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E3 is over and investors are hammering GAME, GameStop

After an E3 filled with great games, you might think retailers could get a little boost, but that's not the case

After a week of press conference showings, demos, and 15,000 ticketed consumers roaming the halls of the Los Angeles Convention Center to go hands-on with all the great upcoming games, you might assume that major video game retailers could benefit. But in 2017, when the digital share of game sales is continually increasing, it wasn't to be.

In fact, as was pointed out by The Motley Fool, UK games retailer GAME Digital has seen its shares plummet 90% since 2014. At 32p, GAME shares are at their lowest in five years. "Just why anyone would consider investing in the high street video game retailer in 2017 is beyond me," wrote The Motley Fool's Paul Summers.

"With the popularity of online gaming making traditional consoles look increasingly outdated, I believe GAME - which struggles to compete on price with online behemoths such as Amazon anyway - is a company in terminal decline," he continued. "Aside from my concerns about where exactly it hopes to find and retain new customers, a quick look into Game's financials is more than enough to put me off the company. Operating margins and returns on capital have fallen dramatically in recent years. Free cashflow? Don't even go there."

It's worth noting that traditional consoles are actually selling quite well this generation, despite what Mr. Summers says. But hardware sales alone are not enough to sustain major games retailers. Across the pond in the US, we can see similar struggles from GameStop, which today closed at $20.59, its lowest since August 2012. GameStop has branched out into other categories to diversify its business, like selling phones and publishing titles through its GameTrust label, but selling games at retail is still a hard business to be in now. Digital game sales represent almost three-quarters of the entire games market in the US, according to the ESA's Essential Facts report. Putting a disc in a box on a shelf is just not easy to do in that kind of environment.

Moreover, the message that investors seemed to have gotten this week during E3 is that people want to buy fewer games. It's all about extending the tail on games and leveraging games-as-a-service -- and that's bad for retail.

Wedbush Securities financial analyst Michael Pachter, explained to GamesIndustry.biz: "I think most investors heard a consistent theme from the publishers about increasing digital mix. The difference this time is that instead of full game downloads, the focus was on engagement and microtransactions.

"Every publisher made a huge deal out of services like Ultimate Team and GTA Online, where people buy a game and play it endlessly with growing digital sales from in-game purchases. The message was that greater engagement equals fewer unit sales, physical or digital, and that's what is weighing on these stocks."

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Latest comments (8)

Klaus Preisinger Freelance Writing 3 months ago
All the stores just selling music: gone in 2017.
All the stores just selling or renting videos: gone in 2017.
All the stores just selling comics: one remains.
All the stores just selling books: severely decimated.

Why should video game stores be better off than any other type of store specializing in one medium? Sure assign half the blame to an industry which does not bother about stores, but the other half belongs to stores not caring about anything more than one type of customer.
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Richard Browne Partner & Head of Interactive, Many Rivers Productions3 months ago
The irony that long tails and games as a service was largely pushed by the likes of Gamestop's reselling our work for their profit is not lost on me!
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Christopher Dring Publisher, GamesIndustry.biz3 months ago
Music retailers do still exist in the UK.

The growth of digital is clearly a trend worth paying attention to, but the physical market remains significant. In the UK alone, it is a £2bn business across software, hardware and merchandise. Digital gaining a greater market share does not accurately showcase the revenue still coming from the physical space.

Of course, that number is likely to get smaller, and therefore investing in business that are likely to get smaller is not recommended.

I would add that unlike music, film and comics, video games are decidedly more complex. With multiple platforms, control mechanisms, digital services and so on. There is definitely an educational role for a physical video game outlets to play in the games space. The challenge is in how to monetise that. GAME's strategy is to turn their stores into experiences and marketing vehicles, whereas GameStop is securing its own content to sell. Both are interesting strategies that have merit, but they need to start pulling in significant revenue to offset the declines in the core retail space.

I think following the delay to Red Dead Redemption 2, investors were looking to E3 for signs of something big to land. There were a few new titles, notably from Bethesda, but nothing noteworthy enough to give investors confidence. That, coupled with the relatively high price of Xbox One X, will have some investors concerned for Q4.

The performance of Nintendo Switch may well prove crucial in the coming months for retailers. Next year's more spread out release slate is a positive for 2018, assuming certain retailers get that far.
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Klaus Preisinger Freelance Writing 3 months ago
The issue is not any individual game. Retailers do not care which game is released and which one is delayed, as long as 99% of people have to go through retail as their channel of getting a product. But that is no longer the case, as people either switch to digital distribution, or physical distributors, such as Amazon. A good portion of people no longer get their stuff in retail stores and as a result, a number of stores will vanish.

Meanwhile the PR money is spent on bigger online presences, not on location demo stations. Reseller is a dirty word these days, whose function and financial gain is called into question by both customers and manufacturers.
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Christopher Dring Publisher, GamesIndustry.biz3 months ago
But both GAME and GameStop are online retailers, too. And trade marketing budgets remain significant, particularly with the likes of GAME expanding into events in a significant way (which ties into traditional marketing budgets).

Both businesses are also profitable (GAME even says only one of its stores is loss-making), and they have money in the bank to invest - which they have been. GAME supplies hosting services to online games (including Titanfall 2), GameStop owns ThinkGeek now and publishes its own games.

Of course, these new investment areas need to grow significantly to offset the decline in the physical games market. We have already seen a big reduction in the number of specialist stores selling games over the previous generation.

The problem for these retailers is that investors want to start seeing some growth. And that's going to prove challenging.
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Jesus Ángel Voice overs http://www.locutortv.es, Escena3 months ago
Yes, Music retailers do still exist in the Spain.

Edited 1 times. Last edit by a moderator on 18th June 2017 7:23pm

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Craig Page El Presidente, Awesome Enterprises3 months ago
It's a hassle to go to a store (or worse, a mall), search for the game, maybe find it? Line up to pay for it, then drive or walk home. Amazon's buying process is infinitely more efficient, you find the game, buy it, and it shows up at your house the next day.
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Klaus Preisinger Freelance Writing 3 months ago
@Craig
add it to the list of things retail stores are no longer needed for: discovery of games which interest you, both new and old.

The last thing GameStop does more efficiently than others is used games; for how long?
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