Debatable point: why should video game companies play nice?

The top selling video game last year was "Grand Theft Auto: San Andreas." It carried an "M" or Mature rating from the Entertainment Software Ratings Board--for those 17 and older--for its graphic game play that includes carjacking, drug dealing, soliciting prostitutes (and beating them), killing rival gang members and burning people. When a hidden sex scene was discovered in the code last summer, the rating was changed to "AO"--Adults Only, 18 or older. The game was yanked from the shelves of major retailers, sending publisher Take-Two Interactive Software Inc.'s stock into a tailspin.

As game companies test the limits of new technologies, exploiting rich graphics and dramatic plots, how much is too much? Is including graphic, racy content worth it, if there's a chance it could push into an Adults-Only rating?

Background

Publisher Take-Two Interactive saw its stock rise more than 400 percent over four years due to the success of "Grand Theft Auto." It contributed to revenue gains of 34 percent last holiday season and drove up net income by 74 percent.

But the "AO" rating is the equivalent of an "X'-rating for a movie. Retailers such as Wal-Mart Stores Inc., Best Buy Inc., Target Corp., and GameStop Carp. yanked the game from their shelves in July, and Take-Two's stock plunged more than 5 percent in one day.

The company projected a $50 million shortfall due to retailer returns, and it had to rush to develop a "cleaned-up" version--at least one without the offending code. Take-Two's stock is now wading in the $18 range, down from the $27 range in July.

The flap has intensified the political debate over violence and graphic content in video games, as well as how games are labeled. Twelve percent of the 672 games released last year carried the 17-and-over Mature rating, meaning that they "may contain mature sexual themes or more intense violence or language," according to the ratings board's definition.

Several state legislatures have taken up the issue. California passed a bill in October that would fine retailers $1,000 for selling "violent video games" to anyone under 18. Michigan passed a law this year imposing fines for selling "ultraviolent explicit" video games to anyone under 17, and Illinois passed a similar bill regarding selling violent games to minors. The Interactive Entertainment Merchants Association is suing to have the bills declared unconstitutional.

Pro--Exciting Game Play, Bigger Audience

There's no question that up until last summer's flap, Take-Two had benefited greatly from its "Grand Theft Auto" franchise--as well as spawning a host of copycat games.

"Many publishers are trying to cash in on this genre," wrote Bank of America analyst Gary Cooper in a November research report. Competition in the line-up of "GTA Wannabe games" this holiday season will be intense, Cooper noted. Among the offerings: Santa Monica-based Activision Inc.'s "True Crime: New York City" and "Gun", (both rated M), a few more titles from Take-Two, and Vivendi Universal's "50 Cent."

Three of the top-10 selling video games in August carried M ratings, according to NPD Group data, and 34 percent of video game customers are between 18 and 34 years old--well within the parameters of a "mature" audience.

"Not every game is directed towards every demographic," said Jim Kennedy, vice president of Calabasas Hills-based THQ Inc., which is known for its branded games developed for Nickelodeon and Pixar Animation Studios, although it also develops games like "The Punisher" for more mature audiences. (It does not have Adults Only games.)

Kennedy says companies don't measure success by numbers alone. "If you're building a game toward a targeted audience, your measure of success is how well it sells in that particular demographic," he said.

But since there are more people 17 and older who play games, a title geared towards a more mature market is going to sell better than one focused solely at a teen market. "Madden Football is a really big seller, and so is Harry Potter," said Michael Pachter, an analyst at Wedbush Morgan Securities. "But GTA is a bigger seller."

Excellent graphics and dramatic plots make for better games, and the detail is important. The hint of sexual content doesn't seem to hurt either. "No self-respecting 13-year-old would be caught dead in a movie rated anything less than R," said David Kinney, chairman and president of Media Data Corp., publisher of independent rating system PSVratings. "The PR value of a shocking title can stimulate buzz and awareness, and that can translate into more sales," acknowledged Christopher Sherman, president of Austin-based The Game Initiative, a video game professional organization.

Cons--Bad Press, Lower Stock, Limited Distribution

Excessive violence and sexual content that pushes a game into an AO rating can have a serious negative impact on sales.

An Adults-Only rating for a video game has the same stigma as NC-17, or an X-rating on a movie, according to Kinney. "It's the kiss of death," he said, because major retailers won't touch it.

To many, GTA's hidden sex scene "didn't add anything to the game," Pachter said. "It was stupid."

Cool graphics and vivid scenes are only as good as the game they are supposed to support. "Developers have to ask themselves, does it further the plot? Does it further the story?" Sherman said.

Sexual content can serve to sour consumers' and retailers' opinion of a game, and can make parents think twice about buying a company's next release. Kinney said the "Grand Theft Auto" controversy "would have never surfaced if the company had revealed that the scenes were in there--people felt misled."

Graphic content also raises the ire of politicians and consumer groups, inviting more examination of the industry and leading to restrictive legislation like that passed in California, Michigan and Illinois.

"Using a particular rating to stimulate sales is just going to increase government scrutiny," Sherman said. "Do you try to boost short term gain at the expense of long-term regulation?" he asked.

Outlook

The ratings controversy didn't hurt "GTA: San Andreas" come awards time. At the recent 2005 Golden Joystick Awards, "Grand Theft Auto" swept five of 19 prizes, including the prestigious "Ultimate Game of 2005" award, making it one of the most decorated video games of all time. But the financial hit to Take-Two was costly, and analysts estimate that it could take another year or more for the company to recover.

"Violence has been around for a long time and it's not going to go away. It's not taboo," Sherman said. "Sex is another story."

The Entertainment Software Ratings Board claims that it lets consumers know the degree of violence or graphic content in a game, citing its decisive action with "Grand Theft Auto." Once the hidden sex scene was discovered, the game's rating was upped to "Adults Only," removing it from shelves.

But the number of copycat games being developed in its wake speaks volumes. "Nobody wants to sell an 'M'-rated game to a 12 year old," Pachter said. "But do they want to sell it to a 16-and-a-half year old?"