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How GameStop Keeps Its Doors Open in the Digital Era

How GameStop Keeps Its Doors Open in the Digital Era: Richard B. Levine / Alamy

Richard B. Levine / Alamy

More businesses fail than succeed. And even once-successful companies can find themselves deep in the red after years and years of prosperity. Sometimes, it’s a product of gross mismanagement; sometimes superior competition is the culprit; sometimes advancing technology and changing consumer tastes strike the fatal blows.

Take the movie-rental business. From the mid-1980s all the way into the aughts, these companies prospered by adjusting to the changing marketplace, transitioning from VHS to DVDs to Blu-Ray. But ultimately, Netflix catered better to its consumers, first by offering a DVD and Blu-ray mail service and then by rolling out a streaming service of entertainment on demand. By 2010, Hollywood Video was dead. Today, there are fewer than 20 Blockbuster video stores in the United States. And although physical media is still on shelves, it’s no longer the single focus of any store. It’s two aisles in Target, six aisles in Best Buy or a lone $5 discount bin at the local grocery.

The same forces that drove Blockbuster out of business shook the video game market as well. Consumers no longer had to travel to a brick-and-mortar store to pick up the latest title; they could buy the game from any number of online stores or download it online. And many of the game companies that sold physical and/or used copies were either closed or swallowed up by bigger fish early on. FuncoLand was sold in 2000, and EB Games was gobbled up in 2005.

The final stop for both of those companies? Gamestop, now the last chain of its kind in the United States. The company, which became famous over the last 10 years for selling and reselling used video games, is still standing. Analysts first began predicting failure in the late aughts, when full Playstation 3 and Xbox 360 games became downloadable online. Digital meant that those downloaded games could no longer be traded in and resold. Without its well-known financial trump card, how could the company possibly endure? Was it “Game Over” for Gamestop? Was Gamestop “out of extra lives”? The doomsday headlines over the years have written themselves.

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One of the few remaining Blockbuster Video stores closes its doors in Denver. Aaron Ontiveroz / The Denver Post via Getty Images

And yet, here we are, in 2016, and GameStop is still standing. And according to executive vice president Michael Hogan, it’s the result of discussions that took place close to a decade ago, well before anyone was placing bets on the company’s extinction.

“What successful companies do is they evolve with the consumer,” says Hogan. “The rate of change internally has to exceed the rate of change externally. So we recognize that we have to think about these things before other people think about them for us.”

The basic plan? Transform GameStop from a single-concept company into one that worked on multiple fronts. They had no intention of getting out of the video-game business—it was still a good business, if not a growth business—but there were ways they could diversify and still appeal to their consumer base.

Hogan joined GameStop in 2008. Prior to his current profession, he was a marketer for PepsiCo and Dean Foods. He describes the 2008-2009 era of GameStop as an “anxiety phase.” The company knew it had to change, but it didn’t know how.

What successful companies do is they evolve with the consumer.

Michael Hogan,
Gamestop Executive Vice President

This was not the first time GameStop had refocused. In fact, the company didn’t even start as “GameStop.” It launched 1984 as an educational software company called Babbage’s, which realized that floppy disks were going the way of the dinosaur and began selling video game software in 1987. The name “GameStop” isn’t so much the company as it is the public face of the original company—a company that originally had nothing to do with video games but followed the money.

So began a process of trial and error, of running numerous ideas up the flagpole to see if anyone would salute them. Along the way, there were numerous failures—the price of experimentation. There was a failed comic-book store in Long Island. There was MovieStop, an attempted spinoff of GameStop that opened in 2004 and was subsequently sold in 2012. In 2009, GameStop acquired a majority stake in Jolt, a company that created online social games. The company, however, had cultivated a poor reputation in the months prior to being acquired, and the GameStop acquisition did little to reverse its fortunes. After discontinuing multiple games (citing a lack of development resources), Jolt announced it would be closing its doors in 2012.

There were mistakes in promoting the GameStop brand as well. For a long time, Hogan admits—as late as 2010—GameStop didn’t fully acknowledge the benefits of e-commerce. The brick-and-mortar stores didn’t communicate with the website, and the two entities mostly existed separately. Today, you can search inventory for the game you want to buy and then head to the closest store to pick it up. The key, according to Hogan, was realizing that customers want to interact with GameStop through multiple channels—that it is not an either/or proposition between brick-and-mortar and online.

Another mistake was creating a game rental program. A rental model worked well for movies, so it should also work for disc-based games, right?

“We learned that the economics of games was very different from the economics of movies,” Hogan says.

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Gamers at a “Call of Duty” tournament at a GameStop store in Universal City, California. Robyn Beck / AFP / Getty Images

Movie DVDs are relatively inexpensive—far less expensive that video games. A proper rental service would have to charge significantly more for video games than it does for movies. Then, there’s the difference in turnover: Movies can endure and remain popular for decades, whereas video games trend and are then discarded for the next big thing, which drives the costs even higher. All this might be obvious in 2016, but a decade ago, when GameStop first attempted this strategy, they had to learn those lessons the hard way.

GameStop, according to Hogan, now rests on four pillars. The first is physical gaming: the sale of new and pre-owned video games. For years, it has been extremely profitable; GameStop keeps 100 percent of the profits from reselling without getting the publishing companies involved. But according to Hogan, the goal is to have more than 50 percent of the company’s earnings to come from outside physical video games by 2019. In 2010, the percentage of non-physical gaming was 10 percent. This year, it’s 30 percent.

The second is digital gaming, and not in the way you might think. When most people think “digital sales,” they think of purchasing and downloading games online, no store clerk or intermediary needed. But GameStop makes a surprising claim—that 95 percent of their digital gaming sales, which made over one billion dollars last year, are made in their physical stores. Much of this is gift cards and “point of purchase” sales like season passes for franchise games and downloadable content that adds on to the core game experience. Hogan points to this statistic as proof that brick-and-mortar stores will not be going away in the foreseeable future.

Digital is going to be a larger piece of the pie. But if you’re talking about the next 10 years? Probably not.

Michael Hogan,
Gamestop Executive Vice President

“I don’t want to bet against technology,” Hogan says. “Clearly, over time, digital is going to be a larger piece of the pie. But if you’re talking about the next 10 years? Probably not.”

Hogan also points to the psychological enjoyment of interacting with something tangible. Many people walk into a store to browse, without a firm idea of what they want. Many consumers pay in cash; they don’t own credit cards. For consumers like these, a brick-and-mortar store is the best, and perhaps only, option.

And what about those publishers, many of whom decry GameStop’s presence as “cannibalizing?” At this point, GameStop drives the very business that its critics claim it destroys. Between physical and digital sales, GameStop accounts for 50 percent of the market share for new titles, despite numerous attempts to cut them out as middlemen. They account for over $1 billion dollars in trade credit every year, 70 percent of which goes towards the purchasing of new games. Microsoft planned to make used games unplayable on its Xbox One, but ultimately backtracked.

As it stands, GameStop is too integrated into the business for publishers to eliminate them without doing damage to themselves. It’s why many publishers cooperate with GameStop instead, planning joint marketing campaigns a year out in order to boost first-month sales.

The third pillar is technology brands. GameStop operates Simply Mac, Spring Mobile and Cricket Wireless stores. They own a mobile game publisher Kongregate, which succeeds in a lot of the ways that Jolt failed.

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A sales associate shows off her Captain America backpack at the opening of GameStop’s ThinkGeek store in New York. Richard B. Levine / Alamy

And the fourth is collectibles. A GameStop shopper who likes playing the Arkham games for example, might also want to purchase other Batman merchandise. In line with this pillar, last year GameStop bought ThinkGeek, an online retailer that sells gimmicky geek products like R2-D2 sports bras and Enterprise-shaped pizza cutters.

These last two pillars are a strong reminder that GameStop is the umbrella company for a lot of smaller companies, which many consumers may not even know are related. Babbage’s begat GameStop, which raises the question: What will GameStop become years from now, when physical gaming is no longer the forefront of their business? Hogan foresees a time in the future when the identity of the corporation may change.

“What’s interesting is we probably won’t be called GameStop at that point. Why would you, if gaming is less than 50 percent of your business?”

Of course, they aren’t the only company to go through something like this. PepsiCo owns Pepsi Cola, but they also own Gatorade, Quaker Oats and Doritos. The vast majority of customers will consume all of those products—oatmeal in the morning, Gatorade after an afternoon run, Doritos as a snack and Pepsi Max with dinner—and never know that the money all funnels into the same coffer.

In the end, the GameStop name may disappear, but the corporation that bore that name may live on, continuing to evolve and diversify.


Wing-Man has written about video games and popular culture since 2013, and has been published in multiple online and print publications. Follow him on Twitter to learn more.


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