GamesBeat

Analyst: GameStop store closures could hurt industry sales

Transitions like the one the video game industry is experiencing — the shift from physical media to digital downloads and streaming — happen slowly. But its effects can send waves through an entire industry.

By end of this year, GameStop will have closed 200 stores, all of which lose money. So far this year, the giant video game retailer already shuttered 156 stores. It plans to close the additional 44 stores by the end of January.

But GameStop is still opening new locations. In 2012, 123 new GameStops opened around the world.

“Net for the year, we expect our total square footage to be down 1 percent compared to where we began the year,” GameStop spokesperson Wendy Dominguez told GamesBeat. “The strategy over the past two years has been to slow store growth during the transition period to a new console cycle.”

That reduction could have wider repercussions for the industry. While the retail side slowly shrivels, many dedicated gamers still get their software from GameStop, the largest dedicated video game retailer in the world. (GameStop is to video games what Barnes & Noble is to books.)

“Although the industry had another difficult quarter, we continue to outperform the rest of the market, as our competitors saw 24 percent software declines, while we have only had a 12 percent software decline, increasing our [third quarter] software market share to 44 percent in the U.S.,” said GameStop president Tony Bartel in the company’s conference call to investors Thursday.

“I think store closures will affect retail sales negatively and ultimately hardware sales,” said Roger Kay, an analyst with Endpoint Technologies Associates. “Consoles and proprietary games have already suffered from the incursion of freeware, mobile platforms, and even PC gaming.”

And now the sector’s biggest retailer is turtling to weather an uncertain transition from Xbox 360, PlayStation 3, and Wii to Wii U and whatever Microsoft and Sony eventually do. GameStop is still most consumer’s first choice for purchasing new gaming hardware. We asked another analyst if he thought these closures could hurt the Wii U’s (or any other new console’s) launch.

“I doubt that the closures will have a significant impact on Wii U, Vita, or next-generation console sales,” IDC research manager for games Lewis Ward told GamesBeat. “Besides online ordering, a fairly wide array of chains will continue to offer these bundles.”

GameStop also already has a Wii U waiting list of 500,000 people. The gamers who decide to spend their money on new hardware will figure out a way to get it, even if their nearest GameStop closes.

Another analyst disagrees that GameStop losing 1 percent of stores is an issue for the industry at all.

“[The closures are] in line with what GameStop previously said — closing net 1 percent of stores — very small in the grand scheme of things,” R.W. Baird analyst Colin Sebastian told GamesBeat. “[GameStop] has thousands of stores and are still opening new ones.”

GameStop is shrinking its global footprint to become more efficient while we all wait for Microsoft and Sony to figure out the Xbox 720 and PlayStation 4. The subtext, however, is that things are changing, and GameStop can’t afford even just 3 percent of its stores in the red until it has a better grasp of how it will produce revenue in the future. That means digital sales and subscription services.

“I see digital as a long-term opportunity for GameStop,” said Sebastian. “If they can be an aggregator of online content, that could help transition the company away from its dependence on retail stores.”

In the third quarter, GameStop grew its digital revenues by 32 percent compared to 2011. That includes a 20 percent increase in sales of console games on GameStop.com and a 55 percent increase of PC games (primarily digital downloads) through ImpulseDrive.com.

But those sales are likely not going to match something like Steam, and online-retail is much more competitive, with Amazon throwing its weight around to entice gamers with trade-in and gift-card deals.

Sometime in 2013, GameStop plans to finally debut its on Netflix-like game-streaming service, although it has retreated from a previous plan to offer the service on consoles and will only release it on PCs and tablet-like devices, which GameStop has already been selling and accepting trade-ins for.

That’s been a tough market that OnLive, which offers a similar solution, still hasn’t quite cracked. Until GameStop reveals more about its plans and what its streaming service can do, it’s profit potential is unclear.

GameStop is a huge player in this market, but that market is shifting. And many people have big doubts that this corporation built on brick-and-mortar physical sales can find equivalent success in a world dominated by digital sales.


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