Can GameStop become the digital company it says it will be?
When some look at GameStop's huge brick-and-mortar footprint, they see a 6,000-store dinosaur doomed for extinction in the video game industry's majority-digital future. But the company's leaders have spent the past couple of years planning to make themselves essential in that future world.
Not only do they expect to benefit from the resale of used games in the coming generation of consoles, but they also expect to build their own captive video game audiences through their online game portal, Kongregate, and a PC game streaming service due next summer.
Just how far along is GameStop in its transformation to a company with a significant digital segment? Probably not as far along as you'd think.
Only 3 percent of the $9.473 billion in revenue it generated in fiscal 2010 came from digital sales. Fiscal 2011, which ended January 28, saw an improvement -- though not a huge one -- at 4.7 percent.
The plans for this current fiscal year call for 7.5 percent of its revenue to come from the digital space, and by the end of January 2014, the company says it will double that to approximately 15 percent.
Are these targets achievable? Late in 2011, I'd have said the company had ambitious targets, but ones they could possibly hit. Now that we're halfway through 2012, I'm not so sure.
First, let's look at the trailing twelve-month curve for digital revenue. Until recently, the company didn't come right out and give this data on a quarterly basis, but after combing through all the available transcripts, charts, and filings, I think I have quite good estimates for each of the last 10 quarters, including a console and PC breakdown. Here are the results:
Remember that each bar on this figure represents the revenue from the previous 12 months, so two bars that are side-by-side actually have an overlap of 9 months worth of revenue. The advantage of viewing the data this way is that it smooths out the variation in sales across seasons and big releases.
Here you can see the 57 percent increase from $289 million to $453 million from January 2011 to January 2012 that the company reported at the end of its last fiscal year. But you can also see that growth slowed significantly in the current year, down to 38 percent.
To reach its $675 million target, the company needs as very strong second half of the year. If we cut the estimated digital revenue up into console and PC segments, then it becomes more clear that consoles are the ones lagging behind. Here's that picture.
(The keen observer will note that there are some small discrepancies between the column totals between this graph and the previous one. GameStop has been somewhat more elusive about the segment data, so this involved slightly more estimation on my part.)
In the last full fiscal year, GameStop grew its digital revenue on consoles by over 60 percent, I believe in part because they educated their sales force to offer DLC to consumers and then made it easier to buy DLC, including with trade-in credit. This includes, for example, the company's big role in promoting Activision's Call of Duty Elite subscription service.
However, as noted by Activision itself, there has been a corresponding drop-off in a la carte DLC sales, which means that everyone promoting Call of Duty
DLC, including GameStop, has had fewer sales in the first half of 2012. Moreover, GameStop said in its last earnings call that the sharp drop off in new titles this year (a trend I've noted repeated in my monthly columns on the NPD Group's estimates for the U.S. retail market) has meant fewer options to sell DLC. As a result, the rate of growth in console digital revenue for GameStop in the last 12 months (through July) has been around 33 percent, about half the rate it was back in January. Just in the last quarter it was a paltry 9 percent.
On the other hand, PC digital revenue grew about 50 percent in the last fiscal year and again 50 percent in the past 12 months. Just in the latest quarter, GameStop's PC digital sales grew 76 percent year-over-year. Part of this growth, of course, includes digital sales of Diablo III
, which is a PC-exclusive product, and heading into the latter half of the year it will include digital sales Blizzard's Mists of Pandaria
expansion for World of Warcraft
And that brings me back to the question of whether GameStop can hit its $675 million digital revenue target by the end of January 2013.
In order to hit that target, the company is going to have to be extremely aggressive with its digital sales during the holiday rush this year. If they managed 40 percent growth in the console segment for the last two quarters of its current fiscal year and 60-70 percent growth in PC (again, buoyed by Blizzard's expansion) then the company would end up $30 million to $50 million short of its goal.
Or, speaking more broadly, the company has just over $250 million in digital revenue so far in its 2012 fiscal year. It needs another $425 million in the lats half of the fiscal year to reach its goal, and that would require a 70 percent growth rate in digital for the next five months. They will have to be extremely aggressive to reach that level.
On top of that, there is the FY2014 goal of reaching $1.5 billion in digital revenue. If we plot out the historical trend along with the future goals, the result is the following picture.
Lots can change in a year or even two, and if any company is determined to be a player in the coming digital future, it is GameStop. I know many people are not fans of the company, for a variety of reasons. But if they manage to pull this off, and bend that blue curve up to meet the red points on the graph above, or even just come close, you'll have to admit they just might have a chance.
As the company releases more results and updated targets, I'll revisit these pictures and see where things are going.