How to Make More Cash From One Game Than 10 James Bond Films

(Bloomberg) -- In a compensation deal unique to the video-gaming industry, Sam and Dan Houser, the brothers responsible for Grand Theft Auto, will get the bulk of an expected $538 million in royalties Take-Two Interactive Software Inc. will pay to all employees for this year, according to an analyst. That’s thanks in large part to their latest title, Red Dead Redemption II, due Friday.

The British-born brothers and a few key insiders share half the profits of Rockstar Games Inc., the Take-Two subsidiary that makes both titles, according to a lawsuit filed by a former employee. Last year, Take-Two distributed $383 million in what it called internal royalties. More than 2,000 Rockstar employees receive bonuses, a company spokesman said.

Take-Two said its compensation programs allow employees to join in the success of software they help develop. The company declined to say how much of it went to the Housers. Gerrick Johnson of BMO Capital Markets estimated the brothers received the bulk.

“As long as Grand Theft Auto is chugging along, no one seems to care,” Johnson said.

The Housers’ haul shows just how far video games have come since the days of Pong and Space Invaders. The industry is expected to bring in $138 billion this year, according to market researcher Newzoo. Red Dead II will sell at least 15 million copies by the end of the year, analysts said, at a retail price starting at $60 for the base package.

Bad Guys

Grand Theft Auto V, the latest installment of the shoot-’em-up gangster series, has sold nearly 100 million copies and generated over $6 billion in revenue. That’s more than the last 10 James Bond films combined. It was one of the first major games in which heroes were bad guys who could murder and thieve at will. Last year, the online version brought Take-Two $758 million in revenue, according to an estimate by Piper Jaffray Cos.

Sam, 46, and Dan, 44, grew up with a love of movies and pop culture, according to David Kushner’s 2012 book, “Jacked: The Outlaw Story of Grand Theft Auto.” Their father, Walter Houser, ran Ronnie Scott’s, a famous jazz club in London. Their mother, Geraldine Moffat, is a former actress who appeared with Michael Caine in the 1971 crime drama “Get Carter.” Some gamers say the movie’s style and ethos permeates the Grand Theft Auto franchise.

Rap Music

Sam Houser in particular was infatuated with American rap music and the gritty New York of the early 1980s, which are also influences on Grand Theft Auto. He focuses on game play and the look of the games. Dan, who studied literature at Oxford University, plots the stories.

The brothers, who joined Take-Two in 1998, are known to be workaholics who drive their employees hard. In 2006, workers sued for unpaid overtime in a case later settled. In 2010, a letter, published by the website Gamasutra, complained of staffers working on the Red Dead series being driven to depression and physical illness due to extended hours, canceled vacations and modest pay raises. A Rockstar spokesman said the brothers have a “very dedicated work ethic.”

Profit Margin

Leslie Benzies, a former Rockstar executive, said in a 2016 lawsuit that he was squeezed out of a royalty pool that may have generated $843 million for the Housers.

While analysts and industry insiders said it’s not unusual for game designers to share in the profits, the Housers’ take is extraordinary. By comparison, Michael Morhaime, the former president of Activision Blizzard Inc.’s Blizzard Entertainment division, earned $12.3 million last year, according to a public filing.

Benzies, through a lawyer, declined to comment. His case is expected to go to trial next year.

Wedbush Securities analyst Michael Pachter said he wondered why the Housers’ pay isn’t disclosed. Take-Two has a narrower profit margin than rivals Activision and Electronic Arts, partly due to the royalty structure, according to Bloomberg Intelligence analyst Matthew Kanterman. But since revenue has doubled and earnings before interest, taxes, depreciation and amortization have nearly quadrupled since 2012, Take-Two shareholders haven’t complained. The stock is up more than 10-fold since then.

Housers’ Leeway

Take-Two Chief Executive Officer Strauss Zelnick gives the Housers leeway in running their business, analysts and former employees said. A spokesman for Take-Two said it’s in the best interests of shareholders for Take-Two management to leave marketing and other decisions to the Rockstar team.

Red Dead Redemption II is much anticipated, in part, because of its level of detail. In the Old West, characters traverse snow-capped mountains and dusty plains. They rob stagecoaches, chat up ladies of the evening and blast every bounty hunter or U.S. marshal who gets in their way. Arthur Morgan, the main character, gets his outfit dirty over time, and players can clean his clothes once he gets to town. Over 190 pieces of original music were composed for the game. Following the model set by Grand Theft Auto online, the web version of Red Dead, due in November, is expected to include opportunities to spend real money to purchase gear.

Unlike Grand Theft Auto, Red Dead II creates a reward system for doing good. The better a character cares for his horse, for example, the more likely the animal will respond quickly to facilitate a getaway.

“What really makes those games is the freedom to run around and do what you want,” Kushner said. “What’s made Red Dead a success is that freedom. It’s the brothers’ greatest contribution to video games.”

Planet Domination

Michael Hickey, an analyst with Benchmark Co., said the Housers make the “highest-quality game software in the world” and could easily venture out on their own.

The brothers, both naturalized U.S. citizens, may be too busy cashing checks. In 2012, the New York Observer reported that Dan Houser spent $12.5 million on Truman Capote’s former townhouse in Brooklyn, New York. The brothers also keep homes on Long Island and in upstate New York, according to public records.

Sam Houser seemed to encapsulate his life philosophy in an August 2007 email to Benvies, mentioned in Benzies’s lawsuit.

“Let’s make some cool f---ing sh-t, enjoy doing it, change the world, have some time off — then dominate the planet,” he wrote. “We can. So why not?”

--With assistance from Kriti Gupta.

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net, Bob Ivry

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