Gaming, Retail, and the Biz
Before we delve deep into why GameStop is in serious trouble, we need to take a quick look at the gaming and retail business as a whole. Consider this a 101 in gaming business by yours truly.
Console manufactures like Nintendo, Sony, or Microsoft make a console (duh). They’ll pay for the cost of manufacturing and shipping cost to bring it into the US. These costs, along with the cost of development, packaging, and some other miscellaneous costs will determine the cost of goods. Based on these costs (COG), they’ll determine how much to sell the console to individual retails, like Target, Best Buy, Amazon, GameStop, etc. Now, no one does anything for free, so a manufacturer like Sony or Microsoft will take their costs, and add on a percentage or margin, that they’ll make profit on. For example, let’s say all the costs put together to get a PS4 into the US is 370 dollars US. Sony will go ahead and sell it to a retailer, GameStop for 380, roughly a 3% mark up. Keep in mind, that 3 percent is next to nothing in the business world which is usually 20-40 percent. Now, GameStop needs to pay for distribution, warehousing, etc., so they’ll mark it up another 20 bucks, 10 for transportation, 10 for profit, and now you have a 400 dollar console.
Again, those mark ups are almost nothing to either business. In fact, that percentage is usually smaller for consoles. Keep in mind; the jeans you’re (probably) wearing were marked up about 40-50 percent. Now you might ask, “Why the hell would they sell at such a low margin?” Elementary my dear Watson; manufactures and retailers will sell you the console at almost no profit to make sure you buy it, and they’ll make their millions by selling you software, where both parties will introduce that 40 percent margin. You might want to call bullshit, and I don’t blame you, but check the math.
PS3 Global hardware sales were roughly 83 million units @ $500 each (taking into account price cuts through console lifetime) @ 2.5% = 1 billion in sales.
PS3 Global Software sales were roughly 832 million units @ $60 each @20% = just about 10 billion. (Numbers grabbed from http://www.vgchartz.com)
Now, you can see that software sales are where it’s at!
With the advent of systems like Steam, PC gaming software sales at retailers have almost disappeared. And as a result, PC gaming hardware almost doesn’t exist in retail stores. When’s the last time you saw a gaming rig at Best Buy? That’s because if there isn’t going to be any software sales for a manufacture’s console, there’s no incentive for retailers to take up valuable shelf space with hardware.
We’re starting to see a similar ecosystem pop up on the Xbox 1 and PS4. In fact, most major publishers are expecting digital game sales to surpass retail sales within the next 5 years, assuming US and European broadband availability continues to soar. In Oct 2012, US Telecom reports that above 70% of US internet users say they use broadband at home, up from just 30% in 2008.
Now for Best Buy, Amazon, Target, and Wal-Mart, this news isn’t great for their bottom line, but it’s not nearly the “arrow in the knee” it is for GameStop.
A Flaming, Poison Dipped Arrow to the Knee
This digital age hits GameStop twice as hard as anyone else. GameStop sells more new games than any other retailer, but that money only made up about 21% of their total profit. Take this in contrast to used game sales that made up 41 percent of their profits and you see how GameStop really makes their money.
So what does that mean? It means that as the industry embraces digital downloads, GameStop starts hemorrhaging money. New game sales account for 1/5 of their business, and we see that pointy arrow entering their knee. The other piece is, as consoles go more and more online, GameStop loses their key money maker, used game sales. You start eroding those used game sales by pushing a digital solution, and suddenly that arrow might as well be on fire.
Not Going Without a Fight
GameStop has said they’re interested in getting involved earlier in the development cycle, though they’re quick to say that doesn’t mean they’ll purchase exclusive content and then sell it to you at a mark-up, it is worrying. Case in point, AMC or Edwards/Regal Cinema wouldn’t ever buy specific footage to be played in their theatres or get involved with movie making, but that may be an option for a desperate GameStop. Most recently GameStop’s exclusive level of Alien: Isolation may be indicative of future plans.
Is It a Losing Fight?
My gut says it’s only a matter of time before GameStop withers to a shell of its former self. The precedent of consuming media digitally has been set forth by both music and PC games. In fact, when Microsoft announced the Xbox One, there was supposed to be a game sharing solution that would allow people to share their digital games. Unfortunately, that was scrapped after some seriously consumer backlash regarding the always online features of the Xbox One. That being said, it’s only a matter of time until MS brings those ideas up again, (I’d bet by the end of 2015, with Sony to follow suit 6 months later).
Personally, GameStop is getting what they deserve. Much like Blockbuster, they’re failing to react to threat they’ve underestimated. They’ve based a majority of their business
on used game sales, and never shared those profits with the developers that made those games. They’d buy a copy of a game, sell it, they buy it back from a consumer and sell it again, and essentially cannibalizing new game sales, eroding developer and manufacturer profits, and essentially becoming a cancer on the industry. Good riddance to shitty and short sighted business practices, and bring on the digital revolution.
– Alex Reyes