Looking to unload your unwanted gaming gear? You're probably on your way to GameStop. As the largest dedicated video game retailer in the world, it's hard to imagine a games enthusiast who hasn't browsed its wares a time or two. Over the last few years, however, the firm has been expanding outside of retail sales -- dipping its fingers into digital distribution, streaming and even phones and tablets. The brick-and-mortar store even seemed to be flirting with building a mobile network. With all these changes underfoot and a new console cycle just around the corner, it seemed like a good time to catch up with GameStop CEO Paul Raines to get some perspective.
GameStop is typically known as a video games retailer, but recently you've started snatching up and reselling Android and iOS devices. How did that come about?
It's an interesting thing -- We've been in the buy / sell / trade business for a long time, maybe 15-20 years, and on the one hand, you can say we're a gaming company, but at the same time, we're a company that has a real strong skill set around buy / sell / trade, and in fact, we're the largest refurbisher and recycler of electronics in the world. So, for a long time, we had customers coming in the stores saying "Hey, I want to buy Call of Duty," or "I want to buy a new PS3," asking "would you take my old phone in trade?" And we had to say no for a long time. We only took consoles and games.
So it was customer driven?
That's where it started. We hit on this about two years ago and asked ourselves, "What's keeping us from refurbishing and recycling other kinds of electronics?" We then went to our PowerUp Rewards community and did some surveys, looking to find out how many members have old iPods and iDevice's they'd like to trade in and, lo and behold, there was a lot of them! So, we began the program in pilot, in Dallas, during May of 2011, and went national in September. In our refurbishing facility we were able to reverse-engineer and learn about refurbishing iDevices. Then we went to 200 stores to see if we could try to sell those devices. We took it national this year; customers tell us they love it.
There's nobody in the US -- there's a couple in Europe -- there's nobody in the US who really does a good job of offering a place to recycle and dispose of your electronics, in a store. There are a lot of online players, but not in stores -- so we found this was a real opportunity.
Here's the thing, though -- you can't over-complicate these stores. Small stores, limited staff, and they are video games stores after all. So we acquired a company called BuyMyTronics, which is an online marketplace based in Denver, and that's where we're putting all the expanded assortment. If you want to trade your camera lenses, we take those at BuyMyTronics.
We noticed back in May when page for "GameStop Mobile" briefly went live, and then was quickly taken down. What happened there? Did somebody pull the switch too soon?
(Laughing) Yeah, somebody pulled that somewhere. We do marketing mockups of products and different things, so that was not a real product page; we don't intend to launch that.
So GameStop Mobile was part of an internal proposal?
No, this was just a creative thing. It wasn't even an idea being pitched, it was just a creative mockup that got out there and was picked up by the media. We aren't trying to hide that or anything, but I don't want to mislead people. Somebody left it up on the server, and people assumed that we were getting into the network business, but we're not. What we are testing, and have been for a while, is selling pre-paid phone services and SIM cards with different providers. The idea is to have customers come in, buy a used phone -- and if we can sell them a pre-paid SIM plan, then that's great. If we can sell them a pre-paid smartphone that has Kongregate pre-loaded on it, then we will do that.
So the bottom line?
We don't have an MVNO (laughing). If you are trying to provide your customers with a bundle that comes with a pre-owned phone and will allow them to play games, make calls, and everything else -- you don't have to have a network to do that; you can sell SIM cards and pre-paid plans, those things exist, and we are in the process of testing several to see which ones makes sense.
Speaking of subscriptions, Microsoft recently looped GameStop into its subsidized $99 Xbox 360 deal.
It's a very preliminary test, a concept, but the idea was "can you imitate what the phone guys have done with bundling service with hardware?"
Has GameStop seen a lot of success with that?
We have, but it's very early, very preliminary. We like it, and we think we could be more aggressive with it, but Microsoft wants to move slowly with it, and that's okay. But the future -- bundling hardware with online services and bundles is a great idea. I think there will be more people doing that, not less.
Do you think these bundles will have more potential with fresh hardware, like the Wii U?
Oh there's no question -- if you think about the console launches, there will be digital bundles with these new consoles that didn't exist before. You'll see bundles that include DLC, connectivity, all those kinds of things. It's a logical thing to do with new consoles that have all those features, and you'll see it largely at GameStop. Our market share of these consoles today is double what it was at the last console launch, so we will be the share leader globally, and we'll provide lots of innovative bundles.
Say Nintendo or Microsoft chooses not to offer bundled content in this way during the next console launch -- would GameStop create its own?
Well, we're doing that with titles right now, interestingly. Go back to last year with Call of Duty; we attached a significant amount of digital subscriptions to Call of Duty Elite when we launched the game, so we're doing that with titles. Pretty much every title that comes out now has DLC attached to it, and our customers, maybe 20-40 percent of them buy the digital bundles that go with the game. So we're doing that with software, and hardware is kind of a logical extension of that. We'll be testing lots of ideas on that front.
That ties into something else you said that generated a lot of buzz -- in a recent interview with GameSpot it was said that GameStop was investigating digital secondhand sales. Could you clarify that?
This got a lot of play, and it just shows you how much appetite there is for the pre-owned business. So here's the real issue, there's a European court that just ruled that you can sell back digital content in a variety of industries -- software and otherwise -- so, we've studied that and seen some startup companies that are developing technology around that. So, my point was that, well, it's interesting -- as the world migrates to more and more digital content, the ability for me to sell to you my digital content that I already own, that's an interesting idea. Courts will have to decide, like in Europe, how this plays out, but we're eager to meet with companies that are working on it. Other than that, there's nothing else -- it's just a small concept. It's nothing that's rolling out.
So it's not something GameStop is currently working on, but something that has its interest?
That's correct. There are a lot of emerging technologies in the space, and we have to watch it closely. Through our GameStop digital ventures group, we will be meeting with those players and learning about it. It's one of these things that gets a lot of buzz, but it's a technology that's not here yet.
GameStop recently started carrying gift cards for Steam, but has its own digital sales model for PC games, through Impulse. That's great for the community, but is this a conflict of interest for GameStop?
Not at all. It's interesting, we, because of space considerations, reduced our physical PC assortment through the years. A lot of customers said, "Hey, you walked away from the PC gamer," and you know, in some ways console really took the leadership role, it's true. But once we acquired Impulse, we plugged it into a technology we developed with Microsoft and Sony to sell digital content in stores that sources unique digital codes at the time of purchase. There's thousands of games you can buy at GameStop this way. When we started doing that, EA launched their own PC download platform called Origin. And so we worked with them and starting selling Origin content in the stores too. We see it as becoming a destination for PC gamers that we haven't been for a while. At the end of the day, you're a retailer -- so we need to be the gamer's trusted adviser.
As the biggest physical retailer for console gaming, how do you feel about the all-digital Kickstarter console, OUYA?
It's cool, man, it's cool. Kickstarter's a great concept, and I love it. We are very interested in discussing it. We will clearly be the best place to launch any new console; we're very good at launches.
Have you talked with OUYA about that, launching at GameStop?
Nothing that I want to disclose, no, but we are very interested in discussions with anybody who's launching a new device. We're interested in innovation. If the question is "What do we need to do for gamers," the answer is that we need to bring innovation to the category. That's why we're in the tablet business, because we want to see more innovation. That's what consumers are interested in. Everybody wants the next gadget. This is a great innovation that we will support.
OUYA has no disc drive, and some rumors claim that the next Xbox will rely primarily on downloaded games, and may tie physical discs to online accounts, effectively blocking used sales. Imagine this digital-only future comes to pass; in a gaming economy without physical products, how do you envisage GameStop surviving?
If the question is "What do we need to do for gamers," the answer is that we need to bring innovation to the category.
We've said in lots of different ways and lots of different times, that we believe it's unlikely that the next consoles will not use physical media. But -- again, we have built a digital content sales business pretty successfully. We can reserve, merchandise and launch digital content just as well as we do physical content, and we've built a several hundred million dollar business of virtual sales in store. Three years ago, people used to ask me, breathlessly, about broadband speeds, asking if we'd be out of business with digital downloads -- that was an interesting point of view, but today we're pretty pleased to say that we like selling digital content -- there's no inventory, so it's pretty frictionless. Still, a lot of customers still want physical product, so we've got to be there for them, but we are able to sell digital content very well today, and we're making that business bigger -- bringing more customers to Xbox Live and PlayStation Network and introducing people to digital content. And they keep shopping GameStop because we have great service in store, they can bring trade credits or their old iPod to pay for it. And they can get PowerUp rewards points, too.
We're not fighting it though. There's technology, and there's chronology. The technology is here, but the chronology hasn't arrived yet. It's no surprise that DLC began to grow when GameStop jumped into it, that's because we provide unrivaled customer acquisition.
A lot of folks think streaming will be a major player in the future of gaming. Sony, for instance, acquired Gaikai earlier this year, and GameStop itself snapped up Spawn Labs not too long ago. What's become of that project?
Right now we have six data centers that are live around the country -- consoles in data centers, Xboxes and PS3s that are streaming to devices. A lot of our managers are playing games on those. The user has an internet-enabled device with a client on it. We spent a lot of time getting the technology right. Our guys at Spawn, in Austin, like to say that the laws of physics are the same for everybody -- that is, the technology reaches a point where the latency and all of that is at a point where we're comfortable with the services. What we're trying to differentiate on is how we go to market. That's where we're spending our time now -- how to do we reach commercial agreements and figure out what our consumers really want. We're still working out the details, and we'll announce more as it comes.
Last question -- UK retailer GAME recently shuttered hundreds of stores. Can you comment on where you think they went wrong?
I can't say that I really know GAME that well, but I've observed them, and we used to compete with them. I think in video gaming, at the end of a console cycle -- it becomes a much tougher business.
Just talking about GameStop and some of the things we've done, we are a very different company from what GAME was. The first thing I would say is that our internal rate of change has far exceeded the external rate of change for the last four years. My point is, when you're in a console cycle that's long in the tooth, you must move very rapidly to find what gamers are looking for. I think we've been far more aggressive than almost any competitor in the space. We've created a digital strategy that's extremely aggressive, and we've built an in-store DLC business that nobody else has. We have also focused on reinventing the pre-owned business. We don't see used gaming as a loss-leader; we see it as a really important business to gaming. We don't discount, either. The UK is a massive discount game where people sell games below cost -- we don't participate in that. We have to find other ways to bring value, and that's the pre-owned business.
The last thing I'd say is that we have no debt! We're one of 28 companies in the S&P with no debt. That allows you to do some things you can't do when you're trying to service big debt. You can buy Kongerate.com; you can do things. And we launched the PowerUp Reward program -- that's 18 million people. So we've got a community of gamers; that's very different from anybody else. We're perceived as doing cool stuff for gamers, and that's where we want to be. We want to be authentically the place to go to find out what's cool and happening.
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