The Future of Physical Game Retailing

Since Gamestop is having a few issues with sales at this point, it seems like perhaps an appropriate time to look at issues in the game retailing business and the timeline for some upcoming changes. For a number of years, folks have predicted the death of games on physical media, and certainly it does make sense that a button click to purchase is a better distribution model than sending folks to a store to pick up something that could simply be downloaded. There have been a few barriers to the transition:

  1. Sales departments at publishers have long been the primary drivers of revenue, and these folks are compensated by how many units they can place in retail, so this major stakeholder naturally stands against a change to digital distribution.
  2. Retailers can drive sales pretty efficiently, so it’s hard for publishers to make a change to online distribution until volumes become large enough through this channel that it’s a strong freestanding revenue-driver.
  3. I remember when EA was first looking at getting into mobile games; they told me that they would get into the business when their production capabilities and marketing muscle could have significant value in the category. An ongoing problem is that lower cost digitally distributed games don’t really need expensive massive production capabilities or vast marketing budgets. The $60 packaged game is hard to sell for $60 through online distribution; really, even core games online want to be smaller chunks, and that means a different sort of business model and a different allocation of production resources. This is a significant transition to make, and likely why game publishing execs seem to be jumping ship from major publishers to new online entities.
  4. In addition to the the marketing difficulty of selling a $60 game through download, there’s the bandwidth issue that makes the full game download process very non-instant, and pushes most users to just visit a local retailer.

We’re at the beginning of the time when these barriers can be seen coming down, and the downloaded sales volume is meaningful. A few elements have brought us here, and will bring us to next steps:

  1. Incremental content has become a significant part of the game experience, enabling user comfort with the download process, and building an easily converted audience.
  2. Steam has shown itself to be highly effective in driving sales.
  3. Casual and social games for PC and Mobile have taken a strong position, with business models that seem more attractive to investors (and industry execs).
  4. Whether in games or other media and software, customers are simply more used to it coming through the network than through a store.

So, the question at this point is really just what effect this will have on retailers, publishers and developers. I’d suggest that physical media won’t go away any time soon, but it is highly likely to flatline. More games are sold online, many with specifically online models, but losses here will be somewhat balanced by physical aggregations of games available online (for an offline and older audience, as well as in special-edition boxed sets). For retailers this will be an interesting change to manage, as growth in videogame sales go flat. The margin on videogame console software is insignificant, so each major player makes their money in a slightly elliptical manner, making the effects of change different for each:

  1. Best Buy -Will be fine with this; they dealt with the transition of music to digital distribution, and have an ongoing expectation of dealing with this sort of transition. They make their money in games from hardware (screens, etc.) and bundling physical products with games.
  2. Target -Use games as a traffic driver, but could easily replace it with something else.
  3. Walmart -This audience lags a bit, and may take up more physical media for longer, in any case.
  4. Gamestop -Depend upon sales of used product for profit margin, which is definitely going to have less value in a new world where fewer titles ship and tie-ins to incremental content degrade the value of used product. They have a true gaming brand, and if they can act pro-actively moving into the new world, significantly changing their model, they have great potential. But, from the outside, it really doesn’t look like they’re doing anything to deal with this.

In terms of publishers and developers, I think this should be a positive change:

  1. A $60 game requires huge investment in development and marketing, making things far too hit-driven to be a sane and attractive business model. Digital distribution is also hit driven (as we see with casual titles) but it’s to a much more limited extent.
  2. When a game publisher releases a game on disk, they must pay the console manufacturer a licensing fee of as much as $12 per unit. This is a sunk cost, whether the units sell or not, in addition to packaging and logistics costs.
  3. It’s a lot easier to allow creativity and innovation in a downloaded or online game than in a $30 million game with a $15 million marketing budget. I remember E3 in 2006, just before this wave really hit, when the titles on view were just astoundingly unoriginal. Everything there was an iteration of a franchise, or a ripoff of a franchise, aside from a couple of original works that simply didn’t live up to expectations. Games were dying, and now they’re flourishing.

One thought on “The Future of Physical Game Retailing

  1. I wonder what will become of the secondary market. One can resell a physical disk but not a digital download. Maybe the industry can solve the problem of durable goods. One the other hand the lack of resell value might be taken into consideration with price.

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