A global, specialty retailer of video game products, consumer electronics and wireless services, GameStop traces its roots to Babbage’s, a small software retailer that started in Dallas, Texas. The metamorphosis from Babbage’s into GameStop began with a series of mergers. The first was with Software Etc., a deal in which Babbage’s Etc. LLC was formed. In 1999, Babbage’s Etc. was sold to Barnes & Noble. The next merger was with Funco, Inc., which was acquired by Barnes & Noble in June 2000. Following this acquisition, Babbage’s Etc became a wholly-owned subsidiary of Funco, also the owner and publisher of video game industry magazine Game Informer which began publication in 1991. For the curious minded, Game Informer is now the 3rd largest magazine in circulation in the US!

At the end of 2000, Funco changed its name to GameStop, and in 2002 the company completed its initial public offering on the New York Stock Exchange. In late 2004, GameStop spun off from Barnes & Noble with its buy back of six million shares of stock from the book seller. GameStop then proceeded to acquire Electronics Boutique (EB Games) in 2005. In January 2007, GameStop purchased Rhino Video Games from Blockbuster.

GameStop has since sensed and seen how digital content has rapidly transformed the industry. It has taken some steps to innovating in this area to stay relevant to the consumer. Investment dollars have gone to both acquisitions and strategic partnerships in an attempt to diversify their revenue streams as well as begin to build out digital competencies. These have had mixed results so far.

GameStop will need to transform the company and business model to stay relevant in the digital video game sector. We recommend GameStop practice what David Teece refers to as ‘corporate ambidexterity’: continuing to cultivate and broaden its successful retail business, while simultaneously investing in emerging streaming technology. In many ways this approach follows NetFlix’s successful transition strategy from physical DVDs to digital streaming.

Industry Analysis

For idiosyncratic reasons the video game retailing market has been growing steadily over the last decade while books, music, movies, and rental retailing have all been decimated by digital disruptions. Analysts expect the digital shift in games to accelerate rapidly in the coming years. The games industry is slowly transforming to digital, similar to how the music, movies, and books industries did over the last decade.

The global video game market as a whole is forecasted to grow 11% over the next four years to $104BN by 2017, but due mostly to gains in tablet, mobile, and digital sales. GameStop primarily sells physical games for home consoles which is rapidly contracting in both unit sales and dollars. Physical game sales in North America, as a percentage of the market, are expected to drop from 88% in 2013, to a 50% split with digital games by 2018.

History

GameStop is a specialty retailer of new and used video game systems, games, and peripherals with nearly 6,700 stores, mostly in North America. Last year the company reported over $9BN in sales and $377MM in net income. GameStop’s traditional competitors have been other retailers such as Walmart, Best Buy, and Amazon.com.

GameStop has developed a competitive advantage and strong competencies in operating small stores (avg. 1,400 sq. ft) with high inventory turns, highly knowledgeable employees, high customer loyalty (25MM program members, 75% of sales), and through a major focus on used products (which account for 40% of gross profits).

However, now GameStop is facing a new set of digital competitors. The hardware platforms themselves (Microsoft Xbox, Sony PlayStation, and Nintendo Wii) have setup walled-garden ecosystems and sell games digitally direct to consumers. Consumers no longer need to go a physical store, unless they prefer a physical copy so that they can resell it or lend it to friends. According to Mintel research, 31% of the consumer group engaged in trade-ins during the last three months and 22% engaged in borrowing. Digitally purchased games cannot be transferred to other people. This is akin to the issues facing the book retailing industry.

GameStop Analysis

The shift to digital impacts business at GameStop. In its latest annual report, GameStop celebrated $1BN in digital sales, creating the impression that they’ve made progress. However, 98% of company revenue is still going through their brick-and-mortar stores. GameStop stores are simply selling codes that enable the customer to download a game direct to a digital device. This is similar to buying a mobile phone card at Target, rather than buying direct from the mobile carrier. This is smart utilization of current resources in the short-term, but cannot be considered transformational in the long-run since it is inefficient to sell this way, and volumes will not be high enough to sustain retail stores once games become entirely digital products. This is evocative of strategic inertia; GameStop is looking at the digital world through their old lens.

Throughout the past 4 years, GameStop invested heavily in growing its capabilities through partnerships and acquisitions. In 2012, acquired BuyMyTronics, an online electronics re-commerce company that has been instrumental in identifying opportunities to expand the company’s device selection and integral to the buy-sell-trade model. I think this acquisition has been successful). In 2010, acquired Kongregate, to tap into and grow its market share in the rapidly growing field of mobile games. Kongregate has published its first nine mobile games, amassing millions of downloads, and is prominently featured within the Apple App Store.

In 2011, acquired Spawn Labs, a developer of technology that allowed users to play video games that were run remotely on machines in data centers rather than their personal computer or console, and Impulse, Inc., a digital distribution company, with the goals of providing new ways to reach new gamers in new locations and on many devices. GameStop closed Spawn Labs in 2014 and it hasn’t built or grown Impulse.

In 2013, acquired Spring Mobile, an authorized AT&T reseller operating over 160 stores selling wireless services and products, and Simply Mac, an authorized Apple reseller selling Apple products and services in 23 stores with the goal of expanding the channels to grow digital sales base, enhancing GameStop’s market leadership position in the electronic game industry and in the digital distribution category.

In 2014, GameStop partnered with Shelfbucks and BestFit Mobile to understand the drivers surrounding the evolution of the retail industry and advance towards Digitization of the physical retail space. GameStop aimed to leverage the partnership with Shelfbucks to deliver a next-generation shopping experience using emerging technologies. In 2014, partnered with Cricket Wireless, an AT&T subsidiary that offers value-conscious consumers with a first-class, pre-paid wireless experience without annual contracts. Adding Cricket’s no-contract option as its exclusive wireless partner makes GameStop “one-stop shop when it comes to affordable phones,” with the goal of seizing tremendous growth opportunities in prepaid digital and online timecards. In 2014, partnered with IBM & Texas A&M University to develop and incorporate new mobile and cloud apps with previously existing systems. In 2014, GameStop partnered with Dynamic Signal to develop and drive traffic through social platforms.

The firm is poised to seize in both its brick and mortar and online presences. It has a strong presence in North America, a somewhat lesser presence in Europe and Australia and completely lacks a presence in Asia and South America. GameStop is positioned to seize and transform in the brick and mortar and online verticals in one of the four existing segments or to venture into new geographies.

Gamestop has recently repaid all of their debt, and had strong positive cash flows from operations. This strong position allows them to pay dividends as well as repurchase stock. As such, GameStop is in an excellent position to invest in the digital transformation as well as expand their presence in brick-and-mortar stores, despite the digitization, and garner a larger share of the international market if they choose this route.

GameStop has 17,000 full-time salaried and hourly workers and anywhere from 27,000 to 52,000 part-time hourly workers, depending on the season – the Thanksgiving and Christmas holiday season being the peak. There are no labor unions in GameStop’s operations in the United States; some international employees have collective bargaining agreements. GameStop has some agility in its people strategy because the majority of its employee population is part-time, seasonal workers and a small portion of its labor force is unionized. The experience of GameStop’s senior leadership is weighted toward the electronics retail, clothing retail, consumer packaged goods, and health sciences industries. None of these industries have experienced the magnitude of change the consumer electronics industry currently is facing (Exhibit 4.) While GameStop has a dynamic capability due to the flexible structure of its employment base, the employees are not likely to embrace a transformation initiated by senior management. Additionally, the senior management of GameStop does not have significant transformation experience.

If GameStop is to fully utilize its transient competitive advantages it must strive to serve its 25MM loyal customers better. GameStop’s transient competitive advantages include its brand, knowledgeable employees and hardware remanufacturing capability. It is the largest refurbisher and recycler of electronics in the world. The devices are refurbished or remanufactured in an 182,000 square foot facility, the Refurbishment Operations Center, located just 2 miles away from the headquarters and employing 1,100 people. GameStop’s competitive advantages include its strong skill set around buy/sell/trade, says CEO, Paul Raines. It needs to take this skill set and create a new business model for online streaming since that is where the market is headed in 5 years. Towards achieving these goals, GameStop introduced a new IT structure in 2013 comprising four strategic areas- IT Strategy, Architecture Design, IT Delivery and the GameStop Technology Institute (‘GTI’). Each area is designed to accelerate the identification and adoption of new capabilities and solutions to address the ever-changing IT challenges impacting business today. The GTI is focused on creating affiliations with leading technology corporations and academic institutions to deliver technology solutions to consumers. It has recently entered into strategic partnerships with Shelfbucks, BestFit Mobile and Dynamic Signal to extend its stated focus within its store environments. These are examples of structural transformations GameStop has undertaken to build on process and technology innovation to drive profitability in the technology-driven online marketplace of the future.

Credits: Geoff, Tanya, Wayne, Dovic, Mike.