Lamentations on Gamestop (or is it Gamestop Analysts?)

Posted: September 24, 2011 by aegisfang in Game Platforms, Game Research, Games and Marketing, Games and the Media

I recently read an article entitled “Game Over for Gamestop” on a website called SeekingAlpha.com which suggested that Gamestop as a business will collapse at some vaguely defined point in the near future if their business model does not change.  Now I see several flaws in the theory and logic that they are using to make this claim, but let’s begin at the beginning.  Who is Seeking Alpha?

Seeking Alpha is, first and foremost, a blog.  It is not news.  It’s not market research.  It is a financial blog that attempts to guide stock market investors with tips, analysis, and sometimes the support of news.  They are making an argument and drawing a conclusion.  According to their About Seeking Alpha page “Seeking Alpha is the premier website for actionable stock market opinion and analysis, and vibrant, intelligent finance discussion.”  And yes they really did boldface their font just like that to jump out at you so you won’t have any delusions about who they are or what their business mission is.  Now as with every business in the modern competitive world, they have to justify who they are and why we should be reading this blog as opposed to say the online Wall Street Journal.  In answer to this quandary, they respond “Seeking Alpha differs from other finance sites because it focuses on opinion and analysis rather than news, and is primarily written by investors who describe their personal approach to stock picking and portfolio management, rather than by journalists.”  And once again they did feel the need to bold those specific phrases so there would be no confusion.  So putting this all together, Seeking Alpha is a blog written by investors seeking to provide financial advice with regard to the stock market.  They are not journalists, which I believe is a two-fold point.  They are not writing news so if you are looking for stock market news, turn around and run the other way.  Secondly, they are investors not journalists, but specifically not stock market (Wall Street Journal?) journalists.  They are not judging companies based on the news of that company.  Well really they are, but that’s not why they are here.  They are here to take the news and take the history and take the products and take the numbers and take their own investment experience and coalesce all of that information into a coherent opinion of the company specifically with an eye toward consumer advice.  Really this just makes them bad editorial journalists and product reviewers, but I digress as that’s an argument for another time.  Now I apologize for having spent my first 500 words on this website and I’m sure you’re wondering what any of this has to do with games and gaming, but don’t worry I’m getting there.

So now let’s get back to the original point “Game Over for Gamestop”.  The article starts off as a consumer advice article would with an opinion (that the company will collapse in its arbitrary timeline of five years or so) and a rationalization (because this analyst believes the business model is obsolete).  The aforementioned business model seems to be the idea of selling “single purpose handheld videogame players” and “plug-in game cartridges”.  So this brings me to my first question: Is this really how people see Gamestop?  Is Gamestop really built on the Nintendo DS and PSP?  I mean, as a gamer and regular gamestop customer, I can’t possibly see gamestop this way, but is this really how non-gamers see Gamestop?  I think not.  The article suggests a new direction for gaming “The new paradigm is to have a multipurpose device like the iPod Touch.”  This might be a valid statement for casual games, but even casual games still have the wii which is probably the single most successful casual gaming platform from a financial standpoint.  The article goes on to say that the game developers are creating app stores for their handheld devices in order to compete with the Apple App Store and Droid Marketplace.  It uses this information to draw the conclusion that Gamestop will be cut out of those sales and lose the trade-in value from used games because there won’t be any new games to become used games and thus that cycle will end.  This is possibly a valid point but again it has a limited scope.  The author then tries to address the problem of the game console which would seemingly kill his argument.

The author starts his argument on the irrelevance of game consoles by saying “While I am not predicting the extinction of the game console, the battle for control of the television screen is raging.  The key fight is over how content is delivered to the screen”.  He admits that game consoles are a factor, but still manages to dismiss them without really examining them.  He says that Gamestop is going to lose in the end because it doesn’t matter how the content gets to the TV.  What matters is that eventually it will get there without the need of a physical source such as a DVD or game disk.  His theory is “Consumers will download software directly to their gaming device and will play on websites like Zynga and Flonga bypassing GameStop completely and eliminating the market for new games.”   I understand how he came to this theory, but it is not without it’s flaws.

First, he is very much overestimating technology.  The Internet is a wonderful thing, but it is not advanced enough to be capable of doing what he is talking about.  Look at most MMORPGs in the marketplace currently.  How many of them are completely browser based with no files installed on the computer?  How many of those are running next generation graphics and rendering?  How many of them are running anything other than point and click gameplay?  The internet with its current methods of delivery can’t support a constant stream of that level of content.  So now you talk about downloads.

Downloads are great, but the same internet that can’t support that level of content will also take you probably an hour at the bare minimum to download that much content.  And once you have that content, it has to be stored somewhere.  Currently, most DVD players and cable boxes don’t have hard drives.  So now let’s imagine his world: DVDs don’t exist.  They’re obsolete.  Everything is either downloaded or live streamed to the TV.  If everything is downloaded, then either we’ve discovered some brand new source of memory that can store significantly more than anything on the current market or more likely modding game consoles and DVD players to accommodate the added memory needs has become a institutionalized.  If everything has to be stored, that takes an insane amount of memory and I don’t think people are ready to completely embrace the Netflix idea and completely give up personal ownership of games and movies.  By the by, the author says that Gamestop has no way to insert itself into a world where everything is direct download.  I believe in this fictional universe Gamestop would survive by doing three things.  First, they would continue to sell the hardware in the form of consoles because this world still requires hardware to exist.  Secondly, they would become the principle source to mod the consoles and other devices to accommodate extra memory.  Third and finally, they would sell hard drives.  If they don’t have to buy games then they have a huge budget to spend on revamping their stores to base themselves on this new model.

The author suggests that Gamestop contains the bad business attitudes of three different failed companies.  First is Blockbuster which failed with the advent of Netflix.  This analyst says it was due to brick and mortar locations.  Gamestop has brick and mortar locations, but does also have a website and take online orders.  Its locations are brick and mortar because the content is physical and that does not seem to be going anywhere anytime soon.  Next is Borders which closed just this past year as Amazon’s Kindle rose  to power.  In the case of borders, the failure came from selling physical vs. digital content.  Gamestop sells physical content.  While digital content is rising, I don’t think it will bring about Gamestop’s demise just yet.  The difference is that Border’s content was text based which makes it easy to mass produce and easy to convert to digital form at a low cost to the consumer.  Gamestop’s content is not so simple.  It requires either a computer or console that can run the content and it is a lot of content.  There is high level code and graphics and memory involved in Gamestop’s content.  The greatest flaw in this part of the argument and perhaps the greatest threat to Gamestop is the fact that there is no mention of Steam by the Valve Corporation.  Steam, for those not already acquainted, is an online game store developed by the Valve Corporation of Half-Life, Team Fortress 2, and Portal fame.  They basically sell PC versions and associated content and DLC of most major game releases and serve as another marketplace for third party developers to launch their games for PC as opposed to the Xbox Live Marketplace or the Playstation store on the console side or the App store and Droid Marketplace on the smart phone side.  Steam is probably the largest non-MMORPG service to deliver well known, quality, and full length games to the PC.  If anything, was going to bring Gamestop down, it would be Steam because Steam eliminates the need for gamers to go to a store to buy PC games.  However, Gamestop is not built on PC games just as it is not built on the Nintendo DS and PSP.  Gamestop, like any good economic model, is built on a variety of products which include but are not limited to these.  Gamestop can survive losing PC business.  It can survive losing handheld business.  It might even be able to survive both together.  Finally, the author brings up Motricity, a company that provided content to non-smart phones.  The analogy here says that because Gamestop relies on old technology it will eventually be obsolete.  The problem is that, unlike Motricity, there is nothing currently on the market to make it obsolete.  There is nothing in the current generation of gaming technology that directly attacks this generation of gaming consoles.  On top of this,  Nintendo just announced the Wii U which is a new console following the same disk based format as this generation of consoles and it is currently slated for 2012 so I think it is safe to say that Gamestop is safe through its 2014 date of execution.

Gamestop is not a house of cards.  It is not a business waiting to collapse and be bailed out by either the government or another company.  Gamestop is a business tragically misunderstood as the game industry itself is often tragically misunderstood.  If anything, Gamestop’s problem is that it has too little competition.  Gamestop actually probably benefited from the demise of blockbuster and movie rental stores because just before their demise, they had started renting videogames.  There are no little local game stores.  Gamestop is the little local game store now.  Gamestop’s main competition comes from Best Buy and Target and other retail stores that sell many items other than games and don’t even focus on games beyond the massively popular ones.  The moral of the story?  Be careful what you read, folks.  At a glance, Gamestop’s business model may look obsolete.  The numbers may suggest that Gamestop could collapse, but I don’t put my faith in “coulds” and “mights”.  Really this goes for any kind of consumer advice.  Do your own research.  This person took glances at different pieces of information about Gamestop and used that to create a coherent thesis and conclusion.  What this person did not do is research any single piece of information enough to see the flaw or perceptional error it was hiding.

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Comments
  1. Tony Jones says:

    Very interesting. Do you not thnk that online gaming will – as business is currently doing (or so I’m told) move entirely to the cloud without the need for much software to be installed on client hardware? Or is the bandwidth simply not there?

    Best wishes
    Tjay

  2. aegisfang says:

    Personally, I think the bandwidth and the hardware are both not quite there yet and you want to know something else? I’m not quite sure they ever should be. It’s kind of the same discussion as we’re all having in the Compulsory Socializing. Collaborative work can be a great thing, but when you start striving toward Collective Intelligence, you walk a dangerous road. In a less paranoid sense, the bandwidth is just not there and neither is the hardware. Currently, there is no such thing as true internet storage. Anything stored on the internet is really being managed and stored by a server somewhere. Setting this aside, we are still so early in the development of the cloud that nobody can even really agree what it is yet. Apple has the iCloud. Bill Gates talks about cloud computing. Are these all the same? Is the cloud a concept or a construct? Is there a physical place where the Cloud exists or is the Cloud the Holy Grail of bringing all computing and developing and design together to a singular point of puppies and rainbows and no viruses and world-wide connection with all 6 and a half billion people on the planet?

  3. Twitchdoctor says:

    Useful analysis. Seeking Alpha’s article sounds like someone who got completely carried away by buzzwords: “streaming” etc. I thought your suggestions for all the ways that Gamestop could respond to possible threats. It has, of course, largely abandoned the PC market, like most other brick and mortar game retailers (offering them still online, of course). The other thing that these stores have going for them is a thriving second-hand game market, which may become even more important as game costs continue to escalate.

    In response to Tjay’s point, there is, I think, a fly in the ointment with this whole cloud thing and it is bandwidth. Gamers in the US basically live in a paradise of unlimited broadband at the moment. I was reminded rather sharply when in NZ recently (and you know this firsthand!) that most of the gaming world does not live in such luxury. At every place I stayed people paid for a certain bandwidth allotment per month. The overage charges were huge, and while unlimited monthly bandwidth was available it cost a second mortgage. The end of the unlimited bandwidth is not, I suspect, far away in the US. The cellphone companies are already making noises about cutting back on their unlimited data plans to try and deal with the network overload being produced by smart phones. Cable companies and ISPs have already tried to throttle downloads at certain times of the day and for certain content.

    This doesn’t even seem to be on the horizon here for most gamers that I talk to. Which suggests that gamers are not immune to the same level of denial about scare resources that afflicts the US generally with regard to gas, coal, etc.

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