GameStop-EB Merger Effect Unclear6 May, 2005 By: Holly J. Wagner
Analysts remain uncertain about how much pressure a supersized game specialty company created from the GameStop–Electronics Boutique merger would have on the game market at large.
Analyst Michael Pachter of Wedbush Morgan Securities said the combined company would have 90 percent of the used-game market and could boost its used-game margins through greater efficiencies.
The effect on other game retailers could be beneficial.
“You've got to assume that at some point they will consolidate their stores, so at some point they may be less competitive because they might have fewer stores,” said Dennis McAlpine, principal analyst at McAlpine and Associates.
Another possibility is that EB Games stores shuttered because of overlap could be converted to MovieStop stores, GameStop's new DVD store venture. However, overlap is limited to about 200 stores, Pachter said, and he thinks it is more likely that stores will be closed gradually over the next four years.
Or, the analysts agreed, the merger could largely be irrelevant to the games market, paling in comparison to the importance of future hardware platforms.
“You've got too many moving pieces,” McAlpine said. “The new consoles will dramatically affect the trade.”
Pachter agreed. But he appears guardedly optimistic, citing the potential for efficiency gains if the game giants merge. A merger would also give the new GameStop the clout of 20 percent to 25 percent market share.
“It is likely that the new GameStop will have somewhat increased negotiating leverage to get better allocations of products at better terms, such as increased advertising allowances and more generous product return rights,” Pachter speculated. “In our view, publishers will likely grant larger allocations of first-day product to the combined EB-GameStop, and initial sellthrough will likely be higher than in the past. We do expect the console manufacturers to change their behavior going forward, and note that the recent Sony [PlayStation Portable] PSP launch resulted in sellouts at EB and GameStop stores and oversupply at Wal-Mart and Target stores. We believe the phenomenon is a testament to the superior marketing and promotion at EB and GameStop. Going forward, we expect the combined entity to command better allocations of the Xbox 360 and PS3 when they launch.”
But far from decreasing competition, that could be a boon to entertainment retailers that aren't game specialists once the new platforms arrive.
“Everyone will clamor for space, given that there will be 10 competing platforms out [Xbox, Xbox 360, PS2, PS3, GameCube, Revolution, Game Boy Advance, Nintendo DS, PSP and PC] at once, so there will not be enough shelf space,” Pachter said.