Take-Two Interactive Software, Inc. (TTWO) Earnings Call Transcript & Summary

And with that, we -- I assume we're rolling. Thank you for kickoff, Strauss. And hello to everybody in the invisible audience out there. Thank you for joining us this morning. Hopefully, you stumbled on to the right place. This is Todd, the media analyst at Bernstein. If you don't recognize me, this is my Zoom appearance. You're joining -- hopefully, you're here to hear what's going on at Take-Two Interactive. We are very lucky to have both Strauss and Lainie here representing the company. A big thank you to them. We're going to just kick this off right away because time will run short. Just a couple of reminders of ground rules or sort of reminder how this works. Most of you in the audience have already become familiar with this. First of all, the way we're going to do Q&A, as I'm sure you know by now, is we have this app called Pigeonhole. I think it's been working pretty well for us. So if you're looking at your screen on your video player, you should see a little link on the left side, that's something like Pigeonhole. If you were to click that, in fact, please do click that, it will open another little window, your video player will stay open. But in that Pigeonhole window, you will see the box where you can enter any questions you'd like us to ask, Strauss and Lainie. You will also see questions that other investors have already asked. If you like those questions, you can vote on them, which will promote them up the ladder. This is your meeting. We want to ask the questions that you want to learn about. So please take advantage of that, and we'll make this interactive. The second one is a similar one, and I will come back to this again. There's another link on your screen, that says something like Procensus poll. We hope when we're all finished here, we really hope you'll take 2 seconds to click on that in the audience. That just collects your feedback about this whole session, which is very helpful to Take-Two. It's very helpful to Bernstein, but most of all, hopefully, it's helpful to you in the audience because if you participate, you'll be able to see what everybody else had to say and sort of share your thoughts. So those are the 2 sort of informational sets of reminders. And with that, love to get rolling.

So as is typical at the Bernstein Strategic Decisions Conference, maybe we'll start sort of wide and then narrow it down. So , Strauss, very important, but maybe obvious question to start it. So I would love just to hear your current way that you like to articulate your view of Take-Two's strategy, if you will. In particular, how -- what differentiates it? Because to me, it strikes me -- as somewhat unique. And so not only how do you -- how would you describe your strategy, but what makes it sort of unique and different and in your view, [ impactful ]?

Well, the starting point of our strategy is kind of a -- kind of a description of who we aim to be, which is the most creative, the most innovative and the most efficient company in the entertainment business. And drilling down into our strategy, our strategy is to deliver the highest quality entertainment to consumers all around the world wherever they are and whatever device they have and without regard to their interest in interactive entertainment. So we cover all the bases; we make big, rich console titles that are available, of course, on console, also on PC typically, and most recently, on the streaming platform and in the future, presumably in any number of other ways. We make casual games that are available on mobile devices. We make free-to-play games that are mid-core. We make online games, and we kind of make everything that interactive entertainment can be and is. But what's unique about our company, and thank you for asking, is this meticulous attention to quality. We said long before it was fashionable to say so that we didn't believe in annualizing non-sports titles that we believe that would run the risk of burning out the intellectual property and more importantly, compromise quality. And we've taken that probably to its logical extreme, which is we devote more time than resources, I believe, to the production of our entertainment properties than any other enterprise in the business. So at times, that's led to some criticism because there can be long lapses of time in between our releases. And there were times when we actually suffered economically, typically not anywhere in recent times. However, in the past, the company -- where the company came from when we took over the company 12 years ago was very peripatetic releases of a very large title, Grand Theft Auto, and then not much else in between. We've addressed that by vastly broadening our development slate and vastly increasing our development headcount. We now have over 4,000 developers in-house, and we work with external parties as well, with a total of about 5,500 people. We have numerous studios all around the world. And what that's led to is the highest Metacritic scores in the business, pound for pound, the highest selling catalog per SKU in the industry. We have over 66 titles that have sold in over 2 million units. We have over 11 franchises that have sold in over 5 million units in an individual release. I think we have the best collection of owned intellectual property in the business. And what that yields is industry-yielding gross margins and very strong growth in organically driven net bookings and cash flow. It also means that in a year, such as the one that we just guided to, our fiscal '21, where we do have a light release schedule for an array of reasons, we have an array of businesses that generate a very significant amount of net bookings and very significant unrestricted operating cash flow because we have a great catalog because we have live services, games because we are engaging with consumers on an ongoing basis without regard to any particular type of release. Of course, our aim in any given year, is to have about a handful or more of huge frontline titles and also to have our catalog also have live services games. So that's really what has been sort of the secret of our success. When we took over the company 12 years ago, we had net revenues of about $700 million and a market cap of about $700 million, I believe. I think it's about right, maybe a bit more. This past year that just finished. We had net bookings just shy of $3 billion, a new record. We've just guided to $2.55 billion to $2.65 billion in net bookings. And we've guided to $350 million or more in unrestricted adjusted operating cash flow for fiscal '21, and that's in a very light release year.

Thank you for that. And if you don't mind expanding a bit, and I just picked up a couple of words you said. So the meticulous attention to quality and the -- and then with that -- which results in what could be described as a less frequent release schedule. It is a less frequent release for your frontline titles and then some others who try to annualize them. Just to push that a little further, that's one of the first thing that strikes every investor I talk with about your company and your stock. And it really brings up this interesting question about risk. Because the initial reaction often is this feels like a more risky company, a more risky cash flow stream and more variability because the releases feel more staggered, and I don't know. I think you make the case that -- I'll let you make the case. But I think you can make a case that is less risky because you're trying to do things better and not more frequently. But I'd love to hear you describe how you would characterize the notion of risk and how it relates to your strategy.

Well, I guess it all depends how you define risk. I mean, if you define risk -- we've spoken to investors who define risk as you're not going to comp positively year-over-year in a quarter, or your release schedule will look worse next year than this year, or you'll have a huge hit last year and no huge hit next year. I don't define that as risk. I define that as the attributes of a pure-play entertainment company that's putting out or trying to put out massive hits and sometimes succeeds and doesn't always. I define risk as failure, as destruction of value. And when we took over the company, it was at risk. It didn't have a particularly strong balance sheet. It lost money in a non-GTA release year, which was more years than there were GTA releases. The sports business was losing $30 million a year. The company had too much overhead for its scale. And scale was rather low, under $1 billion in revenue. We feel like $1 billion at that time was sort of critical mass needed to appeal to worldwide production, distribution and marketing operation. And the company was at risk of actually going out of business. That to me is risk. I've prided myself and my career of running entertainment businesses of being incredibly risk forward creatively, taking extraordinary creative risk, which means that now and then, of course, you fail. That's also how you got huge hits and being immensely risk-averse financially. And today, you have a company with Take-Two that is a highly risk forward creatively. We believe we have the best creative teams on Earth. I think even our competitors would have to agree with that. We have the best collection of intellectual property. And we push the edges of what is possible in everything that we do. And we won't release title until it is as good as it can possibly be. And at the same time, we have eliminated bankruptcy or failure risk from the equation, which was not the case when we took over the company. And frankly, we've seen in these times, in these terribly tragic times that otherwise successful healthy -- otherwise healthy-looking enterprises turn out to be overleveraged, turn out not to have enough cash. And what are they doing? They're changing strategy, trimming operations, furloughing or firing employees, cutting salaries. They are not only feeling the pain themselves, but they're passing the pain along to their colleagues. We're not doing any of that. We haven't fired a soul. We haven't furloughed a soul. We haven't cut a salary. We are financially situated so we can withstand good times, we can withstand bad times, and we can thrive without regard to normal business cycles. I'm always astonished, and no one could have predicted this terrible pandemic. But anyone could have predicted a recession after 10 years of expansion. And we said over and over again, we've said it in our investor calls, look, we don't know when, but it's not a question of whether. It's just a question of when the economic environment changes, we have to be prepared for that. This company is prepared for anything that could be thrown at it. So from a risk point of view, I don't think there's any systemic risk in our enterprise. However, there is creative risk. And again, if an investor is looking for gently upward sloping curve or results year in and year out, this probably isn't a description of what Take-Two is or maybe ever will be.

That's a perfect segue, especially in the eyes of sort of creative risk, there was some notions of scale in your commentary and growth -- pursuit of growth to this notion of the pipeline, which you just shared kindly with all of us, your company, just last week on the earnings call. And I was already prepared to ask you about it or hoping to, and it's now the most popular type and most popular question on Pigeonhole as well. So I'd love to talk a little bit about this slate, as you've described it. So we've seen, correct me if I'm wrong, I think it's 93 releases that are currently in process over the next 5 years. Obviously, as you said, some of those won't make it, some will be added. But right now, it's about 93. I'll just say, to me, that sounds like a lot, and a lot to be going on. And how does that comport with this notion of like focusing on like really big pursuit of massive hits at the highest level of quality and then you then see a slate that looks pretty broad? How do those things go together? And then Lainie, I also want to talk a little on the financial side and how do you think about the mitigating your financial risk and upside to pursue that. But if we could start with this -- how does the broadness comport with the strategy?

Well, we're a big company now. We have 2 core labels, Rockstar and 2K. We have a burgeoning independent group called Private Division. It's already had a couple of hits. And hopefully, Disintegration, which is coming up in June, will be another one. Outer Worlds is a hit, Ancestors is a hit. They have an incredible track record. They're growing a great business, still small, but great and growing. We have Social Point, our mobile studio. We also have mobile titles in other studios. We have businesses in Asia. We have NBA 2K Online in China. So we have an array of businesses that are developing titles for the future. Our core studios have built up their teams so that we can focus as heavily as ever, maybe more than ever, on quality as we develop. And when we do fall short on quality, an example being our WWE title, we basically take a position, okay, we have to address the time it takes to develop that title. We're going to put out a title called WWE Battlegrounds, which is an arcade-style game. However, we're going to take more time for the core simulation game to make sure it's high quality. We've added people to that equation. So we launched new studios, 31st Union, led by Michael Condrey. And a couple of years ago, more than that actually, Hangar 13 led by Haden Blackman. We also work with independent studios. So we are doing more because we're hiring more people, and we are able, with our very tight executive team at Take-Two, to field more independent development because our structure gives our labels so much independence and autonomy. We are not a command-and-control environment. I am not the Wizard of Oz, behind the curtain, pulling all the levers. Thankfully, no one wants me to be the one making a video game nor do I want to make a video game. We try to create the most rational -- well, sense -- rational, sensible, kind and incredibly effective culture of business operations, marketing and distribution worldwide to support our independent and autonomous labels. And that structure can be grown repeatedly as long as you're constantly recruiting, retaining, encouraging, leading and motivating the talent to people who run and work at those studios.

So by the way, to the audience, thank you for the Pigeonhole questions. I see them piling up here, and I want to do them justice, and I'm going to try and do that right now with this topic and just moving it, and Lainie, bringing you into the conversation since we're lucky to have you here as well. I'm going to try and combine 2 questions here. One is around resources and Strauss was just talking about that. And so the question is, particularly on head count, when you think about you're a bigger company now, you have an ambitious release schedule. Can you describe for us what has that meant sort of on the headcount and investment side? And what the shape of that is in terms of how much of that is sort of now a fixed burden of expense for the company and how that's changed and how you see that changing? That's the cost side of this. That's a Pigeonhole question. And then I'm going to follow that with another one, which is more on the revenue side. So then how are you going to know how successful this strategy has been or this release schedule is? And how can we know it as investors? That's for the revenue and success side. And Lainie, I'm directing this to you because you've got to manage the investment versus the financial delivery of earnings. So it's a tough trade-off. I know.

When you talked about the release schedule and you talked about how we look at these investments, we have a whole process that we have in place, which we call the product investment review process. And we meet quarterly with the labels, all the labels, and we work the same way with each one of the labels. And we go through all of the products that are in development. And we look at all the development costs. And with the development cost comes the headcount analysis of all of the heads that they need to make the game and look at the release schedule and the time that it's going to take to the game to come out and any contingencies of time that it may take past the time that the release date is set and any time it may take extra for it to come out. And with that, we'll look at the opportunity for the sales for that game, the marketing cost for the game and take a look at what the overall economics of the game could be. We look at what the passion of the developers are around the game. And then we make a decision whether we move forward on the game. So it could be a game that's before a prototype. It could be a game that's far into its development. So it's a decision that the labels we're making and then it's brought forward to us, and we decide as a team, whether it's something we want to move forward with. So it's really -- it's based on the labels have to feel really passionate about it. And then it's rare that we all -- something, if the numbers make sense and it's something that we'll say that it doesn't make sense to us, but it is something that we all work together on in terms of making sure that the investment makes sense for the company.

So just to give you a sense, there's a lot of questions popping up here around console cycles. So we're definitely going to get to that. Some questions around monetization. I want to get to that. Some questions about specific titles, particularly NBA 2K, the Rockstar games. So those are all coming. I'm going to take the liberty here. Just one more while we're on this topic of the slate because it just strikes me as so personally interesting. I hope I'm not the only one, given all the things you've done in your career, Strauss. When I think about the parallels I see, maybe I'm not right here, but to the movie business, even in the music business, on this trade-off between sort of number of releases, pursuit of growth in projects that look good on a spreadsheet versus the risk of putting more investment into the system, which could be argued drives down overall returns for this -- for any one project? Especially in the context of a competitive environment, where you have competitors who might also be tempted to make more and more games. And it seems to me like there's some really interesting learnings maybe from both the music business or -- and especially the movie business. I don't know if you see it that way too, Strauss, or have you seen any parallels there? But as you think about what is sort of the right balance for your company? And then where does that sit with the industry? I'd love to hear your thoughts on that.

Yes, I think you're right. I mean, when I was in the motion picture business, I observed that any one studio operation could sort of successfully produce and field 20 to 25 major releases a year. And if they increase that with an effort to amortize their fixed overhead more effectively, they ended up not achieving that because their hit ratio has plummeted, and you can't amortize overhead with a negative gross margin as you know. It's like the food's no good and the portions are small. So as we have increased our development, we need to make sure and you made the point earlier, that we're not setting up anything structurally that would cause our hit ratio to decline. And why would it decline? Would decline if we overwhelmed our system. We're not doing that. We don't really have that many releases at the moment. We -- even with this new pipeline, we do not expect to have more than a handful or slightly more meaningful releases a year, big releases a year. We just want to make sure we have them every year. And without that investment, we run the risk of having the kind of light release year that we are having this fiscal year. Now as it turns out, it's a good year to have it. A year of console transition, not necessarily the year you want to come out all guns blazing because the installed base is unlikely to be huge at the holiday season. And with the uncertainty related to a massive unemployment rate and a lot of question marks about when people return to work and what will happen to the economy, again, not a terrible year to sort of to be more conservatively positioned in terms of new releases because new releases are very expensive and very risky. However, in a normalized environment, and we are typically in a normalized environment, we're not now. But I have news for you, we will be again. We need to invest in order to have the kind of frontline release schedule every year that we've said we want to have. And this investment reflects that numbers are significant because it includes titles for all of our divisions, as I mentioned, and includes about 1/4 -- a bit more than 1/4 of the titles planned are, for example, free-to-play titles. A significant number of the mobile titles, 1/2 are new iterations of existing franchises, 1/2 are new intellectual property. So what you're really seeing, when we put the numbers together, which may sound overwhelming, is a reflection of the scale of our enterprise, which has grown materially. And this is the first time that we've given insight as to what that looks like over a 5-year period. We had an investor ask yesterday, "Well, can you go back 5 years and tell me what that number was 5 years ago?" And the answer is, could we? Yes. Would we? Probably not. So we're not going to learn anything by it and we're not model builders. But this isn't a complete sea change in the business. Also, if you take a look at the actual frontline release schedule in the industry, I mean, it's a fraction of where it was 10 years ago. I mean the industry has been shaken out. We -- quality has become the new benchmark, well after I started saying that 12 years ago. I said, you're going to see release schedules decline. You're going to see volume decline because good is the new bad and great is the new good. And absolutely, and awesome, I've never seen it before, is the new great. And so we're not worried about the market being overwhelmed. I was asked around the time of Red Dead Redemption 2 being launched, aren't you worried about a crowded release schedule? I was like, crowded release schedule? There's nothing. And frankly, when we put out a tempo release, our competitors get out of the way of our release date because they know what we're bringing to market. And by the way, we do that with our competitors as well. I mean we're not the only one that puts out great titles. And when someone is putting out a massive title, we'll get out of the way of their release date. There's not that much to go around. There's not that much great entertainment. And finally, it seems like ancient history now, but it doesn't to me, there is room for multiplicity of hits in the marketplace. You give people what they want, they show up for it. When Fortnite was such a massive hit and it's still doing fine, but when it was a massive hit, we got endless questions people saying, "Oh, my God. What's going to happen to Take-Two because there's another huge hit in the marketplace?" And the answer is we were delivering record results for Grand Theft Auto Online. Through that entire period, record results for NBA 2K, launching Red Dead Redemption, which has now sold in 31 million units. We didn't miss a beat. We were thrilled that there was another hit in the marketplace. It brought players in, created energy. People love interactive entertainment. What are they going to do? They're not just going to play one game. They're going to play other games as well. So no, we're -- our schedule, you're correct that overwhelming your own system or overwhelming the market is a path to disaster, but we're not doing either one.

Thank you for that very much. You gave some great cues to where to take this next. You mentioned the console cycle. You also mentioned monetization, a bunch of different platforms, all of which our audience wants to hear about. But the 2 most popular questions I'm seeing are both around console cycles. So let me -- let's just -- let's hit that. So the question is -- let me just read them. So here's a question. In what way is the next generation of consoles can allow for an even better gaming experience? Are there technical attributes that make you believe an even more successful, in this case, Grand Theft Auto, for example, would be possible, given the capabilities of a new console, which I think is wrapped in the broader question of just what does the console cycle mean as you think about what you can put into games and how long they take and what they can become?

Yes. I mean, look, we're very excited about what the new consoles will allow our creative folks to do. We've obviously been developing with new technology for some time. So we're very familiar of where that can take us. And generally speaking, what new technology in our business allows us to do is better memory, better graphics, more fidelity, more beauty, more subtlety, more speed so -- and more richness and more depth, more characters. So for example, the amount of sort of background interactivity in Red Dead Redemption 2 versus Red Dead Redemption is huge. There's way more going on just as you inhabit the world, there's way more that you can do and there's way more that comes into your world proactively. And therefore, there's more realism. I think over time, and I've said this before, our systems will be so sophisticated that you won't be able to distinguish between interactive entertainment created in a computer and live-action entertainment created with a camera. I mean I know it's hard to believe, but we're -- and that's a massive step forward. We're not there yet. Now we're getting closer. If you play NBA 2K, you squint a little bit, you don't pay that much attention. Hard to tell the difference between NBA 2K and a real basketball game at times. But there will come a point where photorealism, it will be possible. And it doesn't mean, by the way, we're going to avail ourselves of it. We -- just because you can do something in a photorealistic way, it doesn't mean you will. I don't think Borderlands is ever going to be photorealistic, it wouldn't make any sense. And I don't -- and I wouldn't even presume to talk about any of our other existing franchises, but I can assure you that we would have creative folks who would be thrilled to make something that looks totally real. And that's what interactive entertainment allows. The more engaging a title is, the more people who can play it simultaneously, the more there is to do in the world, especially in open world games, where we, through Rockstar Games, are really expert. Yes, the bigger your audience is going to be, the more they'll engage with you. And therefore, the more they'll pay you, the more loyal they will be, and the larger the entire industry will be. And that's why this is the fastest-growing industry in entertainment and has been for some time. Coming out of this crisis, I think we'll be even more important relative to linear entertainment. We will grow even faster relative to linear entertainment. Our friends at Activate, our consultancy, have done some research, and they believe coming out of this crisis, gaming usage or interactive entertainment usage would be up about 14% versus prior. Linear will be up about 8%, which, by the way, is great for linear because it hasn't been growing at that level. But we continue to outpace any other form of entertainment. I think technology will continue to explode and benefit us for at least the next 10 years. So we haven't hit an asymptote technologically. Will we at some point? Yes, but it's not soon.

Thank you for that. I'm looking at the time, and I want to make -- there are some title-specific -- and we probably should get to...

I'll try -- I'll do a speed round with you, Todd, if you want.

Well, we did that last year. So I definitely want to get to -- but this is -- we cannot move to the speed around yet without at least talking broadly, and the question is here on monetization, and you mentioned a couple of different bets. And I'd love to hear Lainie, if you wouldn't mind as well, you see all these business plans presented to you, Lainie. And so they've got to be -- you've got to be seeing different proposals on how your development teams are proposing that they're going to generate revenue. As you said on the call, Strauss, you are a for-profit business after all. And so Lainie, I'd love to hear -- the question from the audience is, what do you see the biggest changes in game monetization over the next 3 to 5 years? That's the question. I would love to hear you both share your thoughts on that.

Strauss, you want to begin? Or do you want me to?

No, I'm going to -- I want the expert to begin. You.

Okay. And well, when we do the product investment review meetings and products do come to us, the one focus that we've had definitely over the last few years is that every game has some sort of post-monetization aspect to it. Whether that's in post-monetization currency or downloadable content, we're open-minded to whatever it is or whatever fits the game. It's based on what the developer thinks is the right fit for the game. So it doesn't really matter as long as it's the right type of game experience for the gamer. So we're not really as focused on what that monetization is going to be, more about what the experience is going to be for the gamer, and then we know that the monetization is going to follow. Then we take a look at what the financials will look like and what their expectations will be in terms of what the development costs are and what they think the opportunity is for the economics for the overall experience will be. And then we'll just make the decision whether we want to move forward and approve that title going forward. So that's sort of how it works in terms of a financial basis. And maybe Strauss wants to talk a little bit more about the creativity of it.

I probably -- I don't have much on that, except that we were a pioneer in creating ongoing engagement after initial release, as the company that we inherited and the business at the time was one where you had -- you aspire to have big tempo releases, massive hits. And then you knew you're going to have a dip, or trough of perhaps for a long period of time, and then you had to come out with another hit. We were the first company to launch downloadable add-on content with GTA IV and never looked back. And we've now been able to be in a position where as Lainie said, it's our aim to offer ongoing engagement opportunities with every one of our releases. Now obviously, if we put out a flop, no one wants to engage more with the flop. But we are creating those opportunities. And since our hit ratio is typically so high, it has created an enormous benefit for our consumers and then, of course, for us. I think recurrent consumer spending represented over half of our net bookings last year, was up meaningfully year-over-year. And that's -- that represents a sea change in the nature of the business, the reliability of the business. And much more importantly, it reflects just how engaged consumers are. For basketball, for example, that used to be a 3-month title. You put it out, people played it for 3 months, they put it away, and you saw them next year. It's now at least a 9-month title, and we aspire to make it a 12-month title where you're just engaging all the time in this massive world of basketball that includes culture and engagement, friendships and stories and music and the like and where you can spend money there, too. So this is the business as it goes forward. This is not just a business for us, by the way. This is true for our competitors as well. What differentiates us and Lainie alluded to it also is our goal is to create the best entertainment. When we talked about our attributes, be the most creative, be the most efficient, be the most innovative, you didn't hear us say, generate the highest revenue per consumer or be the most profitable even. We believe that economic benefits come from serving customers. That's our goal.

This actually presents a halfway decent opportunity to sort of segue toward the speed round. If you don't mind me, we -- using a specific example that comes up a lot. I think it's a really interesting to me, again, hopefully, more than just to me, example of sort of ways to monetize straight off. If you think about the live services, particularly in Grand Theft Auto, for instance, which clearly continues to perform at very high levels, right now, the model is, in order to play the live service, you must first buy the game as a player, right? And then once you bought the game, you have the ability to continue and expand your experience inside the live service. There's a notion that it doesn't have to be that way. And there's examples where people are experimenting with flipping that on its head, right? Put out the live service, try to attract as many people as possible to that. And then if they like that, maybe they will purchase something if you know what I mean. And I'm not obviously asking you to comment specifically on your plans for getting there, I thought of that. But I'd love -- that seems to me a very fascinating specific example of the trade-off you deal with in terms of what is the best model for consumers and for your business. And if that opens the doors, any thoughts you can share in response, that would be fantastic.

Well, look, we have free-to-play businesses. NBA 2K Online in China is a free-to-play business. All of Social Point's titles are free-to-play titles. WWE SuperCard is a free-to-play title. So we're familiar with the business model, and it can be a great model. NBA 2K Online in China is as an example. We have 49 million registered users. We're the #1 PC sports title, and our net bookings were up 25% year-over-year in the last fiscal year. So clearly, this is a great business when you get it right. The issue is when you get it right. The hit ratios for free-to-play titles, whether they're mid-core or casual, mobile, are very, very low indeed. And the monetization levels are very, very low indeed. So typically, you're monetizing somewhere between 0 in a disaster scenario and 20% in a massively successful scenario of your user base, which means you're serving at least 80% of your user base and getting nothing for it. Moreover, in the case of a mid-core title or maybe even more AA or even approaching a AAA title, our fixed production and marketing costs remain the same or close to the same. And if you launch free-to-play, you actually can be in a situation where you zero out your revenue. You actually can zero out your revenue. In our core business, we -- when we go to market, we know we're going to bring in a lot of revenue. We may not actually make a profit. We can lose money, we have occasionally. But it's relatively rare and because we know what that model looks like. So the notion that you transition your entire business to free-to-play makes no sense as long as the quality of your product allows you to charge for it. And if you can, because you have such high quality, have sort of what I call tethered free-to-play, which is what Grand Theft Auto Online actually became, right? Grand Theft Auto Online effectively looks like a free-to-play title. You can have a great time playing it without spending any money, but you can't get in without spending money in the first place. And I like that because it keeps our consumer honest and because ultimately, it diffuses our risk, mitigates our risk. But we have to be open-minded. And as I said, a little over 1/4 of the titles we're working on are free-to-play titles. And we'll see how we do. We'll see how we do. We're not going to bet the company on that any more than we would bet the company on anything else.

Let me ask since we're sort of in speed territory here. I'm just going to -- I think it's a well-phrased question, so let me just read this from our audience. It got a lot of votes, so it's NBA 2K. So where do you see NBA 2K being in a couple of years from now? Can this be a 15 million units per year game with RCS continuing to grow double digits? What are the main challenges? Really, so the speed around an NBA 2K, I guess, as a main title...

All right. I'll try to do this quicker. We certainly aren't going to comment on the number of units that we can sell. We sold in over 12 million units on this title. NBA 2K20 addressed all of the previous issues. And now it's crushing it, we're going to set a new record for a 2K sports title. And the NBA 2K franchise was up almost 1/3 year-over-year in fiscal '20. So we couldn't be more excited. I think there's plenty of room for growth. I think a lot of the growth can come from international markets. I think the growth can come from the U.S. as well. But we've scratched the surface internationally. In terms of Asia, the Middle East, Africa and India, we're just not represented there nor our competitors in a meaningful way. And a title like basketball, which is a title that's not controversial and available to everyone, I think, is a great title to be the tip of the spear in those markets. So I think there's extraordinary opportunity for basketball, and my ambitions for unit sales are more ambitious than those for the person who asked the question. But we give our guidance every year, and we don't guide on specific units. Anyhow, we try to shoot for the moon and what's that -- hope for the best, plan for the worst. So...

We do expect NBA to be up for fiscal year 2021.

Thanks for chiming in with that, Lainie. That's an important addendum, especially given the performance of that game this year and what's particularly going on right now. I hate to bounce back and forth. Obviously, lots of people always want to focus on some of the Rockstar Games, particularly GTA. Here's one that's actually, I think, well phrased and worth asking because I think we -- you actually might have something worthwhile to -- that you could say on it, which is basically exploring the notion of, does the success of GTA Online and the continued success of GTA Online, what challenges does that present in terms of thinking about releasing a new version, a new AAA version of Grand Theft Auto, right? Because surely, that complicates the situation in terms of launching a new release when you've got the live service from the past release that's still doing so well. I'd love to hear if you can comment on how that affects your thinking.

Yes. I mean, we don't talk about upcoming unreleased -- unannounced releases from any of our labels. So I'll answer your question more broadly and theoretically, and then I'll give you an example. NBA 2K Online in China was developed years ago, it was based on an early engine at NBA 2K. I think the -- it's based on either the 2010 or the 2012 engine. And so there came a point where our development teams and our business team said, look, we have to update the title. And we assume that when we updated the title, there might be some risk in transitioning folks over. What actually happened was we launched NBA 2K Online 2, it turned out to be a massive hit. Oh, and guess what? The audience was still stable and growing for NBA 2K. It's online itself, the first title, so we kept them both up, and they're both up to this day, and now we have 49 million registered users. We can't call what a consumer is going to want to do. But we know that if we are not innovating, if we're not out in the market generating extraordinary new entertainment experiences for our consumers, then we'll be left behind. And any time you look at a business and you take the position, this is great, it's the gift that keeps on giving, and I'm just going to stick with it, and I'm not going to worry about innovating because everyone loves what we have, you are just moments away from being destroyed by your competitors. So since your lunch is going to get eaten anyhow, I'd prefer to eat it myself. Get out in front of my competitors and always get to market when the time is right with the next great thing and not worry about the possibility that it will somehow have a negative influence on what was previously in the market. I mean there's still people playing NBA 2K17. I hear from them. There are people playing our catalog titles. Otherwise, it wouldn't represent so much of our business. So I am not remotely worried about being in a position that we have a great line of live services and a new release and that there's somehow maybe some internal competition. That to me is the definition of a high-class problem.

I'm reminded when I was in business school, on my second day of introductory marketing class, our professor told us, you're going to learn in this class the most important lesson you will learn in business school. And this lesson was, if somebody is going to eat your lunch, you might as well eat it yourself. There's a couple of questions.

Yes, we must have gone to the same business school.

I'll look that up. Let's see. I do, I still remember it though it was a long time ago. I still remember it. Just a couple of questions on here, and we're going to run out of time here in 5 minutes, but let me consolidate it. It's around cloud gaming. So let me just throw out the topic, but the questions are around the economics of cloud gaming, what it does to the gaming options, when you think about streaming in the cloud, and even subscription models. So that's a lot of aspects wrapped up into a quick question around -- but the topic is cloud gaming. And in here, Strauss, where is your head on that?

So let's make sure to distinguish between streaming, which is a technology, and subscription, which is a business model. You do not need streaming to have subscription. And you can have streaming and not need to have a subscription business. So streaming technology is upon us. The launch of Stadia has been slow. I think there was some overpromising on what the technology could deliver. And some consumer disappointment as a result. I think any time you broaden distribution, you would potentially broaden your audience, which is why we supported the release of Stadia with 3 titles initially. And we'll continue to support high-quality streaming services as long as the business model makes sense. And over time, I believe streaming worked. I had said prior to the release of Stadia, and I continue to stand by this view, it's not a game changer. People who want our games now can get our games now. The fact that you could stream them and not have to have a console interface is really not that big a deal. People have PCs. You can get all of our big titles on PC, maybe not immediately, but eventually. 40% of what used to be a console release can now go over PC. It's going to grow. The world is moving into an open system. And if you're going to pay 60-plus in the U.S. dollars for a frontline release and more internationally, are you really unwilling to buy a $300 console? I mean is it -- your -- the belief that streaming was going to be transformative was based on a view that there were loads of people who really had an interest in interactive entertainment, really wanted to pay for it, but just didn't want to have a console. I'm not sure that turned out to be the case. So I'm excited about the technology and what it can do, but I don't believe it's going to multiply our market by 10x or 20x. And if it does, that would be great. I'd love to be wrong. Subscription, it's challenging. There's sort of the initial challenge on subscription is what has caused it to be such a topic of interest? Is it because consumers of interactive entertainment are just demanding subscription models? Not at all. Consumers of interactive entertainment, currently, consume around 45 hours a month. That's typically 1, 2 or 3 titles. They may play those for 1, 2, 3, 4, 5, 6 months or more. Buying a title for $60 is a pretty good deal compared to a $10 or $15 monthly subscription in that event. No, I think what drove people to get so excited about subscription was Netflix's market cap. And that -- trying to get rich is not a business strategy. And so my view is like what would drive subscription would be an intersection of what's really good for the consumer with what's really good for the producer, distributor, publisher. And we haven't found that yet for frontline subscription because frontline subscription may be good for the consumer and that they maybe be getting a break in price, especially if they're an avid consumer. But it's no good for the distributor. So where we think there is a sweet spot there is for deep catalog, and we've made some deep catalog available on subscription services, and I suspect we still will. And occasionally, we've experimented with day and date frontline subscription. And I think what we found is as you might imagine, if you put out a hit, probably doesn't make sense. You put out a flop. Yes, it probably does make sense, but no one watches flops anyway. And we think everything is going to be a hit before we put it out. And thankfully, we don't have very many flops. So as you can see, I'm very skeptical in frontline subscription. I am enthusiastically in support of deep catalog subscription. And at the end of the day, we're going to do what the consumer wants anyhow.

Right. So we've reached that moment in our conversation where we're down to one last question. So I'm going to do 2 things here. First, I'm going to just make one -- another reminder or appeal to our audience, which is remember I mentioned that little link that says something like Procensus poll or [ Procensus ] should be on your player screen. What that's trying to mimic, I hope you click on that as we wrap up here. I'm saying this now because I know people are going to disappear quickly. The audience, I hope you click on that. What that's trying to mimic or replicate is if we were doing this live, you would go grab a coffee now, and you would say to the person next to you, "Hey, what did you think of that?" Right? We can't do that. So that's what we're trying to recreate here. It only takes a few minutes. It'd be fantastic. I think everybody would benefit if everybody take a second just to click that link. So that's my appeal. My final question, and it's this unifying question. So trying to bring some uniformity across this very broad conference, multi-industry, every Bernstein analyst is tasked with asking every CEO this question, and so I'm going to read it, so I get it just right. So just let me pose it. So Strauss, as you think through and beyond this pandemic, how do you expect your priorities to shift especially as they relate to cutting costs or increasing levels of investment?

As this pandemic comes to an end, we've already increased our levels of investment. I don't think that's going to change anything. In terms of cutting costs, we aim to be the most efficient company in the business. And Lainie's always focused on rationalizing our costs. But we're in a growth mode, we're in a growth industry. And the way that we're going to increase our operating margins, we believe, is through continued attention to cost, of course, but primarily by growing our top line organically and perhaps inorganically. And in terms of what has come out of this, an appreciation for our team even more than I had before, just how people pulled together and didn't complain about working at home and got everything done and have been just doing a phenomenal job, which you've seen in our results. So an incredible sense of gratitude for the team. I already had that sense of gratitude. And I think probably as more open-mindedness about the possibility of remote work when needed, the possibility of doing a Zoom call instead of flying somewhere, now and then, not all the time. So that's sort of where I'm at. This is never going to come again. I love the fact that everyone is so focused on like, oh my God, now we have to plan for the next pandemic. It's like, guys, the last pandemic of this nature was 100 years ago, pandemics don't come very often. And what we should do is decide since we spend trillions of dollars on this thing, which tragically has killed 100,000 people in the U.S. But cancer kills more than that every year. Heart disease kills more than that every year. I hope that we don't turn our attention to pandemic treatments entirely. I wish we would decide to spend $1 trillion on curing cancer and heart disease and crowdsourcing that, which is what we've done here, getting all these scientists all around the world to work together. Then I wish you'd spend $1 trillion on infrastructure. And then I think I wish we'd spend $1 trillion in education. That's what I wish we would do. Not that you asked me for better public policy points of view. But unfortunately, I don't get to make those decisions. I get to -- just get to focus on light entertainment. And I'm good with that.

Your comments are definitely appreciated for sure, and thank you for sharing all the way from the Take-Two point of view into a much more global point of view. I wish we had more time. For those of you in the audience who submitted Pigeonhole questions and feel I didn't ask them or ask them adequately, I apologize. But hope is not lost, just e-mail me. Send in your questions, and I will do my best to answer it or Take-Two will do their best to answer it. Everybody who's listening, thank you so much. Please take that quick Procensus poll. Strauss and Lainie, can't thank you enough. Everybody's got some place to be. So I'll let you go. Everybody, be well and we'll talk soon.

Goodbye.

Thanks.