The Digital Revolution…

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The Digital Revolution is no longer coming.. it is here.

That’s a bold statement to make, but we see evidence of it in the United States, as well as overseas.

Gamestop missed their quarterly projections for the third quarter of 2015 (1), and since that news (in late November), the stock has fell 27%. One of the factors in this earnings miss: A drop in same store year over year sales (the market expected 3.4% growth, they actually experienced a 1.1% drop). In fact, one of the big stories for Gamestop as we hit 2016 is GameStop diversifying into other things, such as mobile phones (through Spring Mobile and Cricket Wireless) and more general technical products (opening 3 test stores for their ThinkGeek subsidiary) (1). This is happening overseas as well, as United Kingdom retailer GAME reported in late December a 6.7% year over year loss in revenues (3).

That’s concerning, as we should be in a gaming boom as the vast majority of game playing customers have upgraded to next-generation systems like the Xbox One and Playsation 4. Why?

Because the Digital Revolution is here.

It has become easier for folks to download games to their systems, and the Big Two video games companies have done a good job in getting people to think digitally instead of physical media (through the Playstation Plus and XBox Games for Gold program). They bank on the ease of users being able to be able to quit playing one game, and load up another game without getting out of their easy chair.

There’s a lot of reasons why video game companies love digital sales over physical sales.. they don’t have to worry as much about over printing a game that may be a flop (which would be a sunk cost), it allows them to better control their retail strategy (when and if to put a game on sale, for example), and the big kicker is, they get a lot more control over what you do with your “purchase”. You notice the quotation marks around that purchase word? It’s because when you buy digitally, you’re not actually buying a copy of the game that you can do with as you please. You’re buying a license to PLAY the game only.. and only as long as the game can be redownloaded from digital sources. Don’t laugh, it happened with the now-canceled Silent Hill prototype, where when the game was cancelled, the playable prototype was removed from the online library, and people who purchased the game could not redownload it.

You may not see this much longer..

You may not see this much longer..

Does anyone remember the 10 dollar program? It was championed by Electronic Arts, where games wouldn’t work online if they were used, unless you paid a ten dollar “reactivation” fee…as part of a series of missteps that landed EA in such hot water with the public, they were voted in a public poll as the Worst Company In America. Twice! Or how about the rumors about the Xbox One’s rumors of always online activation that was rumored to lock out used games entirely? That was a critical misstep in a series of them that put Microsoft well behind Sony in this generation.

So, how do they get customers thinking digitally? They piggyback on the Steam model.

Steam is the dream strategy for retailers except for one thing (we’ll get to that in a bit). No inventory issues. Control over pricing (mostly). Easy to keep your games updated in a quick and simple fashion (before Microsoft and Sony got with the times, if your game shipped with a game breaking bug, you had to wait WEEKS before a fix would be out, which would tank your game’s sales at the time you most need them. That’s crippling.

So, what is the one thing wrong with the Steam model, at least from the video games companies perspective? They’re still giving up a cut of their sales to someone else. That was the thinking behind Electronic Arts’s Origin service, which has failed to set the world on fire, and the Ubisoft Uplay service, which set itself on fire.. (ok a slight overstatement there.. but only a slight one).

So, on the console side, they can’t sell directly to us. But working with Sony and Microsoft digitally takes probably a lot less of a cut then Gamestop does, and they lockout the used games market on that sale. And we go back to the Steam model, namely their ubiquitous Winter Sales. When the games are so cheap, you get used to buying games digitally. In fact now, if you buy a physical copy of a new PC game, sometimes it’s a CD with nothing more on it then a blank cd with a steam install code on it.

So they go with the old story about how to boil a frog. You don’t drop the frog into the boiling hot pot.. it will just jump out. Instead, you turn up the heat gradually, and the frog doesn’t notice until it’s too late. It’s what happened on PC with Steam. That’s what’s happening with Playstation Plus and Xbox Games for Gold. It’s nice to get people interested in games they won’t normally play, but the real idea behind this is to get you thinking “Hey, why do I need to go to Gamestop and deal with a teenager making minimum wage behind a counter telling me everything they think they know about video games. I can just go online, boop, download it, walk away for a little bit and bingo, ready to play! No switching disks. Just play!”

(Oh, and before I go any further, I’m not slagging the folks who work at Gamestop or other such places.. they are sometimes paragons of patience and virtue, say, when someone clears out their video game collection and sells them something on the level of 140 games at one go. I still think they’re telling that story at the Gamestop I did it to.)

What we’re seeing now is the heat being turned up, and the frog blissfully luxuriating in the warm water. Gamestop and Game are feeling the heat too, but it’s more of a deep dish frying pan they quite possibly can’t get out of. And don’t tell me that Gamestop will always sell video games, because we always will play video games on a disk..

Have you seen a Blockbuster Video lately?

I rest my point.

References
(1) http://fortune.com/2015/12/31/gamestop-diversifies-beyond-games/
(2) http://fortune.com/2015/11/23/gamestops-sales-drop/
(3) http://www.gamesindustry.biz/articles/2015-12-23-game-shares-plummet-in-light-of-sales-slump

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