GameStop director Leonard Riggio shows us the future

Leonard Riggio

Leonard Riggio is board chairman of GameStop 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 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, Sony and Microsoft, 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.

4 comments ↓

#1 Deejay on 10.14.09 at 4:10 pm

I’m not so sure we’ll see the end of bricks and mortar. Digital distribution is clearly the way to go, but there are still a lot of people that prefer to browse a shop, and as long as there are high streets then there will be an opportunity for a store front presence to secure passing trade.

There’s also the argument that digital store fronts are particularly weak at presenting a wide variety of titles. Yes, they do stock an infinite number of titles, but how many of those are *presented* to the user? Normally it’s a matter of a Top 10 list, and if your game isn’t in that then the potential customer must search for it. Think how many box fronts you see in the average GAME branch.

I dare say we’ll see physical stores stay, but just sell download codes. Or perhaps, even further down the line, systems like PSPgo being sold by the mobile phone model.

#2 Bruce on 10.21.09 at 2:26 pm

http://www.gamesindustry.biz/articles/gamestop-stock-drops-after-analyst-downgrade

GameStop stock drops after analyst downgrade

GameStop has seen its stock price drop by as much as 8.9 per cent, after analysts downgraded the US retailer’s stock rating from “buy” to “neutral”………………..more

#3 Bruce on 10.22.09 at 8:42 am

GameStop to increase digital distribution investment
http://www.gamesindustry.biz/articles/gamestop-to-increase-digital-distribution-investment

……….according to Lazard Capital Markets analyst Colin Sebastian, via website Industry Gamers, GameStop intends to become “the world’s largest digital aggregator”……………..more

#4 Bruce on 11.26.09 at 12:46 pm

I received this email from Leonard Riggio, which shows who read this blog!

Dear Bruce:

Seems to me you’ve set up a kangaroo court and used it to support some fairly egregious conclusions. At the top of the list is your claim that I am bailing out of my position, which itself is unsupported by the small reduction of my ownership from 6.9 to 5.5%. Do you mean to imply that any sale by me — now or in the future — must be tainted by your assertions that the company is in decline?

Gamestop remains the world’s fastest growing retailer in terms of stores opened and sales volume, and is one of a handful which have posted strong earnings increases in spite of the worst retail recession of our lifetime. Our P/L multiple is close to single digits, which is a huge discount to retailers who have far dimmer prospects than you say we do. Our cash flow, too, is enormous, making us more than capable of adapting to whatever future lies ahead. Ours is a culture of growing our business, and remaining a dominant factor in our industry. You do not create self-fulfilling prophecies for us — we do.

The stock I sold was part of a transaction in which I had to pay a capital gain to acquire it. I decided to sell the stock, in part to pay the tax, and in part to add some cash to my portfolio. Is anything illicit implied with such motives?

Two other questions:

1) If my mind worked like yours does, and I thought the company was in trouble, why wouldn’t I have sold more stock?

2) Isn’t it possible that my mind does not work like yours, and I would never consider selling shares in advance of bad news?

Finally, I have never sold any shares of stock before any bad news in any company in which I was involved, so I object to your misleading implication. On the contrary, our stock has always traded up after any sales I’ve made, and GME’s price today is no exception.

Don’t bet against our stock.

Len Riggio

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