Target quietly soft-launched a new concept store in downtown San Francisco a few days ago: The Game Room lets people try out Magic Leap and Oculus Quest headsets, gaming PCs and mobile gaming rigs. It's an obvious play to make Target look hip to San Francisco's tech-savvy clientele, but it's also indicative of bigger industry changes.

Missing from the store are the typical gaming fodder you'd find in your neighborhood Target. No physical discs or accessories for current-generation consoles. Instead, the Game Room is all about the future of gaming, from phones hooked up to Google's cloud gaming service Stadia to a corner that explains Apple Arcade and Google Play Pass to multiple VR/AR areas. You can buy some, but not all, of the items on display. (Target doesn't currently sell the Magic Leap headset, for instance.)

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The store is largely a test of how Target can capitalize on the growing interest in gaming even as the huge amount of money being spent by gamers is increasingly on digital goods and services not sold in stores.

It also shows what a big retailer like Target considers the cool fun new thing right now. Until recently the space housed the Target Open House: a display-room for the Internet of Things, which first opened in 2015, to show off products like smart speakers and connected doorbells. It was meant to be a splashy, experiment space to demonstrate how a smart home actually works, back when that seemed exciting. The Open House closed in early January, and its website has since been promising "something exciting for the new year." The retailer has yet to announce the Game Room publicly and didn't immediately respond to Protocol's request for comment.

Back when Target opened the Open House, it wanted to make sense of IoT products, figure out which ones it could sell to a wider audience, and how it could best present these products in its regular stores. It worked.

Some of the things that were popular at Open House eventually made it into Target's regular stores, including Tile sensors, Petnet smart pet feeders and the Hello sleep tracker. "Target now has a funnel for going to market with IoT products based on data from real shoppers," the Core77 design community explained in 2017, when the Open House won its design and research award.

Now IoT devices have gone mainstream: They don't need to be demonstrated in a concept living room anymore because people understand what the smart home is. That changes the zeitgeist. Smart speakers used to be cool. Now, they're everywhere. AR headsets, on the other hand, are still way ahead of the curve, so transitioning the experimental space in San Francisco to cutting-edge gaming is a way for Target to attempt to stay relevant.

But like the IoT incarnation before it, the store will serve a practical purpose, too: It will hopefully provide data on what consumers actually want out of the future of gaming — a future that represents significant challenges for a brick-and-mortar retailer. Free-to-play games like Fortnite and PUBG have changed how consumers pay for games, and mobile gaming has been growing at a much faster pace than both PC and console gaming. Video game research company Newzoo estimates that 46% of the global gaming revenue in 2019 was for mobile games. As a brick-and-mortar retailer, Target sees next to none of that money.

For console and PC gaming, trends are less than favorable for Target as well. The retailer may still have shelves full of physical discs at its stores, but the money is clearly elsewhere: Gamers spent some $61 billion on digital downloads for PCs and game consoles globally in 2019, according to Newzoo estimates, but only $16.1 billion on physical games.

Even with this move to digital sales, there are still ways for Target to participate. After all, gamers still need consoles, PCs and phones, all of which can be sold at a store. But two trends should be even more concerning for the retailer: the launch of game subscription services like Apple Arcade and cloud gaming services like Google Stadia.

Both rely on recurring billing and digital goods, making it much harder for Target to participate in the revenue stream. Beyond that, Stadia in particular does away with expensive hardware, relying instead on a combination of game controller and Chromecast streaming adapter to bring games to the big screen — products with much smaller margins than your PS4 or Nintendo Switch. And with a recent IHS Markit estimate showing cloud gaming revenues growing to $2.5 billion by 2023, retailers like Target do have to wonder which role they will play in this world.

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With the Game Room, Target now has an opportunity to observe how consumers interact with these services in real life, and whether they'd be spending any money on these services in a store. The concept store had plenty of gift cards for Apple and Google services on display. The data coming out of the store could also be valuable as Target rethinks gaming for its regular retail locations, if only to figure out whether it should focus more on VR, game computers or mobile gaming accessories.

And then there's the PR factor. The Game Room is clearly also meant as marketing, and not just to San Francisco residents who may be jaded about AR and VR by now: Located across from the Moscone Center, the store is bound to attract convention-goers from across the country. And if Target can't drive the future of gaming, it may at least use it to look hip.