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GameStop Maintains Physical Embrace in a Digital World

13 Aug, 2013 By: Erik Gruenwedel

In the video game retail market, GameStop offers a blueprint of sorts to home entertainment about how to maintain a packaged-media presence in the face of an encroaching online invasion.

The Grapevine, Texas-based retailer with more than 6.500 stores in 15 countries was pretty much left for dead a year ago as media and Wall Street hyped the arrival of online and social gaming. Scuttlebutt suggested the days of the $59.99 new release were about to join the VHS graveyard, including the stores that sold them.

With gaming pundits clamoring for new Wi-Fi systems acting as conduits for Internet-based content, conventional wisdom indicated Microsoft and Sony would respectively eliminate the specter of used gaming on the pending Xbox One and PlayStation 4 — the final nail in the coffin for packaged games, and GameStop.

Indeed, GameStop shares stood at $17.48 on Aug. 14, 2012. A year later, the stock stands just below $49 per share.


Microsoft and Sony collectively threw a lifeline to GameStop and physical games when they indicated their new systems would accommodate used games, albeit with restrictions. While the migration from physical to digital games appears inevitable, GameStop has taken the initiative to expand its used-game business, PowerUp Rewards loyalty program, and work with manufacturers in marketing and sales of new gaming platforms.

For example, GameStop is offering PowerUp Rewards members a $50 guaranteed minimum credit for select standard-edition Xbox 360 titles when they upgrade to the new Xbox One standard version of that title.

The eligible titles (sold separately for $59.99) are: Activision’s Call of Duty: Ghosts; Electronic Arts’ Madden NFL 25, FIFA 14, and Battlefield 4; Ubisoft’s Assassin’s Creed IV: Black Flag.

"This offer gives [our] members the chance to upgrade their current Xbox 360 game for the new Xbox One standard version of that game for $9.99, said Bob Puzon, SVP of merchandising at GameStop, in a statement. “This is a great example of how [we are] helping gamers make the transition to the next generation of consoles economical and seamless.”

Michael Pachter, analyst with Wedbush Securities in Los Angeles, remains bullish on GameStop. He believes the migration from physical to digital gaming will be slow; and that it will have less of an impact on GameStop due in large part to its huge market share of used games.

“In our view, the ‘last man standing’ in the world of physical game sales will be GameStop, given that a large percentage of its customers value the option of trading games in for in-store credit.,” Pachter wrote in a note.

Indeed, the retail generates 30% of its annual revenue from used product. The PowerUp program includes 24 million members operating largely old-generation platforms and software, collectively worth more than $1 billion in trade value, according to CEO Paul Raines.

"The amount of trade currency is far bigger than anyone's marketing budget," Raines told analysts in May. "If [Microsoft and Sony] support it, we can activate it.”

Meanwhile, GameStop has an evolving used consumer electronics business (tablets, mobile phones, laptops), which generated more than $180 million in revenue in the first year. Pachter expects the consumer electronics business to grow to at least $250 million this year, and as much as $1 billion annually when fully mature, helping to offset the inevitable decline in physical game sales.

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