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 Is Real.

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.

2. Weak (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 2012.

3. Pre-Owned 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.

4. GameStop 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
- The 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 fortunes.

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.