Phrenzie.com

I’ve been reading a lot about threats to GameStop’s business. Some are VERY valid, some are a little less than. Here are my thoughts on one stemming from Amazon, BestBuy and Toys-R-Us getting into the trade-in video games business (I haven’t found too much on BestBuy and Toys, but let’s just presume they are in this too).

Amazon: Amazon’s trade-in model (which is run by a third party, NorAm International) seems cumbersome and doesn’t address the same customer that GameStop focuses on.

I would need to ship my game to Amazon, wait (because it’s shipped via US Postal and goes through Amazon’s own quality control), then upon approval, I get a credit to my account to buy other games. I think hardcore gamers (GameStop’s customer) want a more immediate payback…go to the store, trade in (or trade-up), then buy right on the spot. Casual gamers (Amazon’s customer) might be different, but chances are, they aren’t trading games. More so, it only works if people can’t sell their stuff on Amazon Marketplace (presuming that Amazon will buy it).

I have to check some more, but initial reviews suggest that Amazon is following Gamestop’s trade-in prices. So there’s no benefit of using Amazon.

Btw – Amazon was thinking of competing with Netflix (Wal-Mart was also thinking of competing ). As a result, NFLX’s stock suffered greatly. Both companies opted out (actually, I don’t think Amazon ever started, but just thought about it). But honestly, among the two, Amazon had the better database of determining which DVDs to rent (neither had the data to determine how long to rent, though…which was critical). Now, NFLX owns the space.

Speaking of Netflix,snail mail was the EXACT reason why people said Netflix would never overthrow Blockbuster.  So I can’t understate this factor.  However, I also don’t think Amazon will be as disruptive as people have said because of the different market customer segments each company serves (see below).

BestBuy/Toys R Us – It takes expertise to work a trade-in business model: from pricing, to demand, to inventory management. As far as trade-ins, BestBuy’s and Toys’ do not have this expertise. So I really don’t think they are reasonable competitors.

I could see Amazon being a more adequate competitor because it has the database of selling/buying used game trends (Amazon Marketplace), but I don’t think it that reasonable for the reasons above.

Both – The typical customer of GME is a hardcore gamer (GME calls them “electronic game enthusiasts”), whereas the typical video game customer at AMZN, BBY and Toys is a casual gamer. So I believe that the customer retention will not change considerably.

Having said all this, my hope is that GameStop’s management is not arrogant enough to think that competitors and, more so, new distribution channels don’t pose a significant risk to the company. They have to explore these in depth and come up with real “Plan Bs”.

For example, why wouldn’t GameStop explore electronic distribution? I’d rather see them cannibalize their brick store sales and while growing new distribution (for net overall company growth) than to let someone else do it to them.

UPDATE

A LOT of people are very concerned about GME’s lack of a moat, particularly for used games.  I disagree.  GME has a relatively big moat (think Netflix again).  Both companies used their expertise and infrastructure as competitve advantages.  That’s why Wal-Mart couldn’t sustain a rental DVD model, like Netflix.  Trading in games is not as easy as you’d think.  Their’s pricing and inventory management, coordination with regulatory authorities (the GME store I visited volunteered the fact that they DO send information to the local police, as required by LAW), among other things.

I also think that there’s a recessionary reason to trade in games and there’s a functional reason (because you’re tired of the existing game and want something new).  I would think that casual gamers would have more recessionary reasons than functional, and thus trade in games for non-games (like paper towels), which are offered by Amazon and Wal-Mart. But again, GameStop tends to serve hard core gamers, who are more apt to have functional reasons to trade in games.