On Monday, April 15—tax day in America—Take-Two Interactive Software shared with its investors a filing with the Securities and Exchange Commission to register 315,315 new shares of company stock. The filing (Form S-3) is a pretty run-of-the-mill document, used whenever companies go public or, through various circumstances, may have more shares available to put on the market. But in corporate finance, oversight committees require context, so filings refer to several other filings. If you read all the paperwork, you can learn a little bit more about the business of video games. Or, specifically, how one CEO might benefit from a contentious aspect of the industry: microtransactions.
As part of the filing’s prospectus—the part of the document included to give the involved parties a complete picture of what’s being registered, how, and why—the form breaks down the reason for the filing. Namely, that Take-Two is issuing its management company, ZelnickMedia, 315,315 units of Restricted Stock. In corporate finance, Restricted Stock is stock in a company that, for all intents and purposes, doesn’t really count—at least, not until certain conditions are met. Think of it as a sort of IOU for actual stock, cash, or some combination of the two, payable upon the fulfillment of previously agreed-to terms.
According to the filing, those terms are laid out in a 2014 Management Agreement between Take-Two and ZelnickMedia. Part of that agreement details stock incentives, and those incentives are where microtransactions begin to factor into executive bonuses.
Per the Incentive Plan, some Restricted Units are designated to vest (become actual stock, or awarded as cash) as a “Time-Based Award” after several years, as long as certain requirements are met. Others, however, are designated to vest under a “Performance-Based Award.” There are several categories of Performance-Based award. One is determined by sales of games and merchandise, another by the company’s share price. A third is something called Recurrent Consumer Spending.
Recurrent Consumer Spending is the filing’s preferred term for all in-game spending: microtransactions, virtual currency, and add-on content. It designates a range of restricted units that will vest based on how much customers spend on them. There are between 13,986 and 27,972 of these units, by the way, with the lower number being the target amount and the higher one being the maximum number of units that can vest. If spending is stagnant or fallow, these units do not vest and are worthless. If it’s an okay-to-good year for in-game spending, the units will vest at 50%, or even 100%. And if in-game spending exceeds expectations, the units vest at 200%.
Here’s an example of what that looks like. First, keep in mind that all of these restricted units don’t vest for two years and hinge on the company’s stock price, so there’s no telling what they’d be worth exactly, if anything at all. But let’s say these units allocated to Recurrent Consumer Spending vested today, and that Take-Two’s games sold enough microtransactions and add-on content to earn ZelnickMedia shares for every restricted unit it was issued. Since Take-Two is trading at $90.41/share at the time that this is written, that means that selling more microtransactions to customers could net ZelnickMedia anywhere from $1,264,614.12 to as much as $2,529,228.24.
Once again, this is not the only kind of performance-based incentive—even at the maximum number of units potentially allocated to Recurrent Consumer Spending (which is 27,972), we’re only talking about roughly 9% of the total restricted units issued. Many more restricted units are marked for other kinds of performance-based incentives, like games and merch sales, share growth, and also just plain-old adherence to the management agreement for the next two years. (Another thing to keep in mind: While the firm bears his name, CEO Strauss Zelnick is only entitled to 60% of what Take-Two pays it.)
None of this is new—a 2017 Motley Fool article cited this management agreement between Take-Two and ZelnickMedia as a key reason for the company’s consistently good performance on the stock market, and it makes sense. From top to bottom, the entire machine is aligned with the same financial goals, and the execs at the very top get a big payday if they make sure everyone is working towards them.
As the company behind long-running, regularly-supported cash cows like Grand Theft Auto V and the NBA 2K series—both titles that are notorious for raking in real-world dollars in exchange for virtual ones—it makes sense that Take-Two would have an incentive structure that taps right into what’s proven to be a very rich vein. It also suggests a reason for the overreach of some games, like NBA 2K19’s Virtual Currency nightmare. When asked for more details about its incentive plan and microtransaction strategy, Take-Two declined to comment.
Corporations exist to make money, and microtransactions—a way to make more money off a game after it is sold—make cold, capitalist sense. Why make money off a game once, when you can do it indefinitely? And if that system works, then why not add in incentives for CEOs to make sure that they keep the money train rolling? Maybe companies now have more reasons than ever to try and include microtransactions—because they gave themselves a million or two.