Last week we published the first part of the wide-ranging interview with Simon Fox, CEO and MD of HMV UK & Ireland, in which he discussed the state of the retailer's business in 2010, the impact of social media on core gaming habits and his hopes for motion control
Here in part two we tackle the thorny issue of supermarkets and below-cost selling, the future of live events and games with the company's Gamerbase brand and why HMV's Pure card can offer gamers something other than discounts on games.
Q: We're seeing publisher generate strong revenues from DLC these days - but that's not really something retailers can participate in strongly, but it does extend the lifespan of a game. Is that a good thing, or does it erode your pre-owned business?
Simon Fox: Anything that keeps the original sale of the packaged software going is good, as far as we're concerned. I do think people expect to be able to play with their friends, to buy extras - from a retailer point of view it's not a problem.
It's hard for us to participate, as you say - other than selling the gift cards, the points cards. Certainly that's an area that we've probably been a bit slow to get into, because it's a very fruitful area - and we do intend to make sure we're selling the full range of electronic cards for consoles, options and so on that are out there.
That's not the only way, but it's probably the most obvious way for the retailer to participate - for many people they prefer paying cash to a retailer, to get the card and then be able to use it online.
Q: If you're the publisher and you have a revenue stream that's coming direct from the consumer - or at least without having to go via the distributor and retailer, with the cost of manufacturing the cards ... How much enthusiasm has there been from publishers to put those cards into stores?
Simon Fox: I think there's high enthusiasm. You only have to look at iTunes to see how important the card is to them. They won't give their statistics, but it's a surprisingly high proportion of their total sales that come from gift cards - you are making a £10, £20, £50 purchase rather than, for music, a 99 pence purchase.
Q: And if makes music giftable once again - that's going to be key. If you're looking for a present for somebody, it's hard to give them the latest add-on for Red Dead Redemption, for example.
Simon Fox: Exactly - so gift cards, particularly during the key season around Christmas, are very important. I think iTunes is a great example of that.
There's also the HMV Pure card - in time we could make exclusive downloadable content available to our members, which could be a way for publishers to engage.
Q: Communities and networks are everywhere - we have one ourselves, of course, because we want to offer increasing benefits to the industry over time that would be much harder without more cohesive engagement - but as a consumer there's a lot of competition for your sign-ups, whether it's media, publishers, retailers and so on. How do you, as a company, promote the Pure card and market the benefits over and above any other offering?
Simon Fox: Well, we run two very different schemes - we also have the Waterstone's card as well. But if I talk about the HMV one, we ask a small fee for the card - £3 - and that is because we want people to make this conscious decision to take the card. It's too easy for people just to take one, but then not really be engaged.
Q: You probably already have a Subway card, a Costa card...
Simon Fox: It's all worthless, I think - but if you just charge a small amount of money there's a conscious decision that I'll keep the card in my wallet. What we've tried to do with Pure, this isn't about points equals discount, which is frankly a very simple calculation.
This is points equals money-can't-buy rewards - so if you've got a Pure card and you have enough points you can go to film premieres, you can have VIP access to festivals, you can meet and greet an artist of your choice, you can spend a day at a games studio...
What we're really trying to do with our card is to give back to customers something they wouldn't really be able to get from anywhere else. It's because of our strong relationships with music, film and games studios that we can do that.
Our strapline is "Get Closer" - and the Pure card is a way for people to get closer to the content that they love. We think it's different, and a year on we've got about 1.5 million members - which is great - but what we have to do is also make sure we use the information we now have about our customers in a way that allows us to drive their loyalty back to us.
Clearly what we want is more of their entertainment spend.
Q: Do publishers like the opportunity to get involved with that community? Are you able to use it as a marketing channel as well?
Simon Fox: We are able to, and I'd say we're still just at the beginning of the journey on that. We do use it, and probably in the early days we've used it more with music and film partners. So it's a big opportunity.
Q: You have the Gamerbase locations - the perception seems to be in the main that e-sports is the 'live gaming solution' - so how are you looking to develop that over time?
Simon Fox: We think there's a real market for it, and we've got the five centres now. Occupancy in those centres is very encouraging. I think what it gives games the opportunity to do, obviously, is firstly to try games they don't own; to play games on a higher quality of equipment than they might own at home - because it is fantastic state-of-the-art kit that we have; we obviously have the competitive environment and the prizes; and the social environment.
Frankly, it allows people - if they want to - to nip out in their lunch hour to play games that they might otherwise be unable to do. And in some locations we're attracting tourists and other people.
So I'm very encouraged by Gamerbase - it's still relatively small within our estate, but it's something we're committed to rolling out. We have put Gamerbase pods, which are smaller versions, into 100 stores now, so what we're doing there - and this isn't a pay-to-play pod, it's essentially a free play - is bringing interactivity into the stores.
As a retailer we feel we've got to make stores interesting - they've got to be a place where people want to come and spend time. Gamerbase is providing those two functions. One, it's a pay-to-play environment and the other is the demonstration capability.
Q: As I see it there are two main issues you're battling there, that the live environment can be a response to. There's the increasing impact of digital distribution, and the less personal interactions of the supermarkets. That human element will surely become more and more important to you over time, and will allow you to differentiate from the likes of Steam on the PC, or in the supermarkets where games are 'just another aisle'?
Simon Fox: What's always differentiated us, firstly, is that we are specialist stores. We have specialist staff, we try and make it a fun environment, and actually we think that having other product around does make it even more interesting. Gamers also like films, and music, and clothing, and everything else we sell.
As a brand we're also moving more generally into live, so we now own music venues and festivals, and we're growing a ticketing business. It's clear that in a digital age, where people generally at home consume digital product - that might be music, might be games - they have an equal passion for live experiences. In the case of music it's obvious, it's the live gig or festival, and it's interesting in the music market that live is now bigger than recorded.
Q: When artists sign to events companies rather than record labels, that signals a shift.
Simon Fox: The model is completely changing - an artist is now making almost all of their money from live performance, rather than recorded performance, so the HMV brand is trying to follow that value chain by itself moving into live.
Gamerbase fits very nicely into that, because we do think there is a market - we don't know how big it is, but it's a growing market - for people to want to enjoy games in a fun, competitive, social environment. The opportunity to have big events is a really interesting one, because people are innately competitive and social, so if we can provide that service profitably, that will be entirely consistent with the way the company has been travelling.
Q: Things like the Eurogamer Expo and Gamescom - they're big, one-off public events.
Simon Fox: They're like music festivals - short bursts, and it's not clear if the market is ready for something that's all year round or whether it is these big, short bursts of people coming together.
Q: So we can expect to see some experimentation from HMV in that area?
Simon Fox: Yes, definitely. It's an area we're really interested in, and I think we've now got the fixed venues - places like the Hammersmith Apollo - we've got the festivals, and we've got the Gamerbase units. We have the infrastructure to be able to put on big events, and if we can find a way of doing it, we'd love to. We just have to find the right formula.
Q: Big game launches seem to be increasingly popular - there's an expectation of a midnight launch for things like Halo, Call of Duty, World of Warcraft...
Simon Fox: Definitely - and we've also been amazed at just how much interest there is in meeting the developers. You can understand when we have a public appearance from Paul McCartney why the place is rammed - but equally we've had Hideo Kojima, Will Wright, and there's been great interest in meeting them.
Q: How have supermarkets changed the nature of selling videogames in the past couple of years?
Simon Fox: I think that particularly, below-cost retailing - which supermarkets actively engage in - for new releases is extremely damaging for the industry. Firstly it creates massive price deflation, and customers think that if the absolute newest and best product is on sale at £25, why should I pay any more for a less high profile or older product? It immediately puts massive deflation on to the market.
And secondly, what it will ultimately do - as it's done in other sectors, such as off license - is destroy the High Street specialists. Because they can afford to sell below cost in certain categories, in order to kill of High Street competition, and then either they lose interest in the category altogether - which, I think in music you can probably see that the storm is somewhat passing. But the risk is that they come in, destroy prices and then they lose interest altogether.
Q: So ultimately their only competition is other supermarkets?
Simon Fox: They start competing with each other - which they're doing anyway - and they try to outdo each other with their low cost redemptions. It's ultimately damaging for the industry, and frankly damaging for the High Streets of the country.
Q: There's an argument to suggest that the industry benefits from a personal touch point with consumers - that the High Street specialists provide. Looking ahead to next year's PEGI introduction, for example, there's a lot of education work there the industry absolutely has to have done, that it can't do effectively through online portals or supermarket shelves. To that end, should publishers be supporting retail differently? Who needs to act to prevent High Street specialists from being killed off?
Simon Fox: Well, if you look at other countries, why is the French High Street so much stronger than the British High Street? One of the reasons is that French supermarkets aren't allowed to sell below cost - so one answer is legislation, but that's highly unlikely to happen in this market... But I do believe that below-cost selling is very damaging, and I think those countries that have legislated actually have a more balanced society and environment.
Evidently, the other thing is that publishers have to recognise that different retailers do have different roles to play, do have different cost structures, do need to make profit from entertainment product - we simply can't afford to sell entertainment product at a loss, because that's all we do - and therefore require support in other ways.
Q: It seems that from a purely short term view, you're getting your trade price from supermarkets, and generally-speaking they're not participating in the pre-owned market. From that perspective alone it doesn't seem to encourage publishers to lend greater support to the High Street. Look more at the longer term health of the industry, though, and that maybe changes.
Simon Fox: I agree - this is all about today's short term decisions versus taking a longer term view. I fully understand why publishers would sell to supermarkets in great quantities - it's completely understandable. The question really is how the publishers will feel in two or three years' time if their only route to market is either digitally - direct - or via supermarkets.
Supermarkets will evidently, as soon as they have that power, use it - as they have done in every other industry.
Q: In a slightly difficult economic environment the short term view tends to be the easier path - a bit like the original IP versus sequels argument. Is that a good excuse, or am I being too kind?
Simon Fox: Look, I think one has to ask why supermarkets are shifting large quantities, and is the answer anything other than their price points. I don't think it is - I think they're shifting large quantities because they're selling below cost.
The question goes back to: For how long will the supermarkets be prepared to do that? They won't be prepared to do it for very long.
Q: So far we've only seen the below-cost selling on a couple of key titles - FIFA and Call of Duty spring to mind. I personally know several people that cancelled their pre-orders at High Street stores in order to pick up a copy in a supermarket.
Simon Fox: Yes - it's something we have to be very conscious of.
Simon Fox is CEO and MD of HMV UK & Ireland. Interview by Phil Elliott.