GameStop Director Leonard Riggio Shows Us the Future of Gaming

Leonard Riggio is board chairman of GameStop (GME) and until recently owned 6.9% of the company. He now owns 5.5% of the company having sold 2.3 million shares for about $60 million. A very smart move. And one which shows us exactly where the video game industry is going.

GameStop and other high street game retailers rely on video games being distributed and sold in cardboard and plastic and there is a lot of reasons to think that this practice is at the start of a very significant decline. In fact physical inventory for content in this industry may well be about to go the way of the Dodo. And all because online distribution is better:

• No physical inventory to manufacture and distribute.
• No need to give a share of the sale proceeds to distributors and retailers.
• Instant global distribution.
• Ability to update the game for bugs and to give or sell further content.
• Possibilities of more sophisticated business models.
• The internet can stock a far bigger inventory and can keep it in stock for ever.

So online distribution wins hands down. But over the last year the market has changed significantly to rapidly accelerate the move away from physical stock.

• The amazing success of the Apple (AAPL) iStore. The iPhone has, by a massive margin, become the most successful new gaming platform in the history of the industry, and content distribution is 100% online. This is already being widely imitated. Everyone now has a better business model to follow.
• Retailers have moved hugely and aggressively into the secondhand game market over the last year. It runs at far higher profit margins than selling new stock. Unfortunately it has massively angered the game developers and publishers who receive no revenue from the resale of their content. They are very unhappy and are now highly incentivized to move away from physical product.
• All three platform holders, Nintendo (NTDOY.PK), Sony (SNE) and Microsoft (MSFT), are seeing uptake of digital distribution on their current generation platforms that massively exceeds their wildest predictions. The customers are voting with their feet. To the point that it is rumoured that the next generation Microsoft home console, the Xbox 720 or Phoenix, will have no disk drive at all. That it will receive content 100% online.

So the process of moving from physical stock to online distibution is speeding up in front of our eyes, every week we see news of the industry moving in this direction. And moving far faster than anyone predicted. A very good time indeed to bail out of share ownership in high street game retail.

Comments

[John316:]

So why did he only sell 20% of his holdings and leave the other 80% at risk?

Oct 14 01:47 PM

[user1010101:]

Bruce,

Could you please provide an outlook for the video game industry over the next year?

Although I agree with your general coments regarding "long term" industry direction, I think that your arguements have little application in the short term. Products such as the PSP GO have not been given raving reviews specifically because it is an all digital product (gamers can't easily move there existing games over).

Also, I don't beleive the nintendo would support (and infact resist) moving to a fully online distribution platform. Children still like going to the store and purchasing games. Similarly, "gamers" prefer to purchase the game as soon as it hits the shelf - who wants to wait for delivery. Gamestop allows preordering which targets a particular customer that will likley never move online for distribution.

I would find it very usefull to hear your critisism - since I am bullish on gamestop due to valuation as well as environment. Many major titles are coming out, gamestop is running at depressed sales/sq. ft. and continues to expand their store base. At 9x earnings, >10% FCF yeild - i believe this thing could be a home run.

Thanks

Ryan

Oct 15 08:33 AM

[Gaucho420:]

Dedicated gamers will get their games faster by downloading. I have XBL and if a game came out at midnight online, I'd have XBL downloaded overnight and have it ready for use in the morning. That's much faster than waiting for a retail store to open the next day.

I go to store now, such as this week to pick up NBA2k10, because I wanted the anniversay edition. But had it been a normal non-anniversary year and had the option been there to download it straight to the hard-drive from XBL, I probably would've opted for that.

I think a bigger argument agaisnt downloads is 1) the added cost of a hard drive to store them (especially when you get to the full sized games), 2) the lack of a manual and 3) no trade in value on downloads.

I know quite a few dedicated gamers who don't download that many games, because they dont' feel like wasting money on a hard-drive. And that's the over-riding reason, plus the trade-in value of discs.

For the 360, retailers should thank MSFT for making the hard drives propriatery and super expensive, as it keeps a large number of gamers hooked to retailers, as nobody wants to pay MSFT ridiculous price on its 60 gig or 120 gig drives.

I have paid for the 120 gig drive, because I can afford it, but most can and most simply don't even trie demos, movies or anything else, as the hard-drive on the 360 is cost-prohibitive.

I know the PS3 can use any drive you choose, but even at bottom barrell prices, it still cost money.

So in my humble opinion, online gaming will be restricted (for a tiny while) by the cost of extra storage. I have seen this to be true across my gaming friends and I know a boatload of all ages, sex and income types. Gamers want to play...paying for a hard-drive is simply an unwanted hassle at the current prices.

Oct 15 04:41 PM

[Shane Milburn:]

Q: To what degree would the swelling size of games contribute to selling hard copies of games vs. downloading. It seems to me there's a case that processing power will allow games to keep getting larger making hard copy distribution still preferable to long downloads? I am currently holding GME and have asked several gamer friends and they don't seem all that interested in downloading games - at least not as interested as investor concerns seem to be.

Oct 15 07:53 PM

[user1010101:]

Gaucho420,

I am not sure I agree with you that hardcore gamers download games at mid-night since not all games hit XBL before being released at a retail level - this is up to the distributor. As well, with the size of games getting larger, a 60gb HD is worthless. You cannot simply d/l an unlimited amount of games - at some point you run out of space. The idea behind the HDD was not to convert customers to an online distribution model - it is meant for updates, upgrades and game packs.

Finally, if everyone were to jump on to d/l a game (like you do) you would not have the game d/l by the following morning - servers are not capable of handling those loads. So, for now, be happy your are one of the few taking advantage of online distribution.


On Oct 15 04:41 PM Gaucho420 wrote:

> Dedicated gamers will get their games faster by downloading. I have
> XBL and if a game came out at midnight online, I'd have XBL downloaded
> overnight and have it ready for use in the morning. That's much faster
> than waiting for a retail store to open the next day.
>
> I go to store now, such as this week to pick up NBA2k10, because
> I wanted the anniversay edition. But had it been a normal non-anniversary
> year and had the option been there to download it straight to the
> hard-drive from XBL, I probably would've opted for that.
>
> I think a bigger argument agaisnt downloads is 1) the added cost
> of a hard drive to store them (especially when you get to the full
> sized games), 2) the lack of a manual and 3) no trade in value on
> downloads.
>
> I know quite a few dedicated gamers who don't download that many
> games, because they dont' feel like wasting money on a hard-drive.
> And that's the over-riding reason, plus the trade-in value of discs.
>
>
> For the 360, retailers should thank MSFT for making the hard drives
> propriatery and super expensive, as it keeps a large number of gamers
> hooked to retailers, as nobody wants to pay MSFT ridiculous price
> on its 60 gig or 120 gig drives.
>
> I have paid for the 120 gig drive, because I can afford it, but most
> can and most simply don't even trie demos, movies or anything else,
> as the hard-drive on the 360 is cost-prohibitive.
>
> I know the PS3 can use any drive you choose, but even at bottom barrell
> prices, it still cost money.
>
> So in my humble opinion, online gaming will be restricted (for a
> tiny while) by the cost of extra storage. I have seen this to be
> true across my gaming friends and I know a boatload of all ages,
> sex and income types. Gamers want to play...paying for a hard-drive
> is simply an unwanted hassle at the current prices.

Oct 16 11:51 AM

[Yang Wang:]

Nod.

120gb hard drive can hold 10 games (10gb[1 DVD] each after install) at most and we need space for movies, music and photos...

BTW, many PC online games use P2P tech (BitTorrent) to distribute game packages, so it should not be a problem for servers, but now days games become bigger and bigger, like [Blue Dragon] - 3 DVDs, [Lost Odyssey] - 4 DVDs and games released by blu-ray DVD could be up to 30gb, it's gonna take days to download the full game...

So, for now, retail stores should be fine.


On Oct 16 11:51 AM user1010101 wrote:

> Gaucho420,
>
> I am not sure I agree with you that hardcore gamers download games
> at mid-night since not all games hit XBL before being released at
> a retail level - this is up to the distributor. As well, with the
> size of games getting larger, a 60gb HD is worthless. You cannot
> simply d/l an unlimited amount of games - at some point you run out
> of space. The idea behind the HDD was not to convert customers to
> an online distribution model - it is meant for updates, upgrades
> and game packs.
>
> Finally, if everyone were to jump on to d/l a game (like you do)
> you would not have the game d/l by the following morning - servers
> are not capable of handling those loads. So, for now, be happy your
> are one of the few taking advantage of online distribution.

Oct 29 02:11 AM