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Time for Take Two to Quit Sports?

In some ways, the video game industry is a lot like high school.

Electronic Arts is the star athlete. THQ is the quiet guy you want your sister to date. Activision Blizzard is the popular kid. And Take Two Interactive Software is the one wearing

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Source: Take Two Interactive Software

the leather coat smoking a cigarette between classes. You’re never quite sure what he’s going to do.

Five years ago, the company decided to get into the sports genre – acquiring a pair of development studios (Virtual Concepts and Kush Games) from Sega.

The thing is: Not everyone is cut out for sports. Some players are natural athletes, finding success at whatever they try. Others, despite their best efforts, just can’t quite get the hang of the game.

Take Two had some solid early victories, but they didn’t last. It’s now obvious that the company is never going to earn its letterman’s jacket. And perhaps the time has come for it to walk away from the category.

The timing’s right. Investors already know that next year’s going to be a money loser, despite four high profile titles. Stockholders barely blinked this week when the company announced it had sold its Jack of All Games distribution arm – which will drag next year’s projected losses even further down.

The “NBA2K” franchise, admittedly, is doing well. This year’s installment sold over 500,000 copies in October, soundly beating EA’s NBA offering.

Otherwise, though, things are gloomy. The company has stopped making NHL games, since they couldn’t find an audience. (Clarification: Take Two officials say they haven't officially announced plans to abandon the sport, but none have been announced as the company evaluates its sports portfolio.)

Attempts to circumvent EA’s exclusivity contract with the NFL have produced a few forgettable titles. And the exclusive arrangement Take Two has with Major League Baseball has become an albatross – and is being squarely blamed for both the most recent quarter’s shortfall and next year’s ugly forecast.

Worse still, the contract with MLB is not set to expire before the end of the 2012 season.

Add it all up and it’s a division that’s dragging the company down.

“Let’s say, to be charitable, that the NBA game makes $10 million per year,” says Michael Pachter, an analyst with Wedbush Securities. “Do you really want to stay in the basketball business and have to take bigger losses in others?”

Take Two reportedly is saddled with annual payments to MLB of $30 million to $40 million. That’s less than EA pays the NFL for its exclusive deal, but not by much – and the football market is four times the size of baseball.

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Source: Take Two Interactive Software

Take Two’s current management is spared some blame here. The MLB contact was signed before they took over – as was the decision to invest heavily in sports. But as the company struggles to focus on winning properties, there’s nothing preventing them from cutting the company’s losses.

“They could approach EA now and say ‘It would be beneficial to consolidate all sports under the EA label. You can take our studios and engines and essentially take us out of the business’,” says Pachter. “But I think Take Two simply lacks the humility to do that. They’re too proud.”

Offloading the MLB contract alone could turn the financial tides in the near term for Take Two. It would also be a nod to the inevitable.

The odds of Take Two renewing a deal with MLB are slim. The company can’t afford to bid high for the rights – and EA will likely walk away with them for a song.

Even in the games industry, the star athlete often walks away the winner.