in restricted stock.

Pachter's memo regarding the move goes onto discuss the possible implications of the change in Rockstar and Take-Two's financial dealings. Under the previous contract, the last three installments in the series generated revenues of approximately $1.6 billion, with roughly 40% translating into operating profits - about $640 million.

The new deal, if the series continues to sell as well as anticipated, would reduce generated revenues to $528 million (remember, this is only counting one sequel, whereas the previous number included the three releases from last generation) and account for only 35% in operating profits that would come out to about $175 million.

Depending on the details of the contract, Pachter speculates Take-Two would be losing $5.3 million in operating profits per percentage point increase in royalty rates issued to members working on Grand Theft Auto. "The analysis is significant, insofar as Take-Two's overhead has dramatically increased over the last five years," says Pachter.

No one's saying Take-Two won't be raking in money by the boatload when the next Grand Theft Auto hits, but if Pachter's on the money about the new contract, they're setting themselves up for a hit.

News-Source: http://xbox.1up.com