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January 19, 2021
Good morning! This week in Protocol Gaming, your weekly guide to the business of video games: what we can learn about the future of retail from Gamestop's struggle, gaming IPOs are getting very big and a great name suggestion for the new Xbox.
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The Big Story
GameStop's struggles (and the future of gaming retail)
To enter a GameStop in 2021 is to go back in time. The store's inner walls are still mosaics of empty plastic game cases. On the right day, you might encounter the local clerk who waxes poetic about Hideo Kojima's level design. And if you close your eyes and take a deep breath, you'll get a whiff of that stale-but-in-a-good-way air that nearly faded into oblivion alongside Blockbuster.
Unfortunately, GameStop not only feels like a relic of the past; it's performed like one in recent years. The company lost $471 million in its 2019 fiscal year (ended Feb. 1, 2020), which was actually an improvement over the $673 million net loss it reported the year before.
GameStop hasn't resigned itself to obsolescence, but it has struggled to bridge the gap between the brick-and-mortar and digital eras:
- In its 2016 annual report, GameStop detailed its plan to transform by growing three non-core business units: collectibles, digital downloads and wireless products. The collectibles segment still generates around 15% of GameStop's overall revenue. But in 2018, GameStop sold its wireless retail business for $700 million, stating that the funds would be used to reduce debt and fuel growth in the collectibles and core video game business.
- In 2019, GameStop rolled out a new strategic plan, this time focused on reducing operating costs, accelerating store closures, and growing ecommerce and digital sales. It anticipates closing around 1,000 stores by the end of its 2020 fiscal year. The 800 store closures made through the first three quarters of 2020 helped lower selling, general and administrative expenses (SG&A) by $115 million in Q3 2020 compared to the same period in 2019. And in the 2020 holiday season, ecommerce accounted for 34% of overall sales, a 309% increase compared to the 2019 holiday season.
- Despite progress on its transformation efforts, GameStop has recently only succeeded in becoming less unprofitable. In Q3 2020, the company reported a net loss of $19 million, improving from the $83.4 million net loss a year prior.
And if the preceding decade of GameStop history wasn't turbulent enough, consider the events of last week:
- On Jan. 11, GameStop reached an agreement with activist investor RC Ventures to add three new board members. RC Ventures is headed by Chewy.com co-founder Ryan Cohen, and he will be joined on GameStop's board by two other Chewy.com veterans. The move will likely result in further cost-cutting and a continued shift to online sales channels.
- In its holiday financial report released the same day, GameStop delivered the good news that, "unless further unforeseen COVID-19 related impacts occur, it expects to realize positive comparable store sales results and profitability in the fiscal fourth quarter."
- And on Wednesday, GameStock's stock shot up 94% in a single day, setting a company record.
However, 2021 promises to usher in changes to gaming retail that will make it even more difficult for GameStop to compete in the long term:
- Microsoft and Sony want gamers to go disc-less, and they've priced next-gen console models accordingly. Consumers willing to go without a disc drive (and some other functionality) would save $200 by opting for a Xbox Series S over the Xbox Series X, or $100 by choosing the PlayStation 5 Digital Edition over the regular PlayStation 5. GameStop's pre-owned gaming business will be particularly hard-hit by the shift to disc-less consoles, since there's no such thing as pre-owned digital games.
- Game subscription services are gaining steam. Microsoft's Game Pass momentum has been particularly impressive: in September 2020, the company announced that it surpassed 15 million subscribers, a 50% jump from April. The service has only gotten more appealing since then, as Game Pass now includes EA Play (another subscription service, boasting 6.5 million customers of its own) and titles from its Bethesda acquisition. PlayStation Now is relatively small, with 2.2 million subscribers as of March 2020.
- Big Tech is investing heavily in cloud gaming. As we've written in previous newsletters, cloud gaming has a great deal of potential, even if there are still a lot of issues to work out in the near term, and that's a problem for GameStop because it means fewer console sales, no used games and potentially no possibility to even act as an intermediary for digital downloads. With Stadia, for instance, you need to buy games directly from Google.
Here's what GameStop's predicament tells us about the future of gaming retail:
- Companies that are closest to the consumer will win from the shift to "frictionless" sales channels. GameStop's survival is predicated on consumers' willingness to take an extra step — for instance, buying a digital download from GameStop for the loyalty points — but industry juggernauts are keen on removing any and all extra steps in the purchase process.
- Brick-and-mortar retail still has a future, even if it's not with GameStop. The best analogy may be with bookstores since the 2000s: Amazon forced larger bookstore chains to shut down or downsize, but consumers still had a desire for a communal experience, leading to a resurgence in independent bookstores. Something similar could happen with gaming: Independent stores geared toward board games, collectibles, comics and live gaming events could fill the void left by GameStop.
- The death of the disc comes with a few downsides for gamers. I will definitely miss disc gaming if only because it allowed me to borrow games from friends and the public library. There's also something great about digging through a used games bin and finding a gem for $2.99.
- "We will not stay as a one-hit wonder." —As PUBG developer Krafton prepares to go public, CEO Kim Chang-han is adamant that the company has more to offer.
- "Given the events and actions that led to the violence at the U.S. Capitol, we are pausing contributions from the ESA PAC as we reflect on the tragedy and our path forward." —The Entertainment Software Association, which previously donated to representatives that voted to overturn the election result, said it would pause all donations.
- "That's a f**king confusing name … What the f**k's going on with Microsoft? ... Like Series S, X, Mex, Next. I mean, who knows this? Come on. Madness. Call it the Microsoft Box and that's it." —Sounds like Josef Fares thinks the new Xbox consoles have bad names?
There's no question that the digital era has changed banking and financial transactions drastically. In this new fintech world, where managing personal finances is rarely taught in school, how do young people learn about modern financial matters?
- Huuuge plans to raise $150 million in its IPO. That would follow last week's successful Playtika IPO, which raised $1.88 billion and saw the company's stock soar on listing.
- Don't miss this exposé of the Cyberpunk launch, which alleges that the 2018 E3 demo was "almost entirely fake." CD Projekt Red has denied the allegations.
- Epic filed claims against Apple and Google in the U.K. As part of its continuing battle against the companies, it told U.K. competition authorities that both companies have "engaged in anti-competitive agreements."
- 505 Games parent Digital Bros acquired Infinity Plus Two. In other deals, IronSource acquired Soomla; Turtle Beach bought Neat Microphones; and Dolphin Entertainment bought B/HI.
- Facebook exec Ben Webley is Scopely's new chief marketing officer. He was previously director of global marketing solutions for games at Facebook. In other moves: Murray Pannell is out as 2K Games' VP of publishing; and Tomonobu Itagaki launched a new studio.
Look out for
Kids these days
Wondering how your kid's allowance disappears so fast? Look no further than Roblox and Fortnite. The games took the top two spots on RoosterMoney's annual allowance spending report, based on data from 4- to 14-year-old children using the finance app in the U.K. Even better news for the gaming companies: Children that use the app accrued an average of £6.18 — about $8.40 — in pocket money per week.
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