Digitalization Eating Traditional Retail Alive
What do you do if you’re a specialty retailer in the early 2000’s as you watch purchasing shift online? Build an e-commerce website and try to create an omni-channel offering. Now, what happens if your suppliers and customers create a distribution method that disrupts your supply chain and cuts you out completely?
This is the challenge that GameStop, a videogame retailer, faces as consumers have increasingly purchased “digital downloads” directly through their consoles, eschewing traditional retailers completely. Console manufacturers such as Microsoft and Sony, and game developers such as Valve and EA, have created new distribution channels that offer consumers instant downloads, and allow themselves to capture a larger portion of the profits.
The industry is approaching a tipping point, videogame publishers are generating 30% of revenues from digital downloads, compared to 10% in 2013 . And for blockbuster games, that percentage can approach 50% . This means that GameStop needs to prepare for a future where it generates profits from new offerings in order to support the massive fixed costs it has from its large retail footprint.
Adapting In Order to Survive?
Investors and GameStop’s management are clearly concerned with the company’s prospects; its stock price has fallen 70% since its 2013 highs, while game publisher and console manufacturers’ stocks are all reaching all-time highs as industry-level sales balloon to over $100 billion .
A few weeks ago, the company announced a new game rental subscription called PowerPass: for $10/month users can rent as many pre-owned games as they’d like by going into a physical GameStop location (and then get to keep one game at the end of 6 months) . The company then promptly announced that it was abandoning the program before it even had a chance to formally launch . On the company’s last earnings call, the CEO declared, “we continue to face pressure in pre-owned. Our results were within our forecast at a minus 7.5% decline. Inventory levels, a key driver of performance in this category, are stronger at plus 8% per year — or year-over-year” . GameStop’s pre-owned inventory levels continue to increase while they face difficulty in actually selling these games.
PowerPass does not seem like a new long-term vision for GameStop, it seems like a way for it maximize cashflow as it slowly goes out of business. GameStop has built up a large inventory of pre-owned games, and it seems questionable that it would be able to fully monetize this stash, or even maintain current pre-owned sales or inventory levels. As more and more customers purchase digitally, customers have fewer physical games to sell back to GameStop, so GameStop’s funnel to purchase pre-owned games will continue to shrink.
What Can GameStop Do?
Digital Transition: It seems likely that GameStop will end up somewhere in-between Blockbuster and Netflix, which shouldn’t provide much comfort to investors or management. Netflix was able to transition from a physical-inventory-focused company to a leading player in the digital arena by partnering with content producers and purchasing the digital rights to underlying content. While there are digital distribution networks for games, none provide content producers with large guaranteed sums in exchange for the unrestricted right to distribute and market the content. The problem that Gamestop would face is that while they could potentially execute this strategy for PC, consoles are closed systems that prevent Gamestop from being anything more than a retailer for physical games.
Monetize Physical Footprint: Gamestop still has a dedicated customer base that continues to shop at its stores because of the breadth of product offerings, helpful staff, and store ambiance. Gamestop should evaluate if there are alternate uses for its store footprint that would cater to its customer base. One potential use would be converting some stores into arcades that attract (i) gamers that may not own the consoles / games and (ii) eSports teams and fans. eSports, or competitive videogaming, is a growing industry with hundreds of millions of fans and >$700mm of industry-wide revenue (forecast to approach $2bn by 2020) . Professional sports teams, universities, and venture capitalists have flocked to eSports to try and build adequate infrastructure that will allow them to monetize the large fanbase. Gamestop could convert some of its space into arcades that allow (i) teams to train / compete and (ii) fans to gather and watch their favorite teams. This would also be a logical place to sell games, merchandise, and even pre-paid cards which allow for digital downloads once the game returns home.
Are there examples of distributors that, like GameStop, have been disintermediated by their suppliers + customers?
Are there examples of retailers that have successfully found alternative uses for their retail footprints?
What other ways can GameStop pivot to remain relevant with its customer base?
 Dan Gallagher, “Downloads Add Upside for Videogame Publishers”, The Wall Street Journal, November 4, 2017, https://www.wsj.com/articles/downloads-add-upside-for-videogame-publishers-1509804001, accessed November 2017.
 Activision Blizzard Inc., November 2, 2017 Form 8-K, https://www.sec.gov/Archives/edgar/data/718877/000110465917065640/a17-24904_1ex99d1.htm, accessed November 2017.
 “The Global Games Market Will Reach $108.9 Billion in 2017”, Newzoo, https://newzoo.com/insights/articles/the-global-games-market-will-reach-108-9-billion-in-2017-with-mobile-taking-42/, accessed November 2017
 Jordan Crook, “GameStop is launching a game rental subscription called PowerPass”, TechCrunch, October 30, 2017, https://techcrunch.com/2017/10/30/gamestop-is-launching-a-game-rental-subscription-called-powerpass/, accessed November 2017.
 Chaim Gartenberg, “GameStop’s unlimited used game rental subscription gets shelved before it even started”, The Verge, November 14, 2017, https://www.theverge.com/2017/11/14/16650150/gamestop-unlimited-game-rental-subscription-powerpass-used-cancelled, accessed November 2017.
 Paul Raines, CEO, remarks made at GameStop’s Q2 2017 earnings call, August 24, 2017. From transcript provided by SeekingAlpha, https://seekingalpha.com/article/4101789-gamestop-corps-gme-ceo-paul-raines-q2-2017-results-earnings-call-transcript, accessed November 2017.
 “Esports revenues will reach $696M in 2017 and $1.5Bn by 2020”, Newzoo, https://newzoo.com/insights/articles/esports-revenues-will-reach-696-million-in-2017/, accessed November 2017