GameStop: its all fun and games until someone gets disintermediated
What do Barnes&Noble and GameStop have in common?
1. They once were consolidated within the same company; AND
2. They are both big victims of Amazon and Digitalization!
Find out more about this wild and crazy story of a retailer gone wrong!
GameStop traces its roots to 1984 and Harvard Business school when it was founded by classmates James Curry and Gary Sinus. The business began as a video game (including, Atari and Ninetendo) retail store called Babbage – named after the English inventor of the programmable computer, Charles Babbage. Ironically, the company faced both bankruptcy and its purchase by Barnes & Noble in the late-1990s – both ominous associations given the GameStop’s predicament today. Babbage faced declining sales in 1996 and was forced to file for bankruptcy as it was unable to secure the credit necessary to purchase inventory for the holiday season. Chairman and principal shareholder of Barnes & Noble purchased the company’s assets out of bankruptcy and sold it to Barnes & Noble in 1999. GameStop became a publically traded company in 2002 as it remains today. It’s focus remains video game hardware and software sales, though the Company has begun to diversify into various other technology retail businesses.
GameStop specializes in the sale of new and used hardware and software for gaming purposes. Three significant secular trends – ecommerce, digital game marketplaces, and mobile gaming – provide headwinds against the Company’s core business model. With the introduction of Amazon, gamers can reach new releases without the inconvenience of visiting a physical retail location. The negative ecommerce trend as it relates to video game hardware and software will likely continue for some time. Also, HBS case study famous, Valve’s digital distribution platform, Steam, and other platforms like it enable the digital download of new video game titles. By reducing the amount of physical game copies in circulation, the market size for GameStop’s core product offering, trade-in and used game software, decreases as digitally purchased software ownership cannot transfer. Mobile video game adoption has accelerated with increasingly sophisticated hardware devices and faster data speeds on networks. As the world experienced explosively in July 2016, PokemonGo represents the new wave of augmented reality gaming, which will almost certainly focus on the mobile device.
GameStop responded late and ineffectively to the various threats the Company faces. In an attempt to mute the Amazon impact on new video game hardware and software sales, GameStop purchased or put into place seller agreements a variety of technology resellers, including Cricket Wireless (AT&T subsidiary), Spring Mobile (AT&T authorized dealer), and Simply Mac (largest certified reseller of Apple’s full line of products). These sectors of retail have yet to be severely impacted by Amazon’s rise – likely due to the larger, more complex nature of these purchases – but surely consumer behavior changes seen in other areas of retail will manifest themselves in personal technology devices. In 2014, GameStop launched the GameStop Technology Institute – a business unit focused on discovering new business innovations within technology to expand their product offering. This seems like an attempt to reduce the impact of digital distribution, but the lack of physical software CDs will continue to hurt this business. It’s difficult to see a trend reversal towards less digital downloads and more in-store purchases. Finally, GameStop attempted to participate in the mobile gaming revolution – acting as a PokemonGo “gym” and “stop”, selling accessories – but this is a secular headwind that will be difficult to overcome as game purchases shift online through mobile app stores.
GameStop’s management team refused to confront the challenges of digitization outside of the narrow retail strategy the Company employed for over 30 years. The attempt to diversify away from video games fails to resonate with me – as the business’s main threat, Amazon, still exists as the primary threat to its new business lines. GameStop is yet another Company that failed to understand speed at which consumer behavior will change in adaption to technological advances. The management team chose to attack the new issues the company faced (Amazon, digital game sales, mobile gaming) through the traditional lens of retail (expand into new retail end-markets – Apple and AT&T). GameStop’s example should be held up as a classic – “what not to do” – as it relates to changes brought by digitalization.
Word Count (701)
References:
- GameStop Company Website
- GameStop 2015 Annual Report
- GameStop Q1 2017 earnings report presentation
- Electric Arts Q1 2017 Earnings Call
Interesting post. I 100% agree with you that Gamestop does not face a very bright future. The main question is what they can do about it now? It may be late but from your post it looks a lot like the company could shut down immediately. Are there any assets that could be used to pivot into another business area?
I believe that they will never be able to grab a share from mobile given Apple’s and Google’s dominance in the space. Hence, it would be interesting to see what its Technology Institute came up with. Its already two years since it was created.
Interesting post. What do you think is the reason why GameStop did not or could not use their brand to dominate the console gaming e-commerce space? Was it just a matter of them being late? or do you think they can still manage to capture that space with the right Marketing? I’m thinking it might be the latter since, as far as I’m aware of, no platform is widely known as the sole destination for buying console games. Amazon offers a lot more items so I believe there is still space that GameStop.com can position itself into.
I agree that GameStop’s days are numbered. They are being squeezed on both sides of their business model by competitors better suited to deliver. In the physical game space, Amazon offers release-day delivery for new titles and competitive prices to GameStop. Even more damaging for GameStop, though, is the trend toward digital downloads, which come directly from the platform holder (Microsoft, Sony, Nintendo, or Valve). With the higher margins from digital direct sales, the platform holders have effectively cut out GameStop as a channel partner in the digital distribution space. Personally, I don’t see how GameStop can overcome being removed from the digital distribution channel, as more and more of the industry trends in that direction.
I agree that the existing business model of GameStop is quite outdated, especially as Playstation and Xbox users increasingly just download the games via the app store and don’t even buy the CD/disk on Amazon (or GameStop).
If I am sitting in the management office of GameStop, I would advise them to focus on virtual reality and artificial intelligence. Given the extremely high price points of these products (the Playstation VR bundle is ~$600 and that assumes you already own a PS4), I think GameStop could stage a comeback as a user experience testing center for VR products. From a personal viewpoint, I am hesitant to lay out so much money on the Playstation VR bundle but I am not sure where I can test it out. If GameStop focuses on being a place to experience / test out VR, I think they could sustain some of the revenue loss from digitization / Amazon.