We are raising our moat rating for Take-Two (TTWO) to narrow from none and raising our fair value estimate due to our expectations that Take-Two will now deliver excess returns on capital for a longer period of time than previously anticipated. Our new narrow moat rating stems from intangible assets from its brands and a combination of patents and proprietary technology.

While Take-Two finished outside the top 10 for video game publishers by revenue in both 2015 and 2016, the firm has expanded its franchise portfolio beyond Grand Theft Auto with its recent success with NBA 2K, Civilization, Borderlands, Bioshock, and XCOM. Both of Take-Two's wholly owned labels, Rockstar Games and 2K Games, have transitioned their titles into microtransactions with the success of both GTA Online and NBA 2K helping drive the firm's excess returns above its cost of capital in each of the last four fiscal years, a trend that we expect to continue.

CEO Strauss Zelnick recently noted that the firm plans "to have recurrent consumer spending opportunities for every title that we put out at this company. It may not always be an online model. It may not -- probably won't always be a virtual currency model. But there'd be some ability to engage on an ongoing basis with our titles after release across the board."

While Zelnick was typically blunt in his comments, we expect that many of Take-Two's competitors have a similar plan. However, the success of GTA Online over the last four years demonstrates the firm's ability to monetize its games while attracting considerably less backlash than other similar titles. We expect that Rockstar will create a similar online mode for its next big single-player game, Red Dead Redemption 2, which is expected to launch in May.

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