This is the first in a three-part expansive interview with HMV UK & Ireland CEO and MD Simon Fox - one of the most influential people in UK retail today.
As the videogames business continues to weather an economic storm, here he discusses the health of the industry, the impact that social networks and other free platforms are having on core gaming habits and his views on the new motion control peripherals from Microsoft and Sony.
Q: HMV's expanded in the past to take on videogames as part of its overall entertainment mix - how important has that segment become now for the business?
Simon Fox: The thing about HMV is that, as a business, it's been around for nearly 90 years - it started in 1921 - and therefore, inevitably, the DNA of the business started in music, and people will have that perception.
But of course, really for the last twenty years, we've been a broad entertainment brand - and games fits absolutely squarely within that. We don't think of ourselves prioritising one product group over another - games is just part of the mix of products that we sell, and while it varies from year to year, it represents about 15 per cent of our business. That makes it a core category.
Q: The core market's boxed product has been the key element of that, and it's hit a peak in the past couple of years - but how do you feel the industry is performing from your perspective?
Simon Fox: Well, as you say, we're playing primarily in the packaged games business and the games market has changed hugely in the past few years. People play games in a whole range of ways, from the App Store through to Facebook - and that's not a market that we participate in or benefit from at this point.
So we are highly dependent on the health of the hardware and console market, and the packaged software market. Over the last three years we've enjoyed two years of spectacular growth really, largely on the back of the Wii - not solely, but they've been two very strong years. That was followed by what's been a much tougher year in the last 12 months or so - the games market is cyclical and the last 12 months have been tough.
Certainly there are new products coming out that give us cause for optimism - we're all very excited about the 3DS from Nintendo. Clearly we don't yet have visibility on a date for that, but the sooner the better. I think that's an unbelievably exciting device that will put product back in our hands, in our stores - we need product to sell, that's what brings people into our stores.
And we need publishers bringing out big titles - the line-up looks pretty encouraging between now and Christmas. But that's what we rely on.
Q: Going back a year, publishers were telling us they wanted to move titles out of the pre-Christmas window, principally to avoid competition with Modern Warfare 2 (rightly or wrongly) - and it looked for a while as if a solid, consistent slate of new releases throughout 2010 would be a good thing for the industry. But Red Dead Redemption aside, there have actually been very few high points. Did that surprise you?
Simon Fox: I think it was disappointing - as you say, when we sat in Q4 last year it looked as if there would be a more even spread of hits throughout the year. Red Dead Redemption stood out as something very special - but it does look like, again, that all the hits are in Q4 this year.
We are a highly seasonal retailer, and it's not just in games - we see the exact same thing in music and DVD, and a week in Christmas is equal to a month at any other time of the year. So Q4 - that is the time when customers are in our stores, and I do understand why publishers would want to make sure that's the time when they have their very best product available... you go fishing when the fish are in the sea, as it were. Our products do make perfect gifts.
Q: For HMV, with the entertainment mix, whether it's music, films or games on the shopping list, you've got that base covered - in fact, it probably covers the entire Christmas list for some people...
Simon Fox: I hope so - with our mix of products we do think we've got everyone's Christmas gift covered - and books with Waterstone's, of course. Christmas is disproportionately important for us, and the success or failure of our year is governed to a huge extent by what happens over Christmas.
As you'd expect it's something we plan day-by-day through those peak period very, very carefully. Last year we were hit by poor weather - snow - in those critical days up to Christmas, and we hope we're not going to get that again.
This Christmas I do think, though, that the games line-up does look strong - with Kinect, Move and the big software titles, it feels like there will be some good product in people's stockings.
Q: A bit like Easter eggs and advent calendars, the pre-Christmas period seems to start a little bit earlier every year... this year we've already had Halo: Reach and PlayStation Move. Last year Modern Warfare 2 and Assassin's Creed 2 were the key sellers - were they enough to sustain the games part of the business?
Simon Fox: Those were the stand-out releases, and they did fantastically well - but no, they weren't sufficient and our games, although we're been growing share, the Chart-Track stats showed games to be in decline last Christmas. So one or two stand-out titles aren't sufficient - you need people to be shopping across the range.
Q: So is it your preference to see a fully-loaded pre-Christmas slate, or for key releases to spread out more across the year, perhaps something every month? Greater consistency might help the industry as a whole.
Simon Fox: I agree with that entirely - I think having something every month, a reason to purchase, a reason to return, to keep playing games, keep them fresh and keep the interest high would be terrific. We don't create content, we are dependent upon it, and in an ideal world that's how we'd like to receive it, but it doesn't necessarily seem to come like that.
Q: The games industry's seen a broadening of platforms - and greater choice for consumers. In the last 18 months you can point to the iPhone and Facebook as figuring much more prominently in people's habits. Do you see them as a threat to the packaged goods market?
Simon Fox: I think it has to be. Our customers only have so much time that they will dedicate to, let's call it entertainment. I only have to look at my kids to see that, while they're excellent multi-taskers, there are only so many things they can do at the same time.
Being on Facebook takes up a certain amount of time; playing games takes up time; and hopefully doing homework and other things takes up time... there is only a certain amount of time available. You could argue, and it is true to some degree, that you're playing on iPhone when you're on the move - and that is completely different.
Q: It's probably more additive.
Simon Fox: I think it's more additive, yes. When you're at home, you've got the console option - but frankly I do think that's where Facebook can come in.
Q: Is it just time, or does it impact purchasing as well? Even if you're only spending £1.49 or £2.39 or whatever the price point is each time, it's still spending money... and is that taking money away from core games purchasing?
Simon Fox: I think that free entertainment is taking money away from paid-for entertainment, and we see that with music, film and games. The fact is that you can get a great deal of entertainment for free - some of that will be illegal, and it is still the case that only one in every 20 music song downloads are legal. So 95 per cent of the digital music market is still illegal.
Q: That's an astonishing statistic - while the games industry is doing what it can to eradicate piracy, it's fortunate that it's not quite that bad...
Simon Fox: Yes - but free entertainment can be legal or illegal - the ad-funded model is another increasingly attractive model. So you'd have to say that in total, the availability of free entertainment is again eroding into any form of paid-for entertainment. If your choice for a weekend is to buy a computer game at £30-40, or spend more time on Facebook, maybe stream a movie and play some apps - I do think people are making those trade-offs, particularly in tougher economic times.
That's not an excuse, I just think that's what an element of our customers are doing.
Q: And there are some very successful companies out there that are focusing on the free-to-play model - I guess the difference now is that while for a long time 'free' tended to imply poor production values, now that's not so much the case.
Simon Fox: I think to some degree, 'free' is now social. Harnessing that social element and combining it into free is quite an attractive option.
Q: You mentioned the Wii market, but another segment that suffered in the past 12-18 months is the music game genre. If we're talking about Facebook and things like that as social entertainment, could that be a direct correlation?
Simon Fox: Well, those were great games when they were around - and I do think we shouldn't always be necessarily looking back and saying it would be great to have that again. The fact is, the publishers took advantage of a moment in time and did some great business with those music games - and HMV did particularly well because of our customer base. We enjoyed that and it was good business for a few years - there is still a market, but it's smaller.
We as retailers just have to understand and adapt - that market exists, it's smaller than it was, and we have to look for the next opportunity, whether that's in 3D gaming, or Gamerbase which is an interesting area that we're growing. Wherever it is we've got to be looking for that next wave.
Q: Could it be Move and Kinect? Do those two platforms have an opportunity to capture the more casual/social audience?
Simon Fox: Well, look, I really hope so. Anything that prolongs the life of what are two great consoles, and bring new games into the market - and obviously the peripherals themselves - is great as far as we're concerned.
We're doing everything to get behind it and we'll have to see how customers react to it.
Q: It's a slightly tricky thing to incorporate onto the shop floor, because it is something that takes up a lot of space - but it's also something that needs demonstrating? How do you give gamers that experience without sacrificing shelf space?
Simon Fox: Well it's not easy - and it's not so much space as the health and safety police, which constrain what one can do in the stores... Obviously we do benefit from having larger stores and a bit more space than some of our competitors - that's an advantage - and we've also got the Gamerbase opportunities to demonstrate.
But it's not straightforward - we can show videos and train our staff to explain, but also I think, frankly, that the manufacturers are doing a pretty good job.
Q: Well, it's in the interests of Sony and Microsoft to get some marketing budget out there, whether it's in shopping malls, airports or wherever else. Obviously it's down to the platform holders to push that.
Simon Fox: Yes, I think anything they can do to generate awareness is good - as you know, we run festivals through our MAMA acquisition, and it was great to see a number of games companies with dance-type products in the festival. There were loads of people joining in - and trialling probably for the first time - some of the dance products that are out there.
So yes - awareness is always an issue with a new platform or console - but again, I think with Facebook and social media, with online video, I don't think there's going to be a huge problem of people not knowing.
Q: PlayStation Move just launched at the end of last week - is there any indication yet as to how that's been going over the weekend?
Simon Fox: Well we're getting the numbers through at the moment, so I'd say so far so good - but it's not much more than 48 hours on, so it's a bit early to tell.
Simon Fox is CEO and MD of HMV UK & Ireland. Interview by Phil Elliott.