Packaged goods retailer GameStop is at a crossroads, as an increasing amount of video game content is going online, circumventing the company's bread-and-butter new and used boxed game business.
Newly-appointed GameStop CEO Paul Raines is charged with the difficult task of navigating his company through the transition, and he's looking at other "multi-channel" businesses that are succeeding, namely Netflix.
"We are getting a good picture of how to balance digital and physical content," he told investment site The Street. "We have studied Netflix a lot, and most of their users still absorb physical content rather than streaming. Now we are looking to see how gaming compares."
Netflix allows users to rent movies by mail, and complements that service by providing subscribers with an online streaming video library, viewable from a PC browser or from current generation video game consoles.
The vast majority of GameStop's sales come from selling new and used hardware and boxed video games. For the fiscal year ended January 30, the company reported $9.9 billion in sales, a modest rise of 3 percent. That's compared to total U.S. video game sales in 2009 of $19.66 billion, which represented a drop of 8 percent.
Just a few years ago, GameStop downplayed the threat digital venues would have on its packaged goods business, but the retailer now openly acknowledges that a shift is occurring. The company is continuing to evolve its website from an e-commerce destination to a place where users can actually play and buy digital games. In-store, GameStop sells prepaid online time cards, and points cards that can be used on Xbox Live, PlayStation Network and Nintendo's online store. The firm is also investing in in-store kiosks where customers can purchase digital content.
But while major digital sales may be on the horizon, they're still likely a ways off, Raines said. "The technology is clear -- what's not clear is the chronology. ... We are focusing on consumer acceptance. The world won't be all digital tomorrow, even though that's what people are claiming. In this business, users still want physical content."
Interesting that they cite Netflix. As a Netflix subscriber, the only time I still order a DVD in the mail is when it's not available for instant play. If their entire catalog were available, I would probably never use snail mail.
In a figurative future world filled with people like me, Netflix's business model holds up. GameStop is another animal entirely. Unless this kind of talk accompanies a major business model change in the future, it's just that. Talk.
Nate makes a great point. Netflix is a subscription service and physical media is rented and not owned. Not sure how Gamestop sees Netflix as a model since Netflix probably pays royalties to the content owners. Used games sales on the other hand take away potential profit from content holders.
Netflix buys studio DVDs at an inflated price for their snail mail program, but for their instant streaming, they buy the right to distribute a film digitally for a period of time. When that time expires, the film is no longer available for viewing instantly. Most studios dread this because they do not get a per viewing royalty, but since Netflix is one of their biggest buyers of DVDs and Blu-ray films, most studios try to keep the folks at Netflix happy by throwing older library titles into streaming agreements as part of an overall package. Video games are quite different. Gamestop's doesn't buy enough new product from publishers to make this a sort of arrangement a reality. They also aren't working in an industry where retail sales have drastically slumped in the last five years. If Gamestop's wants to transition to a digital presence like Netflix, they have to lower overhead by consolidating (and ultimately eliminating) retail space. They also might want to consider a buyout/merger with a company like Steam while they still have the capital to afford such a transaction.
Gamestop is going to have to add something to the value-added chain for their download model to have any success.
In a figurative future world filled with people like me, Netflix's business model holds up. GameStop is another animal entirely. Unless this kind of talk accompanies a major business model change in the future, it's just that. Talk.
Netflix like all other rental services, purchase their films at higher than retail costs. After that, they do not pay anything else to the studios.