GameStop’s latest quarterly earnings report shows little sign of a turnaround for the long-troubled retail game. Sales fell 26.7% year-on-year for the quarter from April to June. Even reporting on the constant closure of stores and COVID-related reduced working hours, so-called comparable sales from “the same store”
GameStop still sees a public “opportunity to take advantage” of the upcoming release of new Sony and Microsoft consoles that could help turn its business around in the short term. But there is some reason to believe that the next generation of consoles may actually worsen GameStop’s long-term prospects, thanks to console options that completely get rid of disk drives.
Putting a brave face
In a profit talk, GameStop CEO George Sherman acknowledged that “there is growth in digitally downloaded games” and said GameStop “is not discussing the growth of digital games.” But it also tried to positively influence the fate of GameStop’s physical sales for the next generation of consoles.
“First, the new consoles have a disk drive,” Sherman said. “So over the next seven years, consoles will play both the physical and digital software we sell.”
However, this is only partially true. In fact, both the Xbox Series S and the PlayStation 5 Digital Edition there is no have a disk drive. And while GameStop sells some digital software, most of its business comes from selling new physical games and high-margin games that it owns.
We don’t know what percentage of users will choose these diskless consoles, of course. A 2013 GameStop survey suggests that 60% of users wouldn’t even think of a console that doesn’t play used games. Attitudes may have changed in the last seven years, but it is difficult to see how much.
Still, lower hardware costs can definitely make diskless consoles an attractive option for many potential customers of this generation. Xbox S Series is $ 200 cheaper than the more powerful, equipped with Series X discs, an amount that can go for many purchases of digital games.
Nevertheless, any console gamer who abandons a disk drive in the next generation is a user who will have much less need of a retailer like GameStop in the future. And while some of these players may already be ignoring disc games, at least they do now option of purchase some disc titles (especially if a particularly attractive collector’s edition is available).
Starting in November, a significant portion of the console market will not even be able to consider sales of GameStop bread and butter discs.
Is the Internet really that great?
Sherman confirmed in his call for profits that GameStop will sell these consoles without discs in its stores, a move similar to the world in which Tower Records decided to sell iPods as sales of physical albums were cratered. But Sherman also tried to maintain a healthy skepticism that buyers of next-generation consoles would want to give up their disk drives.
“Consumers like the physical aspects of the games,” he said. “They collect them and add value as an exchange. So, as the software continues to evolve with drastically better graphics, it doesn’t take up valuable storage space and the disks are available to those without broadband.”
There is definitely a market segment that continues to value physical games, and Sherman is right that “the life of physical games is here to stay in the foreseeable future.” At the same time, however, the size of this market is already shrinking, although disk drives are ubiquitous in home consoles.
In the quarter ending June, Sony said as much as 74 percent of its total gaming sales came as digital purchases. Even if that number is temporarily overstated by coronavirus-related home stay orders, the 53 percent sales ratio of digital full games reported by Sony last year was not.
It is not difficult to find other evidence that the cost of purely digital games is rising while the cost of physical drives is declining. And while the rise of mobile gaming has something to do with this, the console market is not protected from the same trend by drives.
Sherman tried to put up a bold front against this overwhelming trend, arguing that game downloads were not all they failed at. “Broadband taxation remains tight in most parts of the United States and around the world,” he said. “With a significant increase in home activities, many are forced to compromise on the use of broadband, which is a natural advantage for physical games.
“With our current capabilities and added same-day delivery, we believe that most users can get a physical copy of the game faster than they need to download,” he added.
To our ears, they sound like the kind of arguments, publishers of print magazines facing the growing use of news on the Internet, or that the Blockbuster video made as a video stream is growing. With the average download speed outpacing the size of the game file, it is increasing in the US, and digital game subscription services are providing better value, buying a game on disk is likely to seem less and less attractive to larger and larger market segments.
Maybe GameStop will be able to return to a mobile phone kiosk model by selling and servicing game hardware and accessories (along with collectibles related to games) from a centralized physical collection point. The company has already outlined an ambitious plan to become a “social and cultural gaming center in every GameStop store.” But any future GameStop that relies on its current model to sell mostly disc games doesn’t seem like a good long-term bet.