Electronic Arts (NASDAQ: ERTS) is spending about $167 million for a 15% share in The9 (NASDAQ: NCTY), one of China's largest online game operators. In March, Electronic Arts bought 19% of NeoWiz, a Korean company, for about $105 million.

While these moves into Asia are part of a strategic initiative to develop a stronger distribution network in the region, it got me wondering: If Electronic Arts is in a buying mood, what about Take-Two Interactive Software Inc. (NASDAQ: TTWO)? The company has been plagued by just about every scandal imaginable: options backdating, overstated earnings, porn in video games, etc. But after major institutional investors ousted the company's slimy management, things could be in store for a turnaround. and investors who are fed-up with the company's underperformance may want it to explore a sale.

The prices paid for The9 and NeoWiz might make Take-Two look inexpensive, with its market cap of $1.4 billion, and strong brands, mainly the Grand Theft Auto series (I don't normally play video games, but Grand Theft Auto is amazing).

The shares were up almost 3% today, so maybe investors think Take-Two is a takeover candidate, too. I wouldn't be buying the stock here, given all the problems that are still dogging the company, but there's no arguing that its brands have a lot of value.

Update, 5/11: In the wake of this controversy, Linden Labs has purged Second Life of those responsible for the behavior described below. Kudos to them.

More than six million people worldwide have found a way to live a second, more fulfilling life online in the virtual world of Second Life. Now some of the same seamy behavior that bedevils the real world is showing up in that world as well.

Now, according to The Guardian (registration required), German prosecutors are investigating virtual pedophilia, in Second Life, as some players have taken to engaging child prostitute characters in sex within the virtual world. Sex with e-animals, they write, is also increasingly popular.

The issue of legality in the U.S. of such activities was muddied in 2002 when the Supreme Court, in Ashcroft vs. Free Speech Coalition, struck down a law prohibiting the sale and distribution of virtual child porn as a violation of First Amendment rights, as long as the porn is not based on a real child.

The issue of illegal and/or immoral behavior of avatars in video games such as Linden Lab's Second Life came to public dialog with the release of Grand Theft Auto III in 2001, in which a player can steal a car, pick up a hooker, have sex with her, then kill her and steal her money.

A number of related cases are working their way through the court system today, one or more of which may eventually establish the boundaries for this and other virtual content.

At the moment, however, I suspect the question will be, what will the public tolerate? Certainly, a child e-porn scandal will invigorate a great deal of opposition to unchecked virtual privileges. The controversy presents a huge challenge to Linden Lab's franchise game.

The SEC's informal investigation of Take-Two Interactive Software, Inc. (NASDAQ: TTWO) has gone formal. This comes after years of controversy surrounding the company including allegations of overstated earnings, options backdating, hidden porn in the company's Grand Theft Auto video game, and the current battle for control of the company. The formal investigation will, according to Herb Greenberg, give the SEC "carte blanche to subpoena anybody and everybody."

Interestingly, the stock didn't respond strongly to the news, perhaps a reflection of the changes in management that have occurred -- the market realizes there were massive governance problems, and expects the new management to clean things up. Still though, given the controversy and need for change, the shares don't look particularly cheap to me.

For more on my take on the situation at Take Two, read this piece from April 2.

Electronic Arts (NASDAQ:ERTS) reports earnings today after the close of the market. Consensus estimates are $0.02 for EPS and $672.25 million in revenues. In August the company forecast a loss of -$0.22 to -$0.28 after items and a break-even result before items on revenues of $635 million to $685 million.

This will essentially be the second throw-away quarter for EA as the bulk of the business is centered around the fourth quarter and first quarter of the calendar. Its updated "Madden Football" game posted sales of more than $100 million its first week out of the chute in August.

So this is the throw-away quarter, and that is a given. Now what we have to worry about is the excessively wide range of estimates that exists for the coming quarter. The street is looking for approximately $0.57 EPS and $1.2 Billion, but the lower and higher ranges are apparently $0.40-0.72 and $1.15B to $1.3B. There is also a discrepancy of consensus estimates from service to service. That means that with the stock back up at the highs, you might have to still worry even if they guide slightly up from mid-points. The other worry is that the company has a history of reporting sporadic results and even more sporadic reactions in stock prices.

With the large Madden numbers you would expect that the revenues were attainable. But in this current quarter we get the release of the two new systems going after Xbox 360's lead. We have the Nintendo Wii and the Sony PS3 coming out within days of each other later this month. Both consoles have sold out as far as pre-orders at GameStop and indications seem to suggest some of the same at Best Buy. EA has roughly 30 games under development as of last month. This is actually the second quarter that JamDat has been a subsidiary of the company for mobile operations, so we may have a better grasp of the mobile gaming segment ahead.