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In-Depth: Inside The Business Of GameStop, Part One
by Matt Matthews [PC, Console/PC]
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April 15, 2010
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[In the first of a two-part series, Gamasutra analyst Matt Matthews goes in depth on retailer GameStop's business over the last several years, providing data on everything from revenues to used game sales, parsing out important longer-term trends.]
The retail videogame industry took a beating in 2009, with declining revenue in several regions including the United States, United Kingdom, and Japan. Despite the difficult economic climate, specialty retailer GameStop eked out a 3 percent increase in revenue and a 7 percent increase in its gross profit for its fiscal year ending January 30, 2010.
Below we will take a look at GameStop's business in more detail, and in particular add in the longer term trends found by collating the data from several years of reports. There have been several important changes since we examined the data last year, most notably in the growth of used game unit sales.
Revenue and Gross Profit
Since 2006, GameStop has increased its revenue by 194 percent, nearly tripling the amount of sales it does in a year. Much of this growth has been driven by expanding its number of retail locations, through acquisitions and opening of new retail locations, both in the United States and abroad. In the U.S., the company controls 801 more stores now than it did in 2006, an increase of 22 percent.
Despite that trend, even GameStop's growth was stunted by economic conditions during 2009. While revenue grew by 24 percent in 2008 (from $7.09 billion to $8.81 billion), that same measure increased only 3 percent in 2009. The company claims that decreased consumer traffic through its stores contributed to weaker revenues.
In the coming year, GameStop expects revenue to increase at rate of 4 to 6 percent in the coming year, with revenue between $9.44 and $9.62 billion. Wedbush analyst Michael Pachter expects that GameStop will achieve revenue at the higher end of this range.
The figure below shows how GameStop's revenue has increased in the past five fiscal years.
One gets a much clearer view of GameStop's growth when its revenue is broken out by segment. In its 10-K filings, the company breaks its revenue down into four categories: New Hardware, New Software, Used Products, and Other.
The third category – Used Products – includes not only used software but also used hardware and used accessories. Given the sensitivity that publishers have toward used game sales, it is understandable that GameStop might wish to shield its raw used software sales data from direct scrutiny.
GameStop's revenue in the past five years, broken out by segment, is shown in the figure below.
As the figure above shows, GameStop's business last year experienced a decline in the New Hardware and Other segments while both New Software and Used Product saw growth.
The drop in hardware revenue is understandable. At least in the U.S. all four consoles with significant sales (Nintendo Wii, Microsoft Xbox 360, Sony PlayStation 3 and PlayStation 2) saw their average prices drop in calendar 2009, according to data from the NPD Group.
Combining New Hardware and New Software sales, the company saw a modest 1 percent decline in revenue during its 2009 fiscal year. For the sake of comparison, the entire U.S. industry saw a decline of 10.7 percent in those same segments during the comparable months in 2009 and 2010. (These numbers are not directly comparable, since GameStop's figures also include revenue from Europe, Australia, and Canada.)
As the figure above shows, however, the Used Product segment drove most of the revenue growth in fiscal year 2009. There the company saw revenue increase by $367 million, which is nearly $100 million more than the company's total revenue increase for the year. That is, outside of the Used Product segment GameStop's revenue actually fell by $95 million.
When we examine GameStop's gross profits (total value of goods and services less the cost of those goods and services), the picture changes slightly. Gross profits, by segment, for the last five years are given in the figure below.
Only the Other segment showed a decline in gross profit in fiscal year 2009. Given the increases in the New Software and Used Product revenue figures, it is no surprise that gross profit in those segments increased.
However, as the figure above shows, GameStop also increased its gross profit by $27 million on hardware despite a decline of $140 million in hardware revenue. According to the company, this profit was realized through an increase in hardware replacement plans (i.e. warranties) sold to its customers. That is, GameStop is capitalizing on consumer perception that console and handheld systems may fail or break and is padding its hardware sales margin with extended warranties.
The Used Product segment contributed $146 million, or 90 percent, of the company's total gross profit growth in fiscal year 2009.
Software Revenue and Units
GameStop is primarily a software distribution business, so we should examine its software sales figures closely.
Last year when we looked at new and used software revenue figures (the latter of which are our estimates, since GameStop doesn't break out used software sales separately in its filings) it looked like software revenue was increasing significantly each year. The updated figure, shown below, makes it clear that the situation for new software changed in 2009.
Whereas new software revenue increased by a staggering 32 percent from 2007 to 2008, the same segment saw a much more modest 1.2 percent increase from 2008 to 2009. Given that software sales took a hit globally last year, it is no surprise that a major videogame retailer like GameStop was similarly affected.
GameStop's used software business acts as a buffer in tight times, and 2009 was no exception. While The company does not provide explicit used software revenue figures we estimate that 80 percent of the revenue reported in its Used Product segment can be attributed to used software specifically. The figure above reflects this estimate.
(Our choice of 80 percent is based on the known ratio for new hardware and software and conversations with professionals on the industry. We feel it is a conservative estimate – that is, it underestimates the revenue attributable to used software.)
Since 2002, GameStop has reported the average price of new and used software for each fiscal year. Those figures are given in the figure below.
According to these figures, the average price of a new game sold by GameStop in FY2009 increased approximately $2 from the previous year. Given that significant increase and the very modest increase in new software revenue, we can infer that GameStop sold fewer new software units in 2009 than it did in 2008.
According to figures provided by the NPD Group and Michael Pachter, the average price of new software in the United States during GameStop's FY2009 was just below $40. While the comparison is not direct, it does appear that GameStop's software mix trends toward the higher end. However, we note that some of the higher price may have to do with the higher prices for software in Europe and other markets, or on favorable currency conversion rates for revenue generated outside the U.S.
Putting the data from the last two figures together, we obtained the following estimates for GameStop's software unit sales, shown below. As mentioned above, we see that GameStop's new software unit sales actually declined in the last year.
Last year when we examined the comparable figure we noted in our hypothesis that new and used software unit sales would be closer during the beginning of a hardware generation and then grow apart as the market was flush with used software. The figures shown above appear to bear out this hypothesis.
GameStop itself notes this, saying that the increase in used product sales can be attributed “primarily due to the continued expansion of the installed base of new video game consoles and the availability of used hardware and software from those consoles.”
According to our estimates, GameStop sold five used titles for each four new ones that it sold in FY2009. The ratio was 1 to 1 in the prior year.
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I tend to think, in general, that GameStop is capatalizing on a growing hole left by most publishers. Namely customers don't feel like they are getting their money's worth with new software. Most GameStops I go to still have a sizeable used PS2 section. This tells me that there are plenty of gamers out there that still haven't found a compelling reason to go completely to the "next gen" games. Either they don't yet have a "next gen" system or they are dusting off and playing their old PS2, because they've run out of engaging "next gen" games to play.
It appears that the price point for new titles is at or under estimated demand per unit.
We have to not forget that the cost of development for a lot of games have gone up due to the amount of resources the companies use to create these games but I think flat pricing is hurting a lot of games that people just are not prepared to spend $60 on.
I personally pay what I think the game is worth and will wait for a game I'm unsure of to go on sale before I buy it. I try to avoid used as I'd rather the devs get some of the cash but will go used if I have to. I actually try to avoid Gamestop as much as possible because I hate the way they will buy a used game from some dumb kid for $10 and then resell as used at $5 below new price. You can see in the charts how that is lining their pockets. I think the last time I shopped there was when the Wii came out and I pre-ordered it.
My own game for example, I will sell for 5 USD. Why that low? Because I think that it is worth that.
Likewise, Mirror Edge for example (I finished it with someone else copy, I did not buy it), I consider that it is valued 25 USD, at most.
I think that few games should be priced 50 or 60 USD, games worth that are games with several hours of unique content, like Final Fantasy, Fallout 3, etc... Yet I would not buy them anyway (I wait for bargain prices, to me 60 USD is a huge dent on my monthly money... more than 10% of my salary on my last job).
40 USD games at launch, should be only still big and complex AAA games, like Half-Life 2, Warcraft III, Metroidvanias...
Any game shorter than 8 hours, unless it is completly awesome and replayable (like Portal), should not go much higher than 25 USD. I put Modern Warfare 2 Single Player there. Along with TimeShift, Mirror Edge, etc... (valuing Multiplayer is hard... So I will not wander there...)
And so on...
Responding to some of the comments, it's not clear that game prices are overly high -- that is, not for the big budget games being made by major publishers. Fact is, the game business is a difficult one and we see failures all the time. And for what it's worth, I doubt the used game market would be undercut by a modest price drop -- you'd need something more like book prices to dissuade trading.
Now, I do think publishers should be making games that are cheaper to produce. John Gordon points out the number of PS2 titles still on the shelf -- I often wonder why publishers don't do a better job leveraging their vast libraries of digital content. Rather, they act like movie studios, starting almost entirely from the ground-up with most of their games. It seems only Nintendo really leverages their existing content. Well, Blizzard, too -- they simply don't release many new games. I'm not just referring to art assets, either -- game publishers are sitting on tons of relatively bug-free, fun-proven code that could be graphically enhanced at much less risk than creating a game from the ground up.
Alas, the obsession with new and shiny isn't going anywhere.
Point 1: Last couple years have seen numerous studio closures and layoffs. Many people are struggling to get into the industry or struggling to rise above cheap contract QA positions. And you're saying that the game industry needs to make less money? The more money the industry makes, the more and better games you are going to see. If game prices were cut in half, they would have to get slightly more than double the sales to pull in the same profit, and I have serious doubts about whether that would happen.
Point 2: Saving money is saving money. The same people that buy a used game for $55 instead of new for $60 will buy a used game for $25 instead of a new one for $30.
That's the problem - games have so little value these days, people trade them in only after a few days. That's the question publishers should be asking - not why people buy used games - but why there are so many used games to buy.
The truth is that the customer decides on the value of the product. If it truly is not possible to create an involved 20+ hour experience at the price that the customer wants it then they will simply have to stop making them or reduce costs! That is the hard fact of life. Also, there are many compelling cheap alternatives out there. I think if I had a PS2 I would still be exploring the missed gems on that platform for dirt cheap prices. The new games of this generation are better in many ways but not so much better that everyone will pay many times more for them when the old ones are still available. New games must effectively compete with gaming history more so than purely content-based static media, due to the nature of games.
Joshua, as for saving $5 on used no matter what the price... why not? It's perfectly valid and I do it all the time. People who are arguing on reducing the price of games aren't suggesting that it will stop all used game sales, just that the overall sales will be higher due to meeting the demand curve at a lower price point. They are arguing that publishers stand to make *more or the same amount* money this way, not less. it will be hard to know if this is really true without some price experimentation. We haven't seen much of this outside of Steam and overpriced DLC.
I agree. In areas up in Missouri and even Florida, GameStops are pretty much you're only option, and for great value.
As a developer, I feel that I want my game, our game, to reach as many people as possible. If somebody feels it's worth $25 used, than be my guest. Many times I'll buy a game used, and usually If I like it I'll save up for the sequel when it comes out.
Considering most games look decent enough to try, having 5-12hrs of game play, why not just drop <$10 and rent the game for 5 days. You’d have plenty of time to play the game through and experience it in detail before your time is up. Judging from everyone’s responses it seems that very few titles deserve $60, but you also have to consider most of the people here make up a niche market. You can’t forget the broader casual market that has recently been targeted. Think of all the children whose parents are unfamiliar with the business and those who simply have the capital to buy games at full price.
What makes it worse is that developers are bloating their budgets by stuffing games with a ridiculous amount of content to try and justify that $60 price. Does every game need single-player, competitive multiplayer, and co-op modes? It's doubtful that the majority of players even use all those. And how many people will actually finish that 20+ hour campaign? A lot less than you think.
We need to start making lower-priced games with less content. Ones that people with busy lives can afford to buy new and find the time to finish.
The pricing issue is a complex one that deserves a full article, not a simple comment. So I wont try. However, we all know that a $60 price across the board is damaging to many types of games. So we can all agree that it can be a problem. (from the perspective of someone who cares about the art form, rather than making a profit) The solution is less clear. For example, it's dangerous to consider playable hours as the only or most important metric.