Note: I posted this shortly before Microsoft backtracked on their original Xbox One plans. Some parts of this are now dated but overall I think it still holds together reasonably well.
Last fall I thought about applying for a job at GameStop, not as a clerk or manager of course (although that was tempting). They were looking for a senior solution architect at their home office. I had the exact same job title at the time and the description sounded like a perfect fit. The really appealing part was the prospect of working on video game retail systems. I feel very nostalgic about GameStop having once worked at one of the companies they consumed. There's something inexplicably intriguing about returning there two decades later in an entirely different role.
I floated this idea by my wife, the exchange went something like:
My wife: No.
Me: C'mon, what's the harm?
My wife: Aren't they going to be out of business in five years?
Me: Nah. Why do you say that?
My wife: You told me that. You said all the new game systems were switching to download only games and GameStop was doomed.
Me: Yeah but...
My wife's judgment is almost always better than mine and I couldn't argue with her logic on this one, especially since it was mine. She doesn't know know anything about gaming industry trends but she's awesome at birthday and Christmas shopping. Earlier in the year I added a PlayStation Vita to my collection. At some point she had to ask if there were any games she could buy me and that's when I made the aforementioned download only comment.
It's true, every system released after 2012 (and several before) has a significant library of games available exclusively through a proprietary download channel. By all accounts that trend will only accelerate. Does that mean GameStop is done for?
I'm not ready to dig their grave just yet. I think GameStop has a very legitimate chance to thrive with some changes in direction. They have a recognizable brand that's already synonymous with buying new & used video games. To survive they need to expand that brand into other realms of the gaming market that can't be undercut by online purchases.
Let me get this disclaimer out of the way - I have more experience with corporate finance than I care to admit but I'm definitely not an expert. I certainly don't know enough to look at their past 52 weeks of stock performance and infer anything intelligent. I do however know a lot about video game trends and a decent amount about how video game retail works.
I'll also get all the bad things about GameStop out of the way up-front:
1) Used games account for something like 50% of GameStop's profit, a lot of that money is about to go away. The final specs on the Xbox One and PlayStation 4 aren't out yet but neither seem to be all that friendly to used games. From what we know now about the Xbox One it appears that buying a used game disc will be pointless since the "activation fee" will wipe out any savings. That leaves GameStop with the Wii U, 3DS, Vita, and previous generation used games. That's not a good place for GameStop to be in.
2) Downloadable games will wipe out their new game business. Steam, PSN, and Xbox Live are all taking sales away from GameStop. Undersized on-system memory saved GameStop from falling to this already. The Xbox One is projected to have a 500gb hard drive at launch, it's certain to double in the first hardware iteration. This size increase will allow the average gamer to forgo keeping a physical copy of their library. Ten years ago every mall had 2-3 CD stores which were wiped out by iTunes. GameStop has no conceivable way of selling new games ten years from now, probably less.
3) Their current backup plan of selling used android and iOS devices is a dead-end business. Seriously, who wants to buy a device someone presumably used while on the toilet? Don't tell me shoppers looking to save a buck will buy them. Bargain hunters will gravitate toward the dozens of brand new sub-$100 Android devices available already. The folks at Apple and Google also despise supporting old versions of their operating systems. Devices that are locked-in to an "archaic" version will be worthless once vendor support drops.
So without used games, new games, and limited used hardware how can they survive?
One advantage GameStop has, and it may not seem like one at first, is the small size of their stores. If the entire pre-owned Xbox section vanished they'd only have to fill 8'x10' feet of wall space. They don't need a large quantity of products to fill this space but they do need pricey products. Outside of jewelry, there's probably no higher "dollars per foot" ratio than video games.
What they also need is to give people a reason to visit the store every week. In my limited, slightly ancient experience a video game store only sells a product to 1 out of 10 people who enter. I'm sure that number has changed a bit because in the mid-90s 7 out of 10 people entering a video game store wanted to know when such-and-such game was being released. While they were bugging clerks for release dates they'd hopefully spot a magazine or some game they didn't know they wanted. Obviously the whole internet thing has (or should have) eliminated that particular source of traffic. GameStop will need to invent new sources of traffic and try to make some impulse sales to people who venture in.
What kind of physical items can GameStop sell that fit their image and won't be replaced with downloads? There are obvious things like expanding their selection of video game accessories but that will only go so far. What they need is something a bit bolder - they need to sell items that fit the "gaming lifestyle" concept.
What the heck do I mean by "gaming lifestyle"? I'm talking about products for people who spend every moment when they're not eating/sleeping/working/parenting playing video games; people who have entire rooms of their house dedicated to gaming. I'm not talking about people who live with their parents and play Call of Duty all day (although I'd market to them to). These are predominantly middle to high income types who don't enjoy golf. OK, also ones who enjoy golf but live in a climate where they can't play year round. Most of the people in this target market have kids that also play a lot of video games.
Here are a few products that fit this idea in no particular order:
-Clothing with Nintendo written all over it
-DIY home arcade cabinet kits
-Pre-built high end gaming PCs
-Coffee table books (like Hyrule Historia)
If this sounds crazy remember that this isn't too far off of the Electronics Boutique/Babbages/Software Etc of 1994 (these three chains plus two more merged into the current GameStop).
At the start of 1994 none of them were selling pre-owned games and all carried some degree of computer hardware. Most importantly, all three were growing like crazy. In the case of Electronics Boutique, the great used game experiment didn't begin until mid-1994. They were doing fine before pre-owned games and they can do fine again.
That brings us to something else GameStop can sell that a) usually can't be downloaded and b) will bring people into the store - rare classic games.
I'm talking about Earthbound, Chrono Trigger, Sega CD RPGs, TurboGrafx-16 games, and so on. Researching what's considered valuable is a trivial exercise, even more trivial if you make summer interns do it. If they carried classic (Dreamcast and earlier) video games it would guarantee weekly, even daily, visits from a group of collectors who are willing to part with large amounts of money.
GameStop has the ability to bring in massive quantities of old games through trade-in credits. There are thousands of games in the basements of people too lazy to sell them on ebay. Taking pictures, packing a box, writing a description, and setting up a PayPal account to receive funds is a lofty ordeal compared to plopping them on a GameStop counter.
I'm a veteran of buying boxes of random games...
In virtually every box I've purchased there's something good. If you give someone $50 for a crate of dusty games you only need one good one to turn a profit - one $50 game and 49 $1 games is a nice payday. It's less than their current margin on used games but it's a steady profit.
Yes, there would have to be some restrictions to my trade-in fantasy. They'll need to tell people "sorry but your copy of Madden '94 is only getting a penny". Again, getting the trade-in prices right is easy for them. They figured it out in 1994 when their stores didn't even have a computer and we had to look up all the prices on giant spools of paper (true story bro).
Now what to do with the piles of completely uncollectible cartridges that come in? Two words: GameStop Outlet.
Or maybe GameStop Classic unless that gets them sued by Coca-Cola.
Open 3-4 stores in major markets with a high concentration of hipsters and resell these games in bulk quantity on a thinner margin. OK, forget the hipsters, they'll bore of the concept in a week. Aging Gen-Xers looking to reclaim a moment of their youth is what you need to really fuel this idea. There are a number of cities that fit the right demographic profile.
The outlet stores are ultimately just a dumping ground and minor tourist attraction though. The real objective is getting rare games that drive hunters into the main stores every few days.
Building on this idea, they can also buy import games directly from shops in Japan and sell unreleased/rare games at a nice profit. GameStop has avoided selling systems like the RetroN which play both American and Japanese cartridges. Now that they need to carry more physical items it's a great time to reconsider. Pair them up with some "not previously available" games, setup a demo unit, and there's one section filled.
They're also going to have to suck it up and partner with Sony, Microsoft, Nintendo, or Steam to start offering "free download of the week" cards in stores. Yeah, I stole this idea from Starbucks because it's a good one. Nothing gets people into your store like free stuff. Give away some cheap PSN game or horse armor for an Xbox game and there will be a steady flow of foot traffic. Just keep the cards far enough back in the store that the moochers have to look at other other stuff on the way there.
The perfect opportunity to try new products is approaching quickly. In less than six months GameStop will have millions of Christmas shoppers cramming into their stores to buy the newest hardware from Microsoft and Sony. Once those systems are established GameStop will face a world where all videos games are bought through online markets. They can use their broad physical network of stores and brand name to become a whole new hub for gaming culture. If they can't give gamers a reason to keep frequenting their stores they'll be the next great liquidation sale. As much as I like scoring cheap games on clearance, I'd rather see them survive.