GameStop has posted its second quarter 2012 financials, revealing a shrinkage of both sales and profits – despite an increase in digital business and second hand mobile sales.
Total revenues for the thirteen week period, ending July 28, 2012, were $1.55 billion – down from $1.74 billion in the same quarter the year prior. In-store sales were down 9.3 per cent and pre-owned dropped by 11.2 per cent.
Other areas of sales rose sharply, but still represent a minority slice of revenues. The 40.6 per cent increase in sales of other products was largely driven by a 27 per cent growth in digital, bringing that market value to $134 million, and sales of second hand mobile and tablet devices – up to $29 million.
Despite this promising growth in other sectors, GameStop’s profits suffered considerably compared to the same period last year, dropping from $30.9 million for the second quarter last year to just $21 million this year. Half year profits were also down, from $111.3 million to $93.5 million.
“We continue to see solid sales growth as well as strong margins in our new retail offerings and digital channels,” said CEO Paul Raines.
“We are focused on staying ahead of the curve as the competitive landscape evolves and we manage through the trough of the console cycle. Finally, the ongoing share buyback and increase in dividend demonstrate our confidence in the future of GameStop and our commitment to improving total shareholder returns.”
The company’s share buy-back program continues apace, gathering $134 million worth of stock back to the fold, with a further $301 million purchase authorized.
GameStop is apparently getting into the Mobile phone business with GameStop Mobile, which is a mobile phone plan provider with offerings from $5 to $55 per month, depending on your data plan. From what we understand, all of GameStops’ offerings will use the AT&T network.
According to what we hear, GameStop thinks that gamers will buy their mobile phones from the same folks that they buy their gaming software from. The focus on the GameStop Mobile offerings will be targeted offerings that are customized for gamers at prices they can afford.
The product is said to be for the U.S. only to start with; and the company may expand the GameStop mobile program if it proves to be popular and a money maker for the company.
Used games are a constant irritant for many in this industry – they’re at best tolerated and at worst despised with a passion. Frontier Development’s David Braben recently lashed out against the used games business, saying that it’s effectively killed off single-player titles, and now Silicon Knights boss Denis Dyack has weighed in with his thoughts as well.
Dyack remarked, “From a consumer side, [in the last few years] we started seeing used games really come into fruition, and I believe that has caused quite a problem. I would argue that used games actually increase the cost of games.”
The biggest problem is that used games have essentially cut off the revenue tail for most titles, Dyack explained.
“There used to be something in games for 20 years called a tail, where say you have a game called Warcraft that would sell for 10 years. Because there are no used games, you could actually sell a game for a long time, and get recurring revenue for quite a while. Recurring revenue is very key,” he said.
“Now there is no tail. Literally, you will get most of your sales within three months of launch, which has created this really unhealthy extreme where you have to sell it really fast and then you have to do anything else to get money,” he continued, alluding to steps developers take like including multiplayer or launching DLC.
Dyack warned that if the pre-owned market continues unchecked it could threaten the industry as we know it.
“I would argue, and I’ve said this before, that used games are cannibalizing the industry. If developers and publishers don’t see revenue from that, it’s not a matter of hey ‘we’re trying to increase the price of games to consumers, and we want more,’ we’re just trying to survive as an industry. If used games continue the way that they are, it’s going to cannibalize, there’s not going to be an industry,” he said. “People won’t make those kinds of games. So I think that’s inflated the price of games, and I think that prices would have come down if there was a longer tail, but there isn’t.”
For its part, leading games retailer GameStop has unsurprisingly come to the defense of its used games empire. The company’s argument is that the money from used games and trade-ins ultimately fuels the industry as a whole.
“Remember that used video games have a residual value. Remember that GameStop generates $1.2 billion of trade credits around the world with our used games model. So, consider taking used games out of that, you’d have to find new ways to sell the games, and our partners at the console companies have great relationships with us,” CEO Paul Raines said during the company’s last earnings call.
“What we’ve done is created a way for that new leading edge consumer to dispose of their old games and that’s what creates this great circle of life we talk about that so many try to imitate.”
Beyond the pre-owned problem, the games industry also faces a problem of costs for triple-A projects spiraling out of control.
“On the top side of the triple-A, highly-funded titles, you have $100 million games, and looking towards next generation people once again are saying we’re going to have development costs that are two or three times of what they were last generation. I cannot see how that economy is going to continue,” Dyack stated.
“I don’t think as an industry we can afford $300 million budgets. I think some games can, don’t get me wrong. For a game like Call of Duty, if they had a $100 million budget, or whatever their budget is, they can afford it. That’s not the industry, that’s sort of a one-off. But what is everyone else going do?”
Indeed, a mid-size developer could invest $40-$60 million in a triple-A project and if that title tanks at retail, it could truly wreak havoc on the company.
“It comes back to that tail I talked about, recurring revenue. We need a system with recurring revenue and that’s why I think digital distribution is going to play a big role in things to come. That’s why I am still very big on cloud computing,” Dyack concluded.
GameStop has paid its first ever dividend to investors, having cleared the last of its debts with a successful holiday period at the end of 2011.
The chain raised $3 billion in sales from that quarter, enabling the board to reward shareholders for their faith with a dividend of 15 cents per share, payable on March 12, 2012.
“We have achieved our goal of eliminating debt and are pleased to return excess cash to our shareholders,” said GameStop’s executive chairman, Dan DeMatteo.
“The board’s decision to initiate a dividend reflects GameStop’s strong capital position and demonstrates our confidence in the long term viability of our business.”
The group cleared its last debts on December 16, 2011 and shows continued growth across its businesses, which include game portal Kongregate.com and Game Informer magazine alongside its 6,627 stores worldwide.
GameStop’s fair fortunes are a stark contrast to those of UK retailer the GAME Group, which has been forced to seek a buyer for its foreign holdings in an attempt to stabilise finances.
According to a report on the Wall Street Journal’s All Things D blog, sources close to the deal say it could be completed by the end of the day.
Earlier this year, Disney acquired the media conglomerate UTV, which owned around half of Indiagames. One source placed the value of the company between $80 million and $100 million, meaning that Disney would need to pay up to $50 million to complete the deal.
Indiagames was founded in 1999, and now has more than 300 employees spread across its Mumbai, Beijing, London and Los Angeles offices.
In February, the Disney Interactive Media Group’s co-presidents John Pleasants and James Pitaro pledged to make the division profitable by 2013.
Since then, financial reports have shown consistent losses, leading to redundancies at social developer Three Melons and the closure of Black Rock Studios.
Both Disney and Indiagames CEO Vishal Gondal have declined to comment on the deal.
GameStop is using the Android operating system for its own-brand gaming tablet, which will launch with a number of titles pre-installed.
The US retailer has already chosen the model of tablet, which president Tony Bartel told GamesIndustry.biz is considered by the company to be the “GameStop certified gaming platform” and will sell alongside hardware from Sony, Microsoft, Nintendo and Apple when it hits stores next year.
“I don’t see any need to create a new one with the three hundred or so on the market already,” said Bartel of the decision to use existing hardware. “We have a refurbishment centre and we can bring in the product and preload certain games onto it. It’s an Android device.”
“We definitely have selected one,” he continued. “We’re in test phase right now. But we’re excited at the prospect of coming out with this tablet. I would call it a ‘GameStop certified gaming platform.’ We looked at all the tablets and these are the ones that really worked for gaming and we’re going to give you a few benefits that you’re not going to get elsewhere.”
Tests began on the hardware two weeks ago, with consumers in Dallas, Texas the first to get hands-on with the device – close to the company’s beta testing site for the streaming technology it bought from Spawn Labs.
Although the product will initially have a modest selection of mobile games, GameStop intends to stream console games to the device and ship a dedicated controller for the experience.
“There’s not a lot of tablet/android based games for the consumer that are designed to use an external controller,” Bartel told GamesIndustry.biz. “There are a few games out there and more that are coming, but our thought is that the tablet is a great immersive gaming device so it’s hard for us to envision how that tablet will really function as such without some sort of controller.
“So we’ve created a controller that we’re testing to really allow for immersive gameplay. It’s hard to imagine how to stream a game – let’ say Modern Warfare 3 – onto a tablet and then play it with your finger.
Bartel said that GameStop is following the consumer lead on cloud gaming, and although services like Gaikai and OnLive have already demonstrated World of Warcraft and AAA games on tablets, he thinks it’s a little too early for the best consumer experience. He also hinted that the retailer could work directly with developers on creating games that use a specific controller and stream to the GameStop tablet.
“I know people have tried it and shown it, but it isn’t a great, immersive experience for the customer. Once it is, I think that’s really exciting. As it stands now, I think we’re seeing developer interest in developing immersive games that use the controller as well, but our first foray is to really be working with developers to create an install base of devices with the controller to allow them to develop immersive games.
To mirror that side of the deal, OnLive’s platform will feature GameSpot content such as reviews and interviews to aid customers in buying choices.
“For as long as video games have existed, consumers have sought out information that helps them make smart purchases and get the most out of their gaming experience,” said Simon Whitcombe, of GamesSpot’s parent company CBS Interactive.
“Now, the next big innovation is here: merging the editorial with the experiential. By making demos available from our game pages, GameSpot is now the ultimate one-stop destination for gamers to read reviews, news, watch videos, and actually try out the latest games.”
Over 100 game demos will be available via the service, which has not yet been given an official launch date. OnLive launches in the UK on September 22, at the Eurogamer Expo at Earls Court.
Earlier this year the company bought Spawn Labs, extending its peer-to-peer game streaming service into a cloud gaming offering, and promised “a wide selection of high-definition video games on demand on any internet-enabled device.”
Yesterday it revealed that as well as PC game streaming, it is working with publishers to stream console games to smart devices as well as dedicated hardware via the Spawn software client.
“Spawn recently began its first beta and is currently live, testing the streaming of Xbox 360, PS3 and PC games from a data centre in Austin, Texas,” confirmed GameStop president Tony Bartel.
“We continue to get positive feedback from our publishing partners about the pro-console, low-investment model that we have chosen.”
The closed beta will go national before the end of the year. At the beginning of 2012 GameStop is expected to reveal more details about the service and what it offers, along with a pricing model – and a nationwide launch is currently scheduled for the first half of 2012.
The Spawn client will be offered to GameStop’s PowerUp Rewards members – currently 12 million customers – and feature a demo service which it’s claimed will not require publishers to modify their games.
Cloud gaming technology from Gaikai and OnLive is already proving a viable business, offering PC games and demos over the internet with very little in the way of dedicated hardware beyond the right control method.
Behind closed doors these technologies have also shown format crossover such as World of Warcraft running on an iPad or console and full PC games launching from within Facebook.
And with the growth of Smart and connected TVs, both Gaikai and OnLive are dropping their technology directly into the hardware and consulting on dedicated controllers, taking streaming games straight to the consumer’s living room – an area that GameStop is also interested in.
“Those conversations are taking place today,” offered Bartel. “There’s a whole cadre of services that GameStop can offer far beyond just Spawn. The beauty of Spawn is it can take a very large assortment of games. There’s really no restriction versus an Xbox 360 and PlayStation 3 game.
“We’re also experimenting with PC game delivery as well, but we can take that to any Internet-connected device including TV. So clearly, it’s part of our acquisition forethought. We anticipated being involved in smart TVs as well.”
GameStop saw sales drop 3.1 per cent for the second quarter to $1.74 billion, due to slow hardware sales and a lack of new software releases compared to the same period last year.
However, digital sales for the retailer surged 69 per cent exceeding expectations, while the second hand market continued to grow with a increase of 12 per cent.
Profits were down just under $10 million from $40.3 million to $30.9 million for the quarter.
The best-selling games for the period were Rockstar’s L.A. Noire, NCAA Football 12 from EA, Sony’s Infamous, Brink from Bethesda and Warner’s Mortal Kombat.
“GameStop’s resilient retail model enabled us to achieve our earnings plan despite a challenging period for the industry,” said Paul Raines, CEO.
“Through the back half of the year, we expect industry software sales to accelerate based on an exciting title line-up. Meanwhile, the digital and loyalty programs we have brought to market continue to gain traction with consumers and position us as a leading partner with publishers.”
Second hand games and hardware accounted for 46.2 per cent of gross profit during the period ($292.4m), with digital included in the ‘other’ category, which accounted for 41.7 per cent ($98m).
New hardware accounted for 7.5 per cent of gross profit ($20.8m) and new game sales 22 per cent ($132m).
Used video game product (hardware and software) accounted for 36.3 per cent of sales in the second quarter, compared to 34.4 per cent from new software, 15.8 per cent for new hardware and the ‘other’ category accounting for 13.5 per cent.
For the fiscal 2011 year GameStop expects earnings per share of $2.82 to $2.92, a 6.4% – 10.2% increase over 2010.