ALPHA | OPINION
//COMMENT: BUSINESS Retail therapy
by Nick Gibson, Games Investor Consulting
to buy consoles? This hardware offers high- end, easy-to-use, big-screen gaming with tactile and multi-function controls at subsidised prices. Tablets, smartphones, smart TV and PC offer some of this, but none provides all of it. Hardcore gamers continue to diversify their platforms but are clearly still prioritising console and retail purchasing. Next-gen systems may offer new releases
in download or streamed form, but price competition challenges, growing game sizes, bandwidth restrictions, download caps and latency, combined with a surprisingly low console connectivity rate (circa 60 per cent at best) means that physical delivery of media is going to remain the standard in console gaming for the foreseeable future.
While GAME in the UK flounders, in the US GameStop goes from strength to strength
MUCH HAS BEEN WRITTEN about the collapse (and subsequent resurrection) of the GAME Group, an event which appears to have shaken the industry’s confidence in the retail business and has led to legitimate questions about its validity and role in an increasingly networked age. This month I want to explore whether
GAME’s woes are indicative of the death of games retail and what awaits retail’s future. GAME’s fall has been widely dissected with a plethora of causes posited by pundits ranging from management incompetence, over-aggressive expansion, over-reliance on Nintendo platforms and their casual player bases, the economy, network gaming’s growth and failing to keep up with the times. All of these have some bearing, but I
believe that a critical reason is that the UK (GAME’s heartland) is one of the most cut-throat markets on the planet in which aggressive discounting sees typical game prices plummet within weeks of launch and some willingly selling key titles below cost.
A BRITISH AFFAIR Fascinatingly, another of its victims is the UK PC download market where uptake lags behind the USA due to the huge price discrepancies between download (with publishers reluctant to match retail discounts) and retail versions. This truly Darwinian market of the efficient and the inefficient is increasingly rewarding streamlined online retailers at the expense of the overhead-heavy high street. So, are the UK’s retail woes reflected globally? I believe that GAME’s plight was a
10 | MAY 2012
very British affair – it was simply too inefficient to survive the uniquely competitive UK market. In stark contrast is the success of US games retail juggernaut GameStop with annual sales approaching $10 billion, consistently solid profitability, a healthy balance sheet, a loyal customer base and a
What is true is that retail’s share of
global software sales will continue to diminish at the expense of faster growing network games markets.
focus on markets, like the USA, in which price competition is noticeably less pronounced. That GameStop, with its gargantuan buying
power, chose not to acquire either GAME or its cut-price assets but, instead, to steer clear of the UK high street, speaks volumes. As long as massive competitive pressure combines with inefficiency and the Pandora’s Box of consumers’ low price expectations, British retail’s future will remain troubled. Is games retail destined for extinction?
Undoubtedly, but not for a very long time. Although the global games software retail market has declined since 2008, the hard- core circa $13 billion centre of this market (primarily 360 and PS3) has actually grown. So will these high-value consumers continue
DIMINISHING RETURNS What is true is that retail’s share of global games software sales will continue to diminish at the expense of faster growing network games markets. This decline in turn puts pressure on listed retailers that fail to maintain growth while successfully diversifying their businesses. GameStop’s concerted long- term strategy of diversification in the face of retail’s overall decline is exemplary. This has comprised of selling console and
PC DLC and currency codes in-store, acquiring online games community Kongregate, download service Impulse, Spawn Labs and incorporating network gaming into its loyalty scheme. Led by console DLC and currency code sales, these activities have been hugely successful in generating $453 million in 2011, up 57 per cent over 2010. The convenience and familiarity (and price
discounting) of retail stores engenders enormous loyalty for many customers who would happily purchase digital items such as virtual currency and download codes in physical form. This is exemplified by the remarkable 600,000-plus subscriptions to the Modern Warfare Elite service GameStop sold within its first ten days on sale. GameStop’s success demonstrates why
GAME is not indicative of the terminal decline of games retail, and indicates the direction that it can and probably should take, embracing network gaming products and services and building long-term customer loyalty, not just in-store, but also online. Even if the console business was to shift materially to downloads, I believe that retail would still be able to play a critical role not only selling hardware but also software, virtual currency and services to those unable or unwilling to do it all online.
Nick Gibson is a director at Games Investor Consulting, providing research, strategy consulting and corporate finance services to the games, media and finance industries.
www.gamesinvestor.com
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