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A Look at How One of the Largest Record Companies in the World Once Owned Rockstar Games and Sold it For a Pittance (musicbusinessworldwide.com)

Posted by msmash on from the inside-story dept.

Question: what is entertainment's highest-grossing weekend debut of all time? Hint: It only took place two weeks ago. From a report: It was claimed by a Western-themed video game called Red Dead Redemption 2 -- the second in a series dubbed 'Grand Theft Auto on horseback' -- which generated over $725m in just three days. The wording above ('highest-grossing weekend debut') has been carefully chosen. Because the highest-grossing entertainment launch of all time actually kicked off on a Tuesday, in September, 2013. That launch was Grand Theft Auto V, another video game, which grossed more than $1bn during its opening 72 hours on sale. Both Red Dead Redemption and Grand Theft Auto are made by Rockstar Games -- a New York-HQ'd interactive entertainment company famed for its ability to bring filmic sophistication to the world of PlayStations and Xboxes, and for its ability to generate billions upon billions of dollars by doing so.

Ready for this? The Grand Theft Auto franchise, and the core team behind Rockstar's success, were, unbelievably, both once part of the music business. They were allowed to leave 20 years ago. For an absolute pittance. Let's rewind. Back in 1990, London-born Sam Houser, aged 19, landed a dream first job -- working in the post-room at BMG's UK HQ. Houser then supplemented his university studies by continuing to work at BMG for the next four years, focusing on pop music videos and VHS releases. By 1994, he'd graduated, and took a full-time role within BMG's new interactive entertainment division. Houser, it turned out, had a natural talent for 'A&R'ing' video games -- spotting titles that would sell big and signing them up as a label would an artist -- and, by 1996, he was named Head of Development at BMG Interactive in the UK. Got your palm located somewhere roughly near your forehead? Good. Prepare for the two to forcibly meet.

Interactive released Grand Theft Auto, a 2D action-adventure game, which saw players fulfilling the objectives of criminal overlords across three cities. The title was a commercial smash in the US and Europe -- yet it emerged amid serious corporate turbulence. In March 1998, convinced that its foray into video games had been a waste of time and money, BMG -- under the instruction of owner Bertelsmann -- agreed to sell off BMG Interactive. According to Sam Houser, BMG let the company go, to New York-based Take Two Interactive, for a total consideration of $9m. (For those who can see where this narrative is going: Red Dead Redemption 2 generated that $9m back within an hour of going on sale last month.) The story doesn't end there.

12 of 49 comments (clear)

  1. Happens all the time by Anonymous Coward · · Score: 2, Interesting

    Does Gates schooling IBM ring a bell? It would kill IBM to admit it but they regret it to this day.

  2. That was its worth at the time by WoodstockJeff · · Score: 5, Interesting

    Why is it so surprising? Under the original management, it might have done as well, but probably not.

    Kudos really should go to Take Two Interactive, for recognizing what the future COULD bring.

    1. Re:That was its worth at the time by AmiMoJo · · Score: 3, Interesting

      GTA was a product of Rockstar North, which used to be called DMA Design back when they made games for the Amiga. Classics like Blood Money, Lemmings, Walker, Hired Guns... They are the ones who generated all that money.

      BMG weren't really all that involved with them... They went through a few different publishers over the years but BMG were only every very peripheral to their operation I think.

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  3. This just in by Opportunist · · Score: 5, Insightful

    Corporations have no idea what they're selling and only know for how much.

    For the average CEO it doesn't matter whether he's selling computer games or lawn mowers, they pretty much treat them the same. This is why small businesses with people who know what they're doing can actually still exist.

    --
    We used to have a Bill of Rights. Now, with the rights gone, all we have left is the bill.
    1. Re:This just in by alvinrod · · Score: 3, Insightful

      It's a weird comment. Kotick is the CEO of Activision Blizzard (previously just Activision prior to the merger), and EA is infamous for buying beloved studios only to shutter them a few years later, but the two companies have nothing to do with each other. Kotick is kind of a dick, but I don't think he's only the same level of malicious incompetence the EA occupies.

  4. So? by JaredOfEuropa · · Score: 5, Insightful

    The story doesn't end there

    The summary does, though. Anyway: this story can be summarized by "Execs fail(ed) to predict the future, and isn't that dumb?". There are many similar stories of execs selling an asset cheaply only to see it blossom into a profitable powerhouse. And while these stories are a good example of survivor bias, the reverse also happens: they buy a highly successful promising startup, which then turns out to be a thoroughly unprofitable one hit wonder. It happens.

    --
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    1. Re: So? by Lije+Baley · · Score: 2

      And in between there are countless cases where a company sold off a video game division that wasn't worth anything and never would be.

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    2. Re:So? by barc0001 · · Score: 2

      > The summary does, though. Anyway: this story can be summarized by "Execs fail(ed) to predict the future, and isn't that dumb?".

      Sure, but if you read the whole story you'd also see that one of the execs saw the future, fought a losing battle to keep the company in house with his short sighted bosses, and then later struck out on his own and maneuvered to bring that which he saw value in under his control:

      “We hired a team, and we started acquiring properties for distribution, and just on the eve of watching our first release [hit the market], Thomas Middelhoff, who was then [head] of Bertelsmann, forced us to divest BMG Interactive – over my noisy objections,” says Zelnick....“I couldn’t have protested more but, at the end of the day, I had a boss.”

      "In 2007, Zelnick Media Capital led the acquisition of New York-based Take-Two Interactive. As a result, Strauss Zelnick became the video game company’s CEO & Chairman, and its largest shareholder."

    3. Re: So? by alvinrod · · Score: 2

      Never mind all of the other cases where a company held on to some tangential division that slowly suffocated and never achieved greatness because the parent organization had no idea how to utilize it effectively. Sometimes it's better for companies to divest themselves (or spin-off) parts of the company that don't fit well with the core mission of the company.

  5. These sort of stories are pointless by rsilvergun · · Score: 4, Insightful

    it makes it sound like they left a billion dollars on the table, but give a company a completely different set of management and you'll get different results. The Rockstar we have today wouldn't be the Rockstar that made GTA. Especially if they were owned by a record company.

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  6. Summary is a clusterfuck of omissions by UnknownSoldier · · Score: 5, Interesting

    Here is a interleaved timeline of developers/publishers as far as I can piece together. There are very little details of the history of BMG's (Bertelsman Music Group) sub-divisions such as BMG Music Group, BMG Entertainment, BMG Ineractive

    1984 Acme Software founded
    1984 Just Micro founded
    1987 RCA/Ariola International founded (eventually becomes BMG Music Group)
    1987 Acme renamed to DMA Design
    1991 DMA released Lemmings
    1993 Take-Two Interactive founded
    1994 Just Micro renamed to Gremlin Interactive
    1994 BMG Interactive Entertainment founded (division of BMG Entertainment)
    1996 Sam House becomes head of development for BMG Interactive
    1997 GTA released by DMA, published by BMG Interactive
    1997 DMA bought by Gremlin Interactive
    1998 Sam and Han Houser leave BMG Interactive, start Rockstar Games
    1999 GTA 2 released
    1999 DMA bought by Infogrames
    1999 DMA bought by Take-Two Interactive
    2001 GTA 3 released
    2001 DMA renamed to Rockstar North
    2004 BMG combines with Sony Music
    2008 BMG Music Group sold to Sony

    This whole thing probably needs a 2D timeline chart to show owners/mergers.

    References:

    * https://en.wikipedia.org/wiki/...
    * https://en.wikipedia.org/wiki/...
    * https://en.wikipedia.org/wiki/...
    * https://www.mobygames.com/comp...
    * https://en.wikipedia.org/wiki/...

  7. Story for people who don't understand business by Anonymous Coward · · Score: 2

    They sold it to $9m because it was only worth $9m back then. It had GTA1 under its belt, and GTA2 was a total disaster. RDR2 may well have made back $9m in 33ns but that doesn't mean Rockstar was worth more than $9m back in 1998. TT then took the franchise and developed GTA3 which was a world-beating smash hit. That's why RDR2 is grossing now, because of what TT did with the company, not because the company somehow contained a magic "seed" for RDR2 back in 1998. The RDR franchise wasn't even a concept back then.

    This kind of story is stupid and shows the author doesn't understand business. The details are interesting, but the only facepalm going on is with the readership looking at how green the author is on basic business valuation concepts.