By Alex Pham Times Staff Writer Thu Jul 21, 7:55 AM ET

The oversight board that puts parental ratings on video games took the unusual step Wednesday of slapping its strongest warning on a bestselling title as the game maker admitted putting explicit, interactive sex scenes on the disc.
ADVERTISEMENT

Retailers began pulling copies of "Grand Theft Auto: San Andreas" from their shelves after the Entertainment Software Ratings Board revoked the game's "Mature" rating and raised it to "Adults Only." Publisher Take-Two Interactive Software Inc. said it planned to rework "San Andreas" — the top-selling video game of 2004 — and reissue it later this year.

The ratings board is similar to the Motion Picture Assn. of America's rating board. A "Mature" rating is analogous to an R movie rating, and "Adults Only" is equivalent to NC-17. Most retailers refuse to sell "Adults Only" games.

Executives at New York-based Take-Two had denied for weeks that company programmers were responsible for the graphic sex scenes, which can be unlocked with software that was widely available on the Internet. But Wednesday they acknowledged that the game's designers had created the scenes, dubbed "Hot Coffee."

"The editing of any game is a highly technical process," said Take-Two spokesman Rodney Walker. "We liken it to a painter who paints one painting and paints over it on the same canvas."

Walker's explanation did little to mollify critics, who point to the "Grand Theft Auto" series to highlight the issue of violence and sexuality in video games. The games celebrate nihilistic killing, and Take-Two has reveled in its image as the bad boy of a $25-billion global game industry that's trying to gain respectability to match its profits.

"It looks like Take-Two Interactive purposefully conned the video game industry rating board and parents across the country," said Washington state Rep. Mary Lou Dickerson. " 'San Andreas,' as a top-selling game in the country, now is in the hands of thousands of children who can practice interactive pornography. There should be legal consequences … so [the company doesn't] laugh all the way to the bank."

"San Andreas," which retails for about $50, has sold more than 12 million copies worldwide since its launch in October. "Mature" rated games are intended for players older than 17. Many retailers keep such games under lock and key and have policies requiring clerks to check the identification of buyers.

Wal-Mart Stores Inc., which accounts for as much as 20% of video game sales in the United States, began removing "San Andreas" from its shelves Wednesday, as did Best Buy Co.

"Our policy is not to carry any adult titles on our shelves," said Wal-Mart spokeswoman Karen Burk, who said buyers "can certainly bring the product back" for a refund.

Take-Two said it would make a patch available for downloading so that customers could block the sex scenes.

Word of the scenes began spreading over the Internet last month after Dutch programmer Patrick Wildenbourg began distributing software that he said unlocked them.

Many video games have secrets to which players gain access as they progress. They might, for instance, win extra powers or reach hidden levels.

"Hot Coffee," by contrast, is an interactive sex game, featuring oral sex and intercourse.

Wildenbourg, who removed his software from the Internet on Wednesday, declined to comment.

As late as last week, Take-Two had insisted that the sex scenes were "the work of a determined group of hackers who have gone to significant trouble to alter scenes in the official version of the game." Hackers, the company said, created the scenes by "disassembling and then combining, recompiling and altering the game's code."

The scenes prompted an outcry from game critics, including Sen.
Hillary Rodham Clinton (D-N.Y.), who last week called for a federal investigation into "Hot Coffee."

The Entertainment Software Ratings Board began a review to determine whether the scenes were part of the game's original code and warranted a re-rating of "San Andreas," versions of which play on Sony Corp (NYSE:SNE - news).'s
PlayStation 2, Microsoft Corp.'s
Xbox and personal computers.

"After a thorough investigation, we have concluded that sexually explicit material exists in a fully rendered, unmodified form on the final discs of all three platform versions of the game," said Patricia Vance, president of the ratings board. "Clearly the [original] rating was incorrect, and it needed to be corrected."

Take-Two's Walker said Wednesday that the sex scenes were never meant to be seen by the public and that they were revealed only when an outside programmer, called a "modder," wrote software to unlock them.

"The mod community scratched the painting, revealing the earlier work," he said.

Analysts estimated that modifying and remarketing "San Andreas" would cost Take-Two about $40 million in lost sales. Shares of Take-Two fell 11% in after-hours trading.

"It was a very poor exercise of judgment and a very costly one," said Michael Pachter, a video game industry analyst at Wedbush Morgan Securities in Los Angeles. "It's an embarrassment for management because obviously a maverick developer in their studios decided to put this stuff in there. I can only fault the management team for not putting systems in place to vet their games."

Take-Two is no stranger to controversy. Previous installments of "Grand Theft Auto" have been adored by hard-core gamers but excoriated by parent groups and lawmakers for their depictions of violence and sex.

In one, players could have sex with a prostitute and then beat her to death and take back their money. That game was rated "Mature" because players did not see the sex. Instead, they saw a parked car rock back and forth.

Some lawmakers criticized the ratings board for failing to detect the sex scenes in its initial evaluation of "San Andreas" last year. Although the system is voluntary, most game publishers seek a rating from the organization, which evaluated more than 1,000 titles last year.

"It should not have taken this long," said Rep. Joe Baca (news, bio, voting record) (D-Rialto). "This is evidence that the voluntary ratings system does not work."

Video game industry executives tried to assure parents that the "San Andreas" incident was an anomaly.

The ratings board "has been in business for 11 years, and there has never yet been an incident of this kind," said Doug Lowenstein, head of the Entertainment Software Assn., the industry's trade group. "You're looking at well over 10,000 games rated. If you look at that track record, you can say parents have every reason to be confident in the ratings system."

Some consumers weren't completely reassured.

"As a parent I've lost some confidence in the [ratings board's] ability to police the industry," said Dennis McCauley, editor of GamePolitics.com. "But [the board] did take a big step today, and I have to give them credit for that."

The price of Hot Coffee: >$50 million
As retailers pull games from shelves and eat the cost of used copies, money gets left on the table...or goes to other games.

As retailers count up lost revenues that would have been made from sales of Grand Theft Auto: San Andreas this summer, some business writers are suggesting Take-Two is privately reveling in the publicity the "Hot Coffee" controversy has brought it. "After all, nothing says 'buy me' to a 15-year-old quite like a message that this product is too racy to sell at Circuit City and GameStop," Business Week columnist David Kiley wrote. "In my opinion, censorship and uproar will only make San Andreas and future GTA games more appealing to teen gamers, Take-Two's target audience," said Motley Fool editor Nathan Alderman.

Cheeky theorizing aside, it's clear who the losers on the front line are. Almost every major retailer in North America, including Wal-Mart, Target, Best Buy, and the aforementioned Circuit City, has pulled the game from its shelves. GameStop yesterday said it would lose more than $1 million just from not being able to sell used copies of the game.

Take-Two itself said in a statement that it's lowering guidance for the third fiscal quarter (which ends July 31) to $160-$170 million in net sales. "Accordingly," the company said, "guidance for the fiscal year ending October 31, 2005 is also being lowered to $1.26 to $1.31 billion in net sales and $1.05 to $1.12 in diluted earnings per share."

But when the new M-rated San Andreas is released--sometime in the next six to eight weeks--it may still be hard to find. The New York Times today is reporting that some retailers, including Wal-Mart and Best Buy, have said they might decline to carry even the "cleaned-up" version of the game.

Given that San Andreas was the best-selling game of 2004, the losses could be staggering. Even six months into this year, the franchise has demonstrated continued selling power. The Xbox version of San Andreas was June's top-selling game, according to NPD Funworld.

One analyst's math? Starting with the numbers Take-Two put out yesterday--lowered guidance of about $40 million--and figuring that number to be 80 percent of the retail sales (assuming a markup of 20 percent), the analyst's estimate of lost retail sales could go as high as $50 million. "Specialty stores stand to lose more, as they had to pull their more profitable used titles off the shelves also," the analyst added.

But it's not just front-line retailers that stand to suffer. Renters of games are also reacting to the rerating. In an e-mail to its customers, GameFly said, "Due to the ESRB's new AO (Adults Only) rating for Grand Theft Auto: San Andreas, GameFly has decided to temporarily suspend rental and purchase of the current version."

Are there any winners in this game industry controversy? Maybe other publishers.

Another analyst told GameSpot that "maybe as an offset, more people go to the stores looking for the game--given all the publicity--and then buy something else." In a memo to investors yesterday, Shawn Milne of Friedman, Billings, Ramsey & Co. echoed those thoughts. He said that while "retailers are obviously upset with Rockstar/Take Two," given that the AO rating "blocks big box retailers, such as Wal-Mart, from selling the game," it opens the field up to other games. "We believe that the removal of GTA could benefit other publishers, such as Activision, with more shelf space (there is the possibility that True Crime 2 could be pulled forward)," he said.

And then there is the entertaining logic of Kiley to revisit. "Perhaps Take-Two should consider shrink-wrapping the game with a 16-ounce can of malt liquor and a pack of Luckys... In the long run, it might increase sales even if the company is taking it on the chin in the short run."

Yes, perhaps.

By Curt Feldman -- GameSpot
POSTED: 07/22/05 05:33 PM PST