In fact, State Senator Leland Yee (D-San Francisco), the law’s author, is not willing to go down so easily after waging an eight-year legislative and legal battle that aimed to restrict the sale of some of the industry’s most popular games, like Mortal Kombat and Grand Theft Auto.

“We’ll comb through it and see if there’s something that will pass constitutional muster,” Yee’s chief of staff, Adam Keigwin, told me. “If not, we’ll wait until there’s a change in the makeup of the court.”

Keigwin added, “It’s certainly something the senator is considering.”

Yee currently represents California’s District 8, which includes San Francisco and San Mateo Counties, and is now running for mayor of San Francisco — all areas rich with videogame publishers and developers.

The court, in a 7-2 ruling, said the law violated First Amendment free-speech protections, but four justices left the window open for new legislation that would not violate the constitution. [Here's the full opinion of the court.]

In particular, Justice Samuel Alito indicated the language is too vague to rule accurately, but he would welcome a new version that would address how violent videogames affect youths.

“I would not squelch legislative efforts to deal with what is perceived by some to be a significant and developing social problem. If differently framed statutes are enacted by the States or by the Federal Government, we can consider the constitutionality of those laws when cases challenging them are presented to us,” he wrote.

Justice Clarence Thomas, who dissented, was more blunt: “I would hold that the law at issue is not facially unconstitutional under the First Amendment, and reverse and remand for further proceedings.”

Still, the videogame industry, including the Entertainment Software Association, which was the lead party in the case, considered the ruling a victory.

John Riccitiello, who is chair of the ESA and CEO of Electronic Arts, issued a statement: “Throughout American history, every new creative medium has to fight to establish its rights. Like books and film, videogames have had to face down censors and stand up for creative freedom. This was a long, hard, expensive fight, but it pulled together the developers, publishers and fans into a powerful political coalition. There will be other censors, other challenges. But now we’ve got an army in the field to stand up for the rights of game developers and players.”

The original legislation was passed six years ago and signed into law as Assembly Bill 1179. It called for the prevention of the sale and rental of violent video games that “depict serious injury to human beings in a manner that is especially heinous, atrocious, or cruel,” to people under the age of 18 years.

Retailers who violated the act would have been liable for up to $1,000 for each violation.

In a statement, Yee said: “Unfortunately, the majority of the Supreme Court once again put the interests of corporate America before the interests of our children. As a result of their decision, Wal-Mart and the video game industry will continue to make billions of dollars at the expense of our kids’ mental health and the safety of our community. It is simply wrong that the video game industry can be allowed to put their profit margins over the rights of parents and the well-being of children.”

That translates to about $27.3 million of the company’s fourth quarter revenues and $102 million for the full year ended March 31.

In particular, the New York-based company said digital revenues were driven by offerings for Red Dead Redemption, the Grand Theft Auto franchise, Borderlands and the Sid Meier’s Civilization franchise.

Many game makers have identified digital content as a way to extend the life of console games and to create recurring revenue streams between major releases. As we’ve reported previously, the definition of digital varies among companies. Some define it as content downloaded over an Internet connection to consoles, or mobile or social games.

Activision Blizzard, the maker of World of Warcraft and Call of Duty, said 50 percent of its first quarter revenues came from digital, and Electronic Arts were ecstatic that digital revenues for its fiscal year ended March 31 totaled $833 million, exceeding its forecast of $750 million.

During the company’s earnings call this afternoon, Take-Two’s CEO Strauss Zelnick said it was exploring other digital offerings, including emerging platforms such as massively multi-player online games in China, in addition to social games. He said they have several projects underway that have the opportunity to generate significant revenues. One of the titles in the works is Civilization, which is currently in beta on Facebook and will launch some time this summer.

The company said its digital revenues currently include: downloadable content to both Xbox Live and the PlayStation Network; through PC delivery services, like Steam; and content sold through mobile platforms, such as iPod, iPad, and Sony PSP.

For the year ended March 31, the company said revenues totaled $1.14 billion, growing 49 percent over the year-ago period. Net income totaled $53.8 million, or 62 cents a share, compared to a net loss in the year-ago period. In the fourth quarter, the company lost 27 cents a share or $22 million on revenues of $182 million.

The company’s nine-month results ended Dec. 31 included revenues of $954.6 million, jumping 80 percent, compared with the same period a year earlier. In that same period, income from continuing operations totaled $76.2 million, or 88 cents a diluted share, compared with a loss of $98.4 million, or $1.27 a share, for the year-ago period.

Third-quarter net revenues totaled $334.3 million on earnings of 45 cents per diluted share. That easily beat analyst expectations, which had forecasted revenues of $314 million and earnings per share of 34 cents.

The New York-based game maker, known for hit titles such as Grand Theft Auto and NBA 2K11, also increased its financial guidance for the fiscal year 2011. The company now expects revenues of $130 to $150 million in Q4, and revenues of up to $1.1 billion for the year ending March 31.

The company’s forecasts now call for Q4 non-GAAP earnings per share to be in the range of a loss of 40 to 45 cents, and for the year from 80 to 85 cents to easily beat analysts’ previous expectations of 62 cents for the year.

In a release, Strauss Zelnick, chairman and CEO of Take-Two, said strong holiday results enabled the better-than-expected results. Going forward, it’s evaluating new revenue streams. “These include opportunities in Asia and Latin America, evolving downloadable content models and online multiplayer experiences,” he said.

More to follow after the company’s earnings call.

The first person shooter about a space marine with a penchant for off-color humor who battles aliens with increasingly destructive weapons, was to be the fourth installment in a series of games that garnered critical praise and generated controversy for its depiction of women. After 10 years in development, 3D Realms, the studio behind the game, announced it was shutting down in 2009.

The game is being finished by Gearbox Software and will be published by Take-Two Interactive, maker of the “Grand Theft Auto” series. The game is being shown to consumers and the press for the first time at a video game convention today.

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Two lower courts struck down the law as an unconstitutional restriction on freedom of speech.

How the high court rules could affect videogame makers such as Activision Blizzard Inc. (ATVI), producer of “Call of Duty,” and Take-Two Interactive Software Inc.’s (TTWO) Rockstar Games, which makes “Grand Theft Auto.” The case could also have implications for the broader entertainment industry, specifically for producers of violent movies and television shows.

Last week, the court took a broad view of the First Amendment when it struck down a federal law banning depictions of animal cruelty. The court said the law was too sweeping in restricting speech.

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• So, for starters, investor Carl Icahn recently increased his stake in the company; TTWO has agreed to give him control of three board seats. He thinks the stock is too cheap. (Duh.)
• Icahn’s involvement has fed into a steady drumbeat of rumors suggesting that the company could still eventually be acquired by Electronic Arts (ERTS); in 2008, the company rejected a $25.74-a-share bid from EA as too low. Always looking out for the shareholders!

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But game sales have been weak in 2009, even as movie theaters set box office records. What gives?

I’ll let someone else try to explain the movie side of the ledger (although those box office numbers aren’t always what they seem to be). But it turns out that there’s a simple explanation for game slump: It’s that gamers are huddled in their basements playing Grand Theft Auto over and over and over.

Gamers are indeed spending more time playing videogames, say new data from Nielsen. It’s just that gamers aren’t spending more money on games. Instead, they’re playing the games they have, buying used games, and increasingly turning to game subscription services.

Here’s the argument in chart form–you can get a summary here or download the full report here (PDF). Click on the charts to enlarge:

Hours played:

Used games purchased:

Subscription rate:

All of which explains why Best Buy (BBY) and Wal-Mart (WMT) are both getting into the used game business and why Blockbuster (BBI) and GameFly are expanding their game rental business. Now, if you’ll excuse me, I’ve got to get back to my game of Hover Kart.

Pachter concedes that the call could be early given cautious guidance from the company, but he thinks the forecast is already in the share price. And he thinks the current level disregards a potential new version of Grand Theft Auto in the October 2010 fiscal year.

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Federal prosecutors say they’ve broken up an insider trading ring that scooped up some $4.8 million in illegal gains over a four-year period–some of which came from trades made before EA’s bid for Take-Two became public knowledge. That’d be very lucrative information to have in advance, given that EA was offering a premium of more than 50 percent when it offered to buy the company behind Grand Theft Auto in February.

The quick version (longer summary here): The SEC says that Matthew Devlin, formerly a Lehman Brothers. broker, gained information about secret takeover bids from his wife Nina Devlin, who works for the Brunswick Group, a PR firm that specializes in M&A work. He then passed the tips on to his clients, the SEC alleges.

The SEC hasn’t charged Nina Devlin with anything. In a statement, her employer says she was unaware of what her husband was up to: “This is a violation of trust between husband and wife. Our employee was the victim of a criminal act by her spouse which made detection extremely difficult despite our high standards of confidentiality.”

Electronic Arts’ (ERTS) $2 billion offer for Take-Two (TTWO) was one of 13 deals the trading ring profited on, the SEC says. Unlike most of the other deals, however EA’s proposed purchase never went through. That’s much to the chagrin of ordinary Take-Two investors, who were offered as much as $25.75 per share for stock that’s now trading at less than $9–and just reported dismal results.

But Take-Two (TTWO) did have one glimmer of good news today: It has managed to hang onto the creative team at Rockstar Games, the studio that made the GTA games. It has signed brothers Sam and Dan Houser, along with other “key members” of the group, to a contract that runs Jan. 31, 2012. The Houser brothers’ current contract was set to expire early next year, and there was lots of speculation that a rival game company–likely Electronic Arts (ERTS)–would try to lure them away by backing up a truck full of cash.

So how much did Take-Two have to shell out to keep the Housers, who are the game world’s equivalent of Steven Spielberg and Jerry Bruckheimer? The company wouldn’t spell out the terms during its earnings call except to note that it will share profits from the games the brothers sell so that “their incentives are aligned”; it has also given the brothers the ability to create games that they would own themselves and that Take-Two would distribute.

But make no mistake: There’s no way the Housers agreed to stay on without a significant guarantee: In 2005 alone, the company paid out $84 million in royalties, and most of that went to the RockStar group, according to this excellent Wall Street Journal story. And the Housers have only become more important to the company since then.

Even in a best-case scenario, that contract won’t really pay significant dividends for Take-Two for several years, when the Housers come out with their newest shoot ’em up. In the near term, the future looks rough: Videogames were supposed to be a recession-proof industry, but turns out that game buyers are just as susceptible to economic collapse as the rest of us.

In the meantime, Take-Two shares closed today at $12.07–less than half of the $25 per share that EA offered investors for the company in February. They’ll open even lower tomorrow–investors drove the stock down nearly 20 percent once they got a look at the company’s newest numbers.

For FY Q4 ended Oct. 31, the publisher of Grand Theft Auto and other videogames posted revenue of $323.4 million and a non-GAAP profit of two cents a share; the Street had been looking for $325.8 million and five cents.

That’s not good, but the real trouble is the guidance.

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This time the outcry is over the Nintendo DS-bound Chinatown Wars and its drug-dealing minigame, which offers players the chance to try their hand at a little narcotics trafficking. “We wanted to have a drug-dealing minigame in lots of the GTA games,” said Rockstar vice president Dan Houser. “We played with it a little in ‘Vice City Stories,’ because it worked really well juxtaposed with the main story. It works well with what GTA is, with driving around the map, and it gives you another thing to think about–another layer or piece of the puzzle to keep you motivated.”

And another layer to add to the GTA marketing campaign, which clearly thrives on controversy.

But–as many readers have requested–they will all be available in their entirety in this column.

Here’s an interview I did with Activision Chairman and CEO Bobby Kotick about the state of the gaming business.

The video of the interview is in three parts.

It’s a good week to focus on the gaming industry since Electronic Arts (ERTS) abandoned its hostile acquisition bid for Take-Two Interactive (TTWO) over the weekend.

EA’s effort was motivated, in part, by Activision’s recent merger with Vivendi Games, which includes Blizzard Entertainment’s “World of Warcraft,” one the most popular multi-player games.

The merger has made Activision (AVTI), with its own well-known franchises–especially the hugely popular “Guitar Hero,” which debuted version IV at D6–one of the gaming industry’s largest companies.

In this second video, Kotick talks about virtual goods and in-game advertising, the international market, set-top boxes, violence and “Grand Theft Auto,” the competitiveness of the gaming business, the situation at Yahoo (he was, until recently, a board member), and takes a question from the audience about social gaming.

The company didn’t say exactly what prompted it to end talks with its smaller rival, though presumably it had something to do with Take-Two’s bashing of EA’s $25.74-per-share bid as too low and the company’s acquisition strategy as “mystifying.”

“This was never a must-have proposition, but we respect their people and products,” Owen Mahoney, senior vice president of corporate development at EA told The Wall Street Journal. “We don’t need Take-Two to make EA successful.”

Hence, EA’s repeated extensions and revisions of its offer. …

Anyway, this may not be the last we’ve heard of a deal. There’s still a chance that EA might return to the table. “If Take-Two’s stock price settles back into the teens, we could see them come back again in a few months,” said Michael Pachter, an analyst with Wedbush Morgan Securities. “They walked away, but that doesn’t mean they won’t look at it again.”

Take-Two shares plunged 22 percent in pre-market trading on the news.

Obviously I’m incredibly thankful to Rockstar for the opportunity to be in this game when I was just a nobody, an unknown quantity. But it’s tough, when you see Grand Theft Auto IV out there as the biggest thing going right now, when they’re making hundreds of millions of dollars, and we don’t see any of it.”

–Actor Michael Hollick, who was paid $100,000 for his performance as GTA IV’s protagonist, Niko Bellic, says he was robbed of residuals and royalties on the game.

And while the anti-GTA zealots who blame the game for inspiring real-world violence are decrying it, the press is heaping it with praise (of 31 reviews listed on Metacritic.com, 24 are perfect scores). The New York Times calls it “a violent, intelligent, profane, endearing, obnoxious, sly, richly textured and thoroughly compelling work of cultural satire disguised as fun.” Noting that innocent bystanders in the game now groan in agony when murdered, Slate’s reviewer explains, “what makes Grand Theft Auto IV so compelling is that, unlike so many video games, it made me reflect on all of the disturbing things I had done.” MSNBC says simply: “Grand Theft Auto IV will blow you away.”

Which is likely what it’s going to do to sales estimates as well. GTA IV was inevitably going to be one of the biggest games, if not media events, of the year–one that Hollywood executives worry might depress movie ticket sales as GTA fans drop everything to play the game. And though that might sound like so much PlayStation 3 promoting exuberance, it may not be that far off. With $400 million expected in first-week sales, GTA IV’s debut could be the most lucrative launch in entertainment history.

And then it lowered its bid to $25.74 a share, from $26.

EA (ERTS) did this because last night, Take-Two (TTWO) shareholders approved the issuance of 1.5 million new shares to the company’s management firm, ZelnickMedia–shares that EA claims dilute the value of its buyout offer. A reasonable argument to be sure. But lowering the price of an offer that Take-Two already claims undervalues it clearly isn’t going to advance EA’s cause.

And at this point, that cause needs all the help it can get. As of this writing, EA has gathered a little more than 8% of Take-Two’s shares. It needs 50% for its offer to succeed. And with Take-Two gearing up for the April 29 release of its eagerly anticipated “Grand Theft Auto IV”, it’s not likely to get much more at $25.74. Said Take-Two chairman Strauss Zelnick, “I’m mystified by EA’s strategy.“

And then it lowered its bid to $25.74 a share, from $26.

EA (ERTS) did this because last night, Take-Two (TTWO) shareholders approved the issuance of 1.5 million new shares to the company’s management firm, ZelnickMedia–shares that EA claims dilute the value of its buyout offer. A reasonable argument to be sure. But lowering the price of an offer that Take-Two already claims undervalues it clearly isn’t going to advance EA’s cause.

And at this point, that cause needs all the help it can get. As of this writing, EA has gathered a little more than 8% of Take-Two’s shares. It needs 50% for its offer to succeed. And with Take-Two gearing up for the April 29 release of its eagerly anticipated “Grand Theft Auto IV”, it’s not likely to get much more at $25.74. Said Take-Two chairman Strauss Zelnick, “I’m mystified by EA’s strategy.“