Games retail behemoth GameStop stirred the waters this week when an investor note from R.W. Baird analyst Colin Sebastian revealed the company was considering funding game development in trade for exclusive content through its retail ecosystem. The presumption by the company’s critics: giant corporate retailers shouldn’t muck about in artistic mediums.
GameStop has nearly 6,500 stores worldwide, making it one of the largest retailers on the planet by any measure. And in recent years, as digital sales have grown, it’s been a target for critics who view its brick-and-mortar buy-sell model as terminal at some point. You can’t trade in content you don’t physically own, after all, and at some point (though some of this is up in the air, legally speaking) all we’re likely to “own” are 1’s and 0’s stored on a platter or integrated circuit.
I spoke with GameStop CEO Paul Raines by phone on Tuesday. Here’s what he told me about the company’s plans to tinker with game development and what he calls “GameStop 3.0.”
I used to work for you guys, you know, long, long ago.
I heard that.
Back when the company was Neostar, and much smaller.
Oh man, you go way back. You know who was on the board of the company at that time? A little trivia, Mitt Romney was on the board of Neostar back then, believe it or not.
Yeah, our founders, Dan DeMatteo and Dick Fontaine, you probably know who they are, when they first came to Dallas, Len Riggio bought Neostar out of bankruptcy and it was a Bain Capital company. And apparently Mitt was on the board.
I didn’t know that. I was at Grapevine for the manager’s conference in 1996, the year they were going through all that, you know, chapter 11, then worries about chapter 7, and then Len stepping in to pick up what was left.
The history of the company, a lot of people don’t know it, but people say to us today, you’re moving so fast on all of these changes, and I go “I think the company’s history is kind of filled with rapid change. It’s a little bit in our DNA.”
You’ve done a lot of interesting things over the years. I happen to be in the state, right down the street in fact, from the company you purchased Impulse from just a few years ago — Brad Wardell and Stardock.
Tell him we said hello. It was a great acquisition, we picked up some great team members and technology. It’s funny though, at the time, we perceived there to be these barriers to entry into a series of different kinds of gaming technologies. But once we acquired some of that technology, we found a lot of people interested in distributing with us. That goes back to GameStop Digital Ventures, $100 million we earmarked for marketing and advertising back in probably 2009-ish, which was when we started that process.
Speaking of, I remember the company back in 1996 bringing in these arcade-style demo units that were essentially skiing games, but that you were supposed to control with brainwaves by putting something on your head and “thinking” left or right to make the onscreen skier go in the corresponding direction. It was bizarre.
[Laughs] Wow, no, I missed that. Well, we’re not afraid to try stuff, that’s for sure.
Can you comment on this story making the rounds by way of investment company R.W. Baird and analyst Colin Sebastian about GameStop getting involved in game development early in the process for the sake of creating GameStop-exclusive content?
I think there’s a few things we could talk about, and we’re always in conversations with publishers so we can’t share everything. But I guess the first point I would make is that we’ve been in the exclusive content business for a while, if you consider that we’re always seeking exclusive gameplay items, levels, weapons and so forth.
Remember Call of Duty: World at War, where we had that, I think it was a level 20 M1 Garand rifle, and you would get that item if you bought the game at GameStop? If you remember that year, we drove 90 percent of the growth of that title year-over-year. A lot of it had to do with that exclusive. And so publishers have always participated with us on exclusives whether that be different levels, skins for characters and so forth. I would say exclusivity is attractive to us and also to publishers. That’s always been a little bit of that in the DNA.
The other point I would make, is that through our Kongregate digital casual games platform, we’ve been publishing mobile games for about a year-and-a-half. We’ve been fairly successful, we have probably eight to 10 games on the iOS App Store and Google Play store today. So we’re in the publishing business on the mobile side, and you’ll see us be aggressive on that side going forward.
As far as getting into development, we’re an organization that’s all about gaming, and our publishers of course see the kinds of advantages we bring with PowerUp Rewards [GameStop’s purchase-related customer rewards program], having 34 million members around the world, and our store footprint and our online presence and so forth. Our market share continues to grow, and that’s because gamers prefer to buy from GameStop for a lot of different reasons. When you think about the business of gaming and the cost of developing games, we think there’s an opportunity to put capital at risk with publishers and developers in exchange for exclusive content that would be distributed through our online platforms, in stores, our download business, et cetera.
So you can imagine that’s a long lead time process, and our discussions that we’ve been having and will continue to have revolve around how we could participate in some of the activity around funding or putting games at risk. It’s very early on, but I do foresee a world where we can help facilitate great content. The upside for developers will be much stronger guarantees around distribution and audience with our loyalty program and so forth.
But there’s been backlash against the notion of you — of a giant corporate retailer — getting involved in the development process. What would you tell someone who thinks getting involved in the creative process isn’t something a company like GameStop ought to be doing?
I think it’s pretty clear to me, and that’s that you won’t see us involved in the creative process. That’s not something we do well. We love to play games, and unlike our competitors all we do is gaming. But we will not be involved in the artistic or creative process. That’s not really our domain.
What we do think though is that capital for this industry is always challenging, and has been through the decline of the console cycle. So we’ve made strategic investments in ImpulseDriven.com and Kongregate.com and BuyMyTronics.com. And with Kongregate we’re already funding developers.
So all we’re talking about is extending that capital and distribution skill-set into the console publishing and development space. But I don’t think that involves any creative controls or influence at all. I think we’d be foolish to tell developers how to develop games or publishers how to bring product to market. That’s what they do extremely well. What we’ll do well is put capital at risk and help distribute and connect with PowerUp Rewards customers. That’s really the extent of what we’re talking about. I think the day you see us in the creative side is when you can tell me we’ve officially lost our minds.
When we talk to developers in the mobile space, one of the biggest challenges for the industry, and I would say this is probably true of console as well, is connecting with customers. You’ve got this huge barrier of distribution and publishing and how do you get to the people who want to play your games. We play a lot of indie games here, trying to find interesting ideas and concepts, and I see some great games that never get published or distributed because of the cost associated with it. So we kind of feel like it’s a little bit of an emancipation of the development community if we can find a way to connect them directly with customers.
NPD Group reported in May that roughly half of $1.5 billion spent on games was for digital content. There’s some question about the accuracy of digital sales estimates, of course, but what’s your reaction to the narrative that this shift toward digital distribution threatens GameStop’s longevity?
As far as NPD data, the NPD physical data is point-of-sales based, it’s real sales data coming from resellers. Digital data, as I understand it, is survey panel data, so I’d be cautious with those estimates.
But having said that, there’s no question there’s a lot of digital gaming out there. In fact we sold last year $730 million dollars or so of digital content gaming, PC and console. We understand digital gaming and think it’s good for GameStop. Our business in the digital side is mostly console, and most of the console business is DLC. We just had a huge launch of Watch Dogs, and about 30 percent of all copies sold had digital content attached to them. So we like the growth of digital.
I also think interesting numbers are floating around out there. I don’t know if you saw recently, but Microsoft revealed that 40 percent of their digital sales happen at retail. And of course we’re going to be the biggest player at retail, and we believe our digital market share is pretty close to our physical market share. There’s not great data around that yet, but we’re clearly playing a big role in digital sales. We create an entertainment destination for consumers to come buy content. When we do a midnight launch, people come to buy digital content to go with their physical content, and it’s easy to find the digital content in our stores.
Second, you have trade credits. The GameStop buy-sell trade model funds the sale of new product. That new product includes digital content. Last year, there were over $1 billion of trade credits given to consumers at GameStop. 70% of the time those trade credits go to a new sale, and a lot of that is digital.
Third, we have PowerUp Rewards. People want their PowerUp Rewards points, they want that on their account, and to be able to use that account to buy cool stuff. So all of those things — including Kongregate and our PC digital downloads business, which is doing very well — make us pretty bullish about digital sales.
What about PC game sales? There was this moment when you picked up Impulse in 2011, that I think a lot of people thought you were going to square off with Valve and Steam. What happened?
There was a day here, years ago, where we saw ourselves as on opposite sides of the sale of PC content. If we couldn’t sell it, we were competing with people who were selling downloads.
But the new GameStop is more of a collaborative approach. So we’ve been in a relationship with Steam, we’ve been selling Steam digital currency probably for the last two-and-a-half years, and we’ve been very successful. In fact I think we sell Steam currency in all 15 countries that we’re in.
We of course sell our own downloads on our website, but we also carry EA’s Origin games as well as Ubisoft’s PC downloads. So I would say we changed our philosophy a couple years ago from trying to compete with PC developers and publishers to being more of a distributor and collaborator, you know, how can we make your PC business bigger, how can we leverage PowerUp Rewards and trade credits to grow your business with us. So we’re very bullish on PC.
Back in April you unveiled what you called GameStop 3.0, which seems pretty clearly like a product leveraging move given industry inevitabilities, even if you assume a certain contingent of consumers are going to buy digital at retail. And since those other products – – AT&T, Apple and so forth — don’t involve games, is there a point at which you might have to stop calling yourself GameStop?
I would leave the name question for the last priority, because our name is iconic with people and I don’t know that we’ll ever change that. But certainly with GameStop 3.0, we’re describing old GameStop through about 2007 as GameStop 1.0, and that’s that physical console business you’re familiar with. GameStop 2.0 I think was when we were diversifying our gaming concepts, so the acquisition of Impulse, the acquisition of Kongregate, Jolt Gaming, BuyMyTronics, all those things were efforts at expanding into digital gaming and other forms of gaming. With $730 million of revenue last year I think we’ve been successful with that.
There are some things we could have done better. You know, our Spawn Labs investment on streaming, we announced that we were closing that. We still own the patents, but we just couldn’t find a consumer model that worked. But if and when streaming becomes interesting like on PlayStation Now, we will sell that and distribute it.
GameStop 3.0 is when we looked around starting about a year ago and said “Okay, we’re going to be strong in gaming for a long time, the console cycle is going to recover and grow, what other areas do we have skills for?” And as we looked at the world, we said “We’re pretty good on real estate. We’re pretty good on human talent. We have this incredible buy-sell trade business that works in gaming, and we’ve discovered it works in phones and tablets, and probably other wearable devices. We have this PowerUp Rewards program that’s 34 million members strong, and are there other products these customers might want from us? And then we’re a very low debt, strong balance sheet.”
So as we looked around, we saw that the Apple ecosystem was very interesting, and we went to Apple and had a conversation around how could support their efforts to build distribution. We discovered there aren’t a lot of Apple dealers in rural markets. Apple has stores in big cities, but nothing, say, in Lubbock, Texas. All there were were big boxes. So we acquired SimplyMac, and we’re building out SimplyMac as a secondary market Apple dealer with full support from Apple.
And then we continued looking and got into the wireless space. The wireless space has both postpaid and prepaid models. We approached AT&T and were fortunate to sign an exclusive agreement with AT&T. So we, today, are the third biggest dealer of AT&T stores in the U.S. And we’re also one of the fastest growing Cricket prepaid dealers. We’ve got great people, we’re flipping leases of GameStop stores into phone stores, we’re bringing associates over from the gaming space there.
The bottom line is, we’re trying to redefine ourselves as a family of specialty retail brands to make the most popular technologies affordable and simple. I don’t know that it’s been attempted in electronics, but that’s what we’re trying to do.