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.

It’s a shame that people are so ready to call an end to GameStop because of a start-up company, OnLive, that hasn’t launched yet.

Some of the headlines were puns off of the GameStop name, but pretty much read the pretty much the same…streaming video games online to PCs and TVs would crush GameStop’s brick and mortar business model.

There are several observations/questions…

1) It’s not the idea, but the execution that counts. It won’t launch until Winter 09, and many things can change, like product delays, lack of funding (remember, the business is a start-up)

2)  Will pricing and demand be enough to pay for the costs of running the business while enticing games to use the service?

3) Will latency and other major technical potential problems be worked out by the time of launch or soon enough after

Nonetheless, this COULD be another Blockbuster v Netflix (remember, people said that no one wanted to wait for DVDs in the mail).

No question that management at GameStop should watch OnLive and see how they are doing and formulate Plan B (I really do hope they don’t think they’re Superman) just in case.  I mean, EA, Take-Two and other major publishers have apparently signed on, so there HAS to be something to it.

Actually, if customers want another distribution channel, GameStop should work on  anyway to meet that demand, as a practical business exercise.   CEO, Daniel Matteo, said on the 4th quarter earnings call that they’ve seen these types of things come and go.  I have no doubt about it.  Again, it’s not about the idea, but execution.

It’s just too soon to tell.

Honestly, I have to say it’s kinda cool.   While there’s the risk of being labeled a sellout or “gone corporate” if it’s the right brand (i.e, one with street credibility), it just puts the person/group on another level.  

For example, NO ONE would think twice of Red Bull sponsoring James “Bubba” Stewart, mega motocross racer.  

But I think it’s cool for gamers to come to the forefront.  Video games are massive business.  EA alone has revenue of $3.7 billion (with a “B”).   Activision, the next biggest, is not too far behind with about $2.8 billion thanks to a few blockbuster games and acqusitions (both numbers are from fiscal 2008…2009 revs s/b  be much higher)…by the way, I mentioned on TechMediums.com that video games tend to be much better positioned to work through recessions than many other companies.

There, I said it! 

It’s really that good.

So if the video game is on par with the anime, then we should be in for a treat.

Problem is that sometimes a top anime doesn’t translate into video games.  Some fans of Spawn know what I mean.  I mean, I really TRIED to like the game play, but just got, well, bored, underwhelmed, disappointed. 

Bandai is gonna send us a copy of the game, so my man, Will, is gonna let you know how it plays on the 360.

Afro Resurrection Trailer…

Well, it looked inevitable.  EA has FINALLY backed off of it’s, seemingly longstanding desired of EA to plow it’s seed into the fertile soil of Take-Two (yuk – for visual, but that’s the way TTWO felt).

It was inevitable.  TTWO, for 8 months, said “I’m not ready”, probably because of it’s vows of chastity.  EA, the ever present jock, was like “Come on, baby.  I’m the captain of the football team, and all-state.”

TTWO’s stock hit the skids today, as would be expected, when a suitor pulls out of a bid.

A little bit ago, I wrote a blog on why video games are recession proof. The theory is that people want a nice form of entertainment that, in a recession, is extremely low cost. Think about it. For about $50 for a brand new game, you get unlimited play for the LIFE of the game. The means the cost/play or cost/hour of play is as close to zero as you can get. Compare that to the movies. That cost is $9/play or maybe $4.50/hour. It’s off the chain for most popular concerts.

So why would movies do well in a recession? I have a couple of thoughts…

1. People like going out. In a recession, this truth still holds. And in an environment when there are so many reasons to stay home, it’s still true. For example, the ungodly number of social networks, video chat, AIM and other ways (like the phone) to maintain contact with friends, in addition to movies on demand and the old tried and true, TV, are some of these reasons to stay home. These should not be underestimated.

2. Compared to other forms of entertainment, going to the movies is relatively cheap (assuming that you eat before/after the movies and avoid the concessions, which can eat a whole in your pocket). It always gives you something to talk about afterwards too.

3. The reason to go out to a movie is because something is good. There were so many movies I wanted to see this summer it’s ridiculous (The Hulk and Batman being two of them). This is very crucial. If there were horrid movies at the box office, theatres would not be doing well at all.

What’s interesting is that some theatre chains (the industry is coming off of a period of consolidation) are doing okay. Theoretically, consolidations should be good since you can squeeze synergies out of most of them. With the theatre consolidations, initially, I was wondering whether it would good, since the industry wasn’t doing that well. I kept myself in check, because you can never scold good companies in a bad industry (don’t throw the baby out with the bathwater – type of thing).

Here’s a wonderful blog from Wired.com that gives some stats on the matter.

EA

It’s like the rich dude who keeps begging the cute chick to go out with him, thinking that with all his wealth and star-power, she should just say yes.  In this case, EA is the rich dude, and Take-Two Interactive (TTWO) is the cute chick. 

Well, she’s ridiculously hot because she’s got one of the best bodies – the enormously popular Grand Theft Auto franchise. 

But after extending its offer for Take-Two, again (4^th time), EA’s offer was rejected, again.  Still too low for Take-Two. 

Initially, Take-Two wanted to wait until GTA had been officially released to see if it could drive increased sales and value. 

So far, not-so-good.  Sales are high, but since the debut of GTA on April 29, Take-Two’s stock has actually gone slightly down -.5%.  In the last three months, Take-Two’s stock is only up 4%, having fallen off quite a bit in the last few weeks.

So maybe EA is saying, “Look babe, I know you’re hot.  You know you have a killer body.  But you can’t pull any other dudes with my looks, intelligence and wealth.  So I’ll wait, but let’s stop fooling around and make it happen.”

Take-Two is giving EA the “It’s not you.  It’s me.”, routine.

It’s actually kinda funny. 

What if traditional media companies were able to use predictive models to lower their inherent risk profile?

 The Risk Profile

So, think of media companies (like Disney, EA, Bad Boy) as a series of formal start-up ventures, where the business model requires the constant formation of start-ups (e.g.., new artists, games, movies) to make money. 

However, unlike normal start-ups, each media start-up utilizes common administrative systems like legal, accounting, marketing, etc., and, for the most part, they are more efficient, since this is what they do day-in and day-out.

Some of these businesses already have a library of content (franchises like Madden, or Disney’s Classics) that they milk to lower the risk profile – making the business model more like software – build it once and charge “rents” and/or offer updated versions for a fee.

But unless you have people who consistently pick out winning “ventures” (Diddy, Clive Davis and DJ Drama come to mind), then you’re at a much higher risk.

 Predictive Models

So what if predictive models (PM) could be used to lower the risk profile by refining the kinds of potential audiences, venues, alternative media, (like video games for film or music), price points, additional merchandise that could be sold to fans? 

Predictive models use a series of data (like whether someone buys a product on sale, what day, what kinds of products, etc.) to anticipate future behavior, like other products they would buy or what day they’d buy in on.  It’s a way to drastically improve the click-through rates of customers.  Obviously, the most widely known models are the ones used by Netflix and Amazon.  Insurance companies have been doing this for years, though, in determining likelihood of getting into accidents or dieing.

  Application to Media?

So how can it be applied to media?

Example questions that can be answered:

·        Music –

o       What extras, if any, should be given away with the CDs?

o       Should CDs even be made?

o       Would demand increase by offering the music for free (then charge for concerts and merchandise) or charge for music, lower price for concerts or no change?

o       What kind of merchandise should be sold?

·        Movies –

o       Should advertising be 100% online? 

o       What other product tie-ins could be developed?

o       What products should be licensed?

·        TV –

o       Which shows or episodes should be broadcast on internet only?

o       What other product tie-ins could be developed?

o       What products should be licensed?

Notice that none of these deal with content.  Entertainment is such a different animal.  You can do all the right research – type of movie to produce, the actors and directors to hire, etc, – and still fall flat because the actor didn’t put in his/her best performance, etc., etc. 

Nonetheless, constant research, polling – on and offline, are critical to gaining as much detail as possible.

 While many of these questions have already been answered, to varying degrees of success, PM (like the one developed by Proclivity Systems) seeks to maximize the effectiveness of the marketing, product development, licensing, etc., and lower the risk profile of the business (not necessarily eliminate it).

Before we get into piracy, a word from McLovin (of SuperBad) on the topic.

Matt Mason, in his book “Pirate’s Dilemma: How Youth Culture is Reinventing Capitalism” discusses a fascinating look into what is very possible a mega trend…piracy in other forms – not just music but everything, how technology is making piracy easier and how, on some level, it should be embraced.

As far as the first two points, sure, there have been bootleg BMWs, watches, software, but Matt’s talking about a world where it’s becoming much easier.

An example, is the 3D printer, which has been talked about for a while (heard about this at about the same time I heard that someone built a PC accessory that could replicate smells over the internet).

As far as it being embraced, I remember an old professor of mine, Pete Fader, a marketing professor at Wharton who’s known for his patented rants, arguing that file sharing was actually good for copyright holders (primarily record labels and their artists). It created buzz. Matt also talks about this in that the demographic who would get pirated material is not the demographic who would actually buy the material. Fader argued that the labels were wrong when saying that they lost $X amount in revenues due to pirated materials. “That’s ridiculous!” Fader said. Just because you can’t get something for free, doesn’t mean you’ll buy it otherwise.

While thinking that copyright laws should be updated, Matt likes the idea of piracy (mentioning that he can’t wait for his book to be pirated).

I actually agree, in concept. I like the idea that new business models need to emerge. That’s why I like open markets. It forces companies, and thus, products, to evolve.

But if I spend a lot of money to make intellectual property, I deserve the right to protect it, regardless of borders.

That notwithstanding, I also think some forms of IP can be seen as marketing materials for a greater thing. Classic example is music. Because of the amount of music put out yearly and the lack of distinguishing characteristics of some tracks to others, music seems more like a commodity. As such, it could be effectively used to market the artist. Artists can let viral marketing take over, bootlegged or not. In fact, in this scenario, you want people to pirate it because it costs you nothing…free marketing to create demand.

The model that I favor is a controlled “open” IP.

Software companies have been doing things like this for a LONG time. Adobe let people get Reader (reads pdf documents) for free to help create demand for Acrobat (to make pdf), for which it charges.

This model might be able to be used consistently for all IP and is a direct link to revenue– that’s why I like it.

Here’s Matt’s video. Enjoy!

Thanks to ProHipHop.com for the video.

E3 (Electronic Entertainment Expo – run by the Entertainment Software Association, ESA) hasn’t been what it was.  I’ve been hearing that for since 2003 from hard-core gamers – it’s way too commercial and too large. 

Well, Gaming Nexus reported last week that Activision will not be at any official 2008 E3 activities.  The ESA confirmed to GameDaily that Activision and Vivendi Games (which Activision is merging with – see below) are no longer a member of the ESA as well.  That’s a major blow.  Major, major, major.

I can’t help but think that the gamers’ prediction 4-5 years ago is coming to pass…that E3 is not relevant.  One gamer said that new games are previewed over the net now anyway.  Outside of the “spectacle” of the large crowds, loud music and bright lights, why would any developer/publisher/relevant third party come?  Indeed, developers/publishers complained that the event had been getting expensive and not conducive to making business deals, since E3 was overly crowded and didn’t allow exhibitors the ability to properly get out their message. 

Well, E3 is making amends, having scaled back the number of participants and moved back to a single location, among other things.  However, other trade shows have been quickly taking E3’s dominance, like GDC (Game Developers Conference).

 Merger

Vivendi, the French conglomerate is acquiring a controlling stake, 52%, in Activision, to combine its Vivendi Games (which owns Blizzard Entertainment and its mega MMORPG game, World of Warcraft) into Activision to create Activision Blizzard. 

Also, here’s Jamie Kennedy’s performance at Activision’s press conference at 2007’s E3.  Not that good.  Thanks to Joystiq.com.