Will Digital Distribution Destroy Gamestop?

by Jim DykstraImage

The retail game corporation Gamestop owns and operates over 6,500 stores in North America and Europe, and competes directly with Best Buy and Wal-Mart for its share of video game sales in the United States.

Unlike the latter corporations, however, the majority of Gamestop’s sales come from used products, rather than new. In fact, 46.8% of their sales in 2010 were from used games alone, compared to 27.8% for new games and hardware. The rest of sales were listed as “other”, which includes used game accessories and movies.

The difference in new and used video game sales is the profit margin. According to Andy Withers, a Senior Game Advisor at Gamestop in Conyers, Georgia, Gamestop only makes “around eight to ten dollars for a new game sale,” while they make “anywhere from five to thirty dollars on a used game sale.” If Gamestop sells a new game, the majority of the profit goes to the video-game developers. However, if they’re used, all the profit goes to Gamestop. In the words of Chris Reincher, Senior Game Advisor at a Valdosta, GA Gamestop: “Have you ever heard of flipping a house? That’s how Gamestop makes its money.” (Warning: Language)

This has major implications for game developers, who are seeing their critical first-week sales cut into by used-game sales. “Flipping” games at Gamestop is as easy as buying a game the day it comes out, and returning it for store credit.

To compensate, they have steadily increased prices of new games, and have resorted to digital distribution methods as a way of regaining lost business.

These methods can generally be divided into two categories, additional downloadable content, or “DLC”, and direct sales of full games by way of the internet.

DLC has found a happy medium, being sold both digitally and in retail venues, including Gamestop. Direct digital sales, though, effectively eliminate the need for a retailer, and could place Gamestop at a precarious financial crossroads down the road.

It seems the corporation is prepared to adapt, however. “I don’t believe Gamestop is going to become another Blockbuster.” Withers said.  “They are already working on selling products outside of games; iPods, iPhones, tablets… some stores even have T.V.’s. I know they’re also working on a program for the computer like Steam, and we already sell DLC. We’ll be alright.”

This program, if successful, will blur the line between digital and retail distribution. “Steam has made me a believer of online distribution… Valve (creator of Steam) has made what iTunes is for the music industry possible for the gaming industry.” Reincher said.

With Gamestop’s place in the videogame industry seemingly stable, for now, the question becomes, ‘Digital or Physical?’

“I personally like digital downloads,” Withers said. “It’s convenient for the consumer, and also cheaper for the game developer to make.”

Adam Hall, an avid gamer and owner of all three current generation systems, has a more old school perspective: “I grew up buying a video game at a store. I expect a manual inside of a box. I like the artwork, and the ability to trade a game in at a later date. With digital, you get none of that, and are stuck with them forever.”

Where do you stand?

Gamestop Rant Pt. 2  (Warning: Language Continues)

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