Mixed reaction to San Andreas rerating

Pols, analysts, and critics react to new AO sticker; most see limited downside for Rockstar as a "buy on the dip" attitude prevails.


Grand Theft Auto: San Andreas

The industry's most renowned franchise has just gone through an unprecedented dressing down. The newly minted AO rating for Rockstar's premier game, Grand Theft Auto: San Andreas, means that right now, tens of thousands of retail operations in the US are pulling copies of the game from their shelves.

Reaction from some of the game's harshest critics, as well as Wall Street? Surprisingly mild.

Take-Two stock today had shed just over $1.20 as of press time, down a few percentage points and actually up from after-hours trading. In a statement, game industry detractor David Walsh of the National Institute on Media and the Family expressed some delight in the fact that "it has been confirmed that Rockstar Games ... failed to disclose to the ESRB the pornographic content of Grand Theft Auto: San Andreas." Yet all the organization could muster as an official response after the rerating was announced was a vaguely worded "questions remain" coda in a statement.

Unsurprisingly, potential 2008 presidential candidate US Senator Hillary Clinton (D-NY) weighed in on the scandal she helped bring to the forefront of the national discourse. "I urge the ESRB to redouble its efforts to make sure something like this doesn't happen again," she said in a statement, in which she also "applaud[ed] the ESRB for its quick and thorough investigation."

And most analysts, according to Zacks Investment Research data, remain bullish to neutral on the stock...even after Wal-Mart, Target, Best Buy, and Circuit City say they're pulling copies of the game from store shelves.

Are hidden sex minigames good for business? No. But so far, the fallout hasn't been all that bad for Take-Two Interactive, parent of San Andreas publisher Rockstar Games, or the industry at large.

In a memo sent to investors shortly after the rerating, PJ McNealy of American Research Technologies asked: "Does this now spell horror, feast, famine, and doom for the rest of the video game publishers? In short, no."

Tony Gikas of PiperJaffray said he viewed the ESRB action "as a temporary issue" for Take-Two. He said he "does not expect that any other [Take-Two] games are at risk at this time."

Wedbush Morgan Securities' outspoken Michael Pachter was more critical in his reaction. "We are disappointed that this type of content was included in the game in the first place," he wrote. However severe his disappointment might be, Pachter sees little enduring damage to the company's standing among investors. "We do not expect any long-term impact on GTA: San Andreas sales due to the product recall and later release of the new version. ... Notwithstanding the large negative financial impact, we believe that investors should view this as a onetime charge."

Pachter maintained his "buy" rating on the stock.

Among high-level game industry executives, the consensus was that it could have been a lot worse. One executive said he thought the ESRB might have revoked rating privileges for Rockstar Games, meaning future products would have entered the retail channel unrated. Just as retailers often refuse to carry AO-rated games, many will not carry unrated games. Another executive candidly suggested to GameSpot that the only way for Take-Two to fend off negative publicity would be to jettison Rockstar North, the Scotland-based studio that produces the Grand Theft Auto games...and is largely responsible for its enormous success.

As of now, Rockstar maintains its position that the Hot Coffee minigames are the work of "an unauthorized third party modification." It considers the ESRB investigation concluded and resolved, although Take-Two's president Paul Eibeler today did tell the Wall Street Journal that his organization is "'evaluating' whether any individuals will face repercussions." The Journal said Eibeler declined to name those inside the Take-Two organization who might have been responsible for the hidden code.

But as one prominent journalist said to a reporter after the rerating was announced, "Take-Two just brought the industry a whole world of hurt." The exact magnitude of that hurt remains unknown.

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