GameStop's Business Model is Rapidly Deteriorating

There are a few things happening here. GameStop Corp. (NYSE:GME) is running around in a bunch of different directions and while each seems to be met with initial success, the longer term success is questionable at best. Their newest initiatives seem to be taking them away from gaming which validates the bear thesis to a point that their current model is unsustainable. Further, it says that their drive to digital either isn’t working OR isn’t going to deliver the same profits as their previous physical game/trade in model does.

Trade-ins are still the bread and butter of this company. Until they find something that drives constant traffic and dollars, they will continue to shrink as gamers move to digital. To this point they have not found it. These newest plans won’t either.

Let’s first deal with their most recent foray and then look back at some previous ones for clues as to how this ends……

From “The Verge“:

“Why would a retailer have a factory? This was a big bet on the future,” says CEO Paul Raines. It’s one of many such bets: GameStop also bought electronics reseller BuyMyTronics in March of this year, along with several companies to help it begin to digitally distribute games across both desktop and mobile ecosystems.

For a company like GameStop Corp. (NYSE:GME), finding new businesses, particularly digital ones, would seem to make sense. They could ensure a future for a company whose brick and mortar presence — stemming from the need for physical discs and cartridges — might not be guaranteed indefinitely.

Surprisingly, though, the chief executive tells me that future-proofing GameStop wasn’t the aim. These new initiatives were originally born to “fill a trough” in the company’s core business, he explains. “We’re coming off the longest console cycle in history,” Raines reminds me, referring to how the next Xbox and PlayStation aren’t expected until 2014. “It’s putting pressure on everybody.” In other words, the other ventures are a short-term way to boost the balance sheet and please investors while current-gen console sales taper off. But when GameStop store shelves get filled with the next generation of game machines, Raines says it’s not clear whether there will still be room for electronics too, and the new BuyMyTronics subsidiary gives GameStop an alternative way to sell them.


Raines sees refurbished electronics as more than a short-term experiment — “I think we passed the experiment phase in December,” he says, citing a projected $200 million in mobile device sales this year. He’s merely not sure when and where those electronics might actually be sold. Due to the ubiquity of the company’s physical locations, he believes that GameStop stores is a “superior trade collection point” for electronics, but that doesn’t mean there will necessarily be a dedicated electronics section in future GameStop stores.

He claims it’s also not about the product so much as the Buy-Sell-Trade model where GameStop’s expertise lies: “We could trade in shoes if we wanted to.”

GameStop has to reverse-engineer every single device it decides to refurbish, and figure out the best, most cost-effective way to do so. “When we first started refurbishing hardware, we asked, ‘Where are the training manuals going to come from?’ ‘Training manuals? What training manuals?’” Daughtery quips. The iOS department has been operational for six months, but for Android, things are more tenuous. Android refurbishment operations began only six weeks ago at a single table, and it’s a learning experience. Manufacturers don’t provide instructions on how to disassemble their products, and they rarely give GameStop hardware in advance. “As soon as the public can get it, we’ll reverse engineer it and break it down,” Daughtery tells me.

This will be, and has been very successful out of the gate. Why? There are not many people who refurbish out there and most people have a few old broken devices sitting around. (I have a few ipods the kids have broken in a drawer in my office). So, there will be an initial surge of people taking advantage of the program. But, after the surge, there will be a precipitous drop as the low hanging fruit has been picked.

Additionally, if this does become a viable business, it will not be very long before competition enters the space in a major way, shrinking margins. Think Best Buy Co., Inc. (NYSE:BBY) or, Inc. (NASDAQ:AMZN)? Best buy is desperate for additional revenue/foot traffic and a program would help that and Amazon could offer free/reduced repairs to Prime Members to further boost subscriptions there? Think about it, if Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT) or Google Inc (NASDAQ:GOOG) think they are losing revenue due to a repair/resell program how long before they enact their own? Either way, I am highly skeptical this becomes a significant long term business. This is especially so if they plan for it to replace the inevitable shrinking of the game trade-in business

This also begs the question: What is Gamestop? Are they a gaming destination or are they morphing into a reseller of second hand electronics and whatever else they can refurbish….Are they a glorified GoodWill?

So now lets look at some past deals $GME made that despite initial successes are now petering out.

Kongregate was supposed to be GameStop’s play for mobile, delivering free-to-play games with a little help from Adobe Flash. It worked well enough to start: the Kongregate Arcade app has over 500,000 downloads on Android and a 4.5-star rating. Now that Adobe has abandoned Flash for mobile, though, the future of Kongregate Arcade doesn’t seem so bright: Bartel calls the app a “brand-building exercise,” rather than a commercial product. “Flash not being a part of mobile going forward will have an impact,” Bartel admits.

Really? That isn’t what they said when they bought it

Acquiring Kongregate strengthens GameStop’s digital platform and its commitment to become the gaming aggregator of choice.

J. Paul Raines, Chief Executive Officer of GameStop, said, “Kongregate advances GameStop’s digital strategy by providing a gaming platform for casual, mobile and browser games that can be promoted and played by our existing gamers. We welcome the Kongregate team to the GameStop family.”

GameStop President Tony Bartel added, “Combining Kongregate’s expansive catalogue of games with our well known consumer brand, powerful marketing and strong customer relationships, means that even more gamers will be able to enjoy their games anytime, anywhere and on any device.”

Kongregate co-founder Jim Greer expressed his excitement regarding the acquisition and offered that, “To date, our company’s unique DNA has given more than 8,500 game developers the tools to make their games social, reach a huge audience and make money from over 30,000 innovative games. This includes access to virtual currency and robust community features such as leaderboards, player achievements, profiles, multiplayer, dedicated game forums, and a site-wide leveling system. Our community will only be enhanced with GameStop’s close relationship with millions of passionate

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