How the coming console transition is already affecting Take-Two Interactive’s business

Take-Two Interactive Software is already preparing for the launch of the next-generation game consoles from Sony and Microsoft in 2020. And you can already see some evidence of that in today’s first-fiscal quarter report for the three months ended June 30.

In a conference call with analysts today, Take-Two CEO Strauss Zelnick and other executives said they looked forward to the new generation of consoles, but they did not want to raise concerns that it would be accompanied by a big revenue drop during the and rising of costs for making next-gen games.

Still, there were small signs that the onset of the next-generation is already having a small effect on Take-Two’s . The company beat guidance today in its earnings report for the first fiscal quarter ended June 30. Lainie Goldstein, chief financial officer at Take-Two, said in the call that the company expects to spend $90 in the coming fiscal year ending March 2020 are expected to be $90 , up from $60 in the previous year. That is due to both expansion of office space and the purchase of development kits for the upcoming consoles.

Both Microsoft and Sony are expected to launch new game consoles in 2020, while Nintendo has smaller updates coming for its Switch this fall. Take-Two president Karl Slatoff also said that the company expects to incur higher research and development expenses because of new investments in intellectual properties. The company said that its R&D costs for the first fiscal quarter were $68 million, compared to $50.7 million in the year-ago quarter.

That’s another indication that Take-Two is investing in games for the next generation of consoles. Take-Two has also started Private Division, an indie label that funds titles from external developers. Three games have been launched or announced for that , and Slatoff said more are coming. Those investments are not necessarily

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“We have talked about R&D expenses going up, particularly this year, which is indicative of investment in new titles,” Slatoff said. “We have our most robust pipeline of all time for new IP. A lot of that is driven by Private Division but there is new IP throughout the entire company as well.”

As I mentioned, these are small signs but still significant as tea leaves for the coming console transition. Historically, it takes years of planning and development to be ready with new games for a new generation of consoles. That transition is not likely to be as tough this time around, as both Sony and Microsoft are relying upon known processor and graphics technology from Advanced Micro Devices.

Zelnick noted that the fees may change for the better in the future as competition is rising among the platforms. For instance, Google is launching its Stadia cloud gaming in November and expanding it throughout 2020. That could help smooth out the costs of any console transition.

Zelnick said that the demographic forces in favor of video games (a greater slice of the population is playing games) and the arrival

“The last console cycle had no negative influence and frankly the whole industry because the entire platform business is diversifying,” he said. “The PC format, particularly, since that is now all , can be 40% to 50% of a release now. We expect that the new console generation will be a significant new positive.”

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