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.

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.

The New York Times wrote an interesting piece on how Dr. Pepper is using a professional gamer, Tom Taylor (aka, Tsquared) to promote it’s Dr. Pepper line.   DP also signed up his crew, Str8 Rippin.  

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.

Got an email from Namco Bandai today…Afro is coming out as a video game January 27, 2009.  I hope this is good.  The anime was off the hook.  Thanks Gonzo/Funimation!  The quality and style of graphics are (dare I say) on par with Ninja Scroll. 

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 is yet another company who continued to get spurned by a smaller, high-profile company.  The other, of course, being Microsoft.

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. 

Release Dates
US: April 29, 2008
Europe: April 29, 2008
Japan: April 29, 2008
Australia: April 29, 2008

There’s so much buzz going around that it’s buzzonkers.  Announced a long time ago in a galaxy…(uh, yeah) – this one’s prolly gonna crush Halo 3’s records, which was $300 million and 5 million units in the FIRST week.

“I’m not a player, I just crush a lot” – rapper, Big Pun.  Fitting, given the expectations.

Expectations – $400 million in the first week. 

Unlike Halo 3, which was released on Xbox360 only, GTA is being released on multiple platforms, thereby expanding the potential overall sales.  Since EA is making a move to grab Take-Two, the maker of GTA under TTWO’s Rock-Star brand, there’s some need for TTWO to show such strong sales to entice EA to increase it’s offer or downright encourage stockholders to reject the tender offer (FTC also is a little skeptical).

Here’s an excerpt of the interview that IGN.com had with Rockstar’s VP of Creative, Dan Houser, and Rockstar North Art Director Aaron Garbut.  The interview is excellent, check out the rest here. 

 IGN: Do you think the heightened realism is going to make the anti-GTA politicians even more vocal?

Garbut: I think regardless of how the game looked or what it contained the politicians [would] be just as vocal. GTA is an easy target for politicians and journalists to pick on. It doesn’t really matter what we do or don’t do. It’s an open experience that allows players to do as they choose in a realistic environment. As these sorts of games become more and more sophisticated and the choices and abilities open to the players increases it will become easier and easier to sensationalize a particular aspect of it and at the same time become more and more ridiculous [about it].We’re seeing it already with the drinking in the game. There is no drunk driving minigame, there’s just drinking and getting drunk. Combine this with the ability to enter cars in the game and people are able to drive drunk, but that’s a choice they have made based on the abilities we have made available to them. It’s just as valid for them to walk home, but that doesn’t make for such interesting headlines.I seem to be ranting but my point is we don’t allow what…a politician might think to be an issue. We just make a game that is as good as we can make and as beautiful as we can make. I really loathe the idea of self censorship.

What’s fascinating is that I’ve had former 40+ year old co-workers talk about how they were playing GTA for hours after putting the kids to bed and picking fights with local gangs…and what it felt like being marked (one guy is from North Jersey, so that that into account J).  But it speaks to the wide following GTA has with hard core gamers and passive folk. 

IGN also did a good history expose too – pretty cool.