Not Enough Power, Not Enough Players
Videogame retail giant GameStop recently held a conference call to discuss
its Q1 '12 results and to offer some projections for the months ahead. Here are
five observations that I took from the call and associated data:
1. The Slowdown
Overall global sales for GameStop's retail business were down by $280 million
in the first quarter of 2012 versus the same time last year. This translates
into a loss of 12.2%. Gains in GameStop’s digital and mobile sales were not
nearly enough to offset big declines in new video game hardware (-19%) and
software (-20%). Interestingly, partial blame for the decline was placed on the
extension of the current console generation, which was noted to be two years
longer than the previous generation. In addition, slower store traffic was also
cited as a factor for the decline.
(Physical) Sales In The United States.
As if those numbers weren’t scary enough for investors and analysts, a
further breakdown of GameStop’s sales data revealed that new software sales were
down by 29% last quarter in the United States, trending significantly lower than
global sales. New video game hardware also saw steeper losses domestically,
dropping to 28%. These numbers reflect the significant slowdown in sales of new
hardware and physical software that NPD data has been showing over the course of
Sales Are Flat.
Although sales of new games and hardware plunged last quarter, sales of
pre-owned goods were actually pretty flat. Globally, pre-owned sales were off by
only 1%. In the United States, however, pre-owned sales were actually up 1% last
quarter. GameStop is still projecting a YOY increase in pre-owned sales in 2012,
despite challenges due to the length of the current console generation.
Pre-owned remains an important driver for GameStop profit; 49% of the retailer’s
profits last quarter came from sales of pre-owned goods.
Asked, And People Answered.
During the call, select results of a survey posed to GameStop PowerUp Rewards
customers were shared. The customers were asked about what they want to see in a
Gen4 (next-generation) console, and the leading answers were:
- Backwards compatibility
- Ability to play used/pre-owned games
console must have a physical drive (disc-based, cartridge or card-based)
The data from the survey is to be shared with console hardware manufacturers,
including Nintendo, Sony, and Microsoft. More details regarding the survey
results will be made public after E3 in June. The survey results shared during
the call, along with select comments made by GameStop CEO Paul Raines, indicate
that the ability to play used games in Gen4 consoles is a critical factor in
many ways and seems to acknowledge the idea that some sort of anti-used measure
in Gen4 is a real threat.
5. Will Wii U
Turn Things Around?
There seems to be confidence that the Wii U launch - slated the “this fall” -
will reverse trends and get consumers to start spending again. It’s fair to
argue that a new console launch will generate more revenue, but there’s no
guarantee that consumers flock to Wii U as they did in the first half of this
current console generation. Despite assurances that a “high level of innovation
is expected” from Wii U, price point and available software will play a
significant role in the short-term success of the platform. In addition, there
are no guarantees that more casual consumers - who bought the Wii for Wii Sports
and Wii Fit - will make a return purchase this time.
Video games for more casual users have expanded to other immediate platforms,
like smartphones, tablets, and web browsers... and there’s arguably no need to
spend as much as $350 on a console when entertainment options already exist for
this group of consumers. There’s potential for WiiU to be big out of the gate,
but GameStop will need more than that potential to turn around its current
Armchair Analysis will be covering Q4 and 2012 fiscal year earnings for Take
Two on May 22nd before gearing up for E3 in Los Angeles. Look for special E3
content before, during, and after the event.