GameStop’s Earnings Guidance Signals Industry Problems

If the recent earnings news and guidance provided by the video game retailer GameStop are any indication, it would be reasonable to assume game outlets are headed for a similar fate as that experience by movie video stores like Blockbuster 5-10 years ago.

Is spite of beating expert’s projections, GameStop CEO Paul Raines had this to say about the future prospects of his company: “2016 proved to be a more difficult year than we originally forecast, while our strategic transformation drove record gross margins of 35% and earnings came in within our revised guidance of $3.77 a share, we encountered stiff headwinds as we completed the third year of the console cycle. As a result, the physical games category declined 15% and our GameStop brand lost a small amount of market share during the holiday period due to deep discounting.”

At issue is the increase in online video game subscription solutions. Gamers can now order the latest and greatest games online directly from game developers. While brick and mortar stores like GameStop and Best Buy are seeing a significant decrease in video game sales, companies like Electronic Art (EA)and Activision Blizzard are seeing an increase in direct sales to customers. By eliminating the middle man, these game developers can gain more control over prices and increase its profit margins while giving customers a more convenient way to buy games.

While the sale of gaming consoles from retailers will continue to grow, it seems reasonable to assume that eventually all games will be purchased through online retailers and/or streaming services. Expensive packaged games have most likely seen better days. From a marketing perspective, it won’t be necessary for the gaming industry to “dress up” its games for the right to compete. The online playing field is level and the best games will be the real winners along with customers.