(Graphic by J. Spencer Jr)
By now, anyone reading this is presumably aware of the stock trading fiasco that unfolded in recent weeks, all swirling around video game retailer GameStop.
If not, the quick version is this: large Wall Street hedge funds made "short" bets against what appeared to be a downward-trending company, then Reddit decided to collectively fight back, and pandemonium ensued.
We will not be rehashing or relitigating what happened with the STONKS! here because this is not a STONKS! blog.
Instead, we'll examine the company at the center of it all. Why did GameStop become such a popular target to bet against? Why does the investing community feel so strongly that the last great physical video game retailer is on its way out?
What does it all say about the gaming industry and its future?
Let's dig in.
Quick plug: You can learn plenty more about the history and future of the gaming industry by grabbing a copy of our book, VERSUS: 25 Head-to-Head Battles that Shaped the Evolution of Video Games in either paperback or ebook. Okay, onward.
GameStop vs. The Free Market: Destiny Calls Once Again
Chapter 17 of our book is titled "Dreamcast vs. Destiny," and it examines Sega's fateful last ride in the console business. On the one side you had Dreamcast: a truly impressive and innovative system that bridged the nostalgic early era of gaming to a new world ruled by advanced tech, multimedia, and the internet. On the other side you had destiny.
Personally, I'm no believer in any invisible hand guiding our worldly events, so when I speak of destiny, I refer to the more tangible forces from which we cannot escape.
The higher power that sunk Dreamcast was no god, but rather a colliding array of factors: diminished position after losing an earlier bout against Nintendo (Chapter 10), friction between the Japanese and U.S. arms of Sega, and the looming arrival of Sony's unstoppable PlayStation 2.
Barring some divine intervention, Sega's fate was sealed.
From Page 159 of #versusbook
Of course, it is much easier to say so in retrospect. When it comes to the battle that we now size up – between GameStop and the will of a free market, hell-bent on digitalization – the outcome is not yet known.
The Rise and Fall of GameStop
At one time, GameStop feasted upon the free market. From humble beginnings, it grew and grew and grew, consuming everything in its path like a capitalistic machine.
The brand traces its origins back to a merger between two software retailers – Babbage's and Software, Etc.* – back in the 1990s. The newly formed Babbage's Etc. and its fledgling e-commerce website GameStop.com were purchased by Barnes & Noble in 1999 for $215 million.
(*If you've read Chapter 9 of VERSUS, you may recall Software, Etc. as the store where Paul Charchian was working when he came across and purchased, very possibly, the first consumer copy of SimCity.)
A few months later, Barnes & Noble purchased another heavy hitter in the game retail biz, FuncoLand, soon folding both of its new acquisitions under the "GameStop" umbrella.
In 2002, GameStop went public for the first time, claiming the stock ticker symbol GME. In 2004, it became an independent company when Barnes & Noble sold back and distributed its majority shares. From there, GameStop went into monopoly mode, buying out the competition.
Among the companies absorbed in the course of its ravenous growth:
EB Games (aka Electronics Boutique)
Rhino Video Games
According to an article from Adam Epstein at Quartz, GameStop was generating nearly $10 billion in annual revenue at its height in 2011, with 6,700 stores open around the world. But as digital downloads and online services like Steam, Xbox Live, PlayStation Network and Nintendo eShop gained traction, GameStop rapidly began to lose it.
By 2019, GameStop's revenues were down to $6.4 billion and the company was staggered by waves of layoffs, store closures, and cost-cutting measures. Last year's pandemic, of course, exacerbated everything working against GameStop, further tanking the brand's outlook even as video games surged in popularity.
Says Epstein: "GameStop is the Blockbuster of video games—a relic of old consumption habits, barely scraping by in a digital world."
(Illustration by J. Spencer Jr)
With all this in mind, it isn't hard to see why investors were licking their chops at the prospect of profiting off this once-dominant brand's seemingly inevitable demise. The efforts of scrappy Redditors who temporarily sent GameStop stocks soaring were admirable, but are they enough to derail destiny? Ultimately, the free market will decide the fate of not just GameStop, but specialized video game retailers at large. For its part, the last great hope is scrambling to align with a reshaped future.
GameStop will need to reinvent itself in order to survive. A recent article in the Washington Post notes that the company reported a $19 million loss in its most recent quarter, and that sales have dropped in 10 of the past 11 quarters.
"GameStop has not turned a profit since 2017 and has gone through five chief executives in that time," according to the Post, which adds that since bringing in their latest CEO in April of 2019, "the retailer has closed more than 1,000 stores, with plans to shutter more in the coming months. About 5,500 stores remain, many of them in shopping centers and strip malls that are facing their own reckoning as the pandemic enters its 11th month."
A bleak picture. Enter: Ryan Cohen
(Image via Flickr)
The entrepreneur and investor knows something about building a successful modern company; he founded an online pet food retailer called Chewy at age 25 and sold it to PetSmart in 2017 for $3.35 billion, in what was the largest e-commerce deal ever at the time.
Late last year, Cohen disclosed a 10% stake in GameStop, making him the company's biggest individual investor. Around that time, he began publicly charting a bold new course for the brand, generating some excitement in the stock-trading community (and setting the stage for short-squeezing madness to come).
GameStop Rises on Investor’s Plan to Make It an Amazon Rival, pronounced a Bloomberg headline in October. Among the key visions for rejuvenating GameStop lies in building an online version of its mainstay trade-in program, which would become a go-to digital market for buying and selling used games and equipment.
It's a blueprint that is not without merit, and Cohen is seemingly the right guy to help GameStop see it through. So is Matt Francis, the newly hired Chief Technology Officer who formerly served as engineering lead for Amazon Web Services.
Good ideas and good people are helpful, but not necessarily enough to overcome the forces of destiny. Dreamcast had both, and still fell victim to one factor that outweighs all others: timing.
Is GameStop too late in its concerted effort to orchestrate a comeback?
Does GameStop Have a Future Worth Investing In?
Earlier we heard GameStop derisively referred to as "the Blockbuster of video games." That comparison takes me back. I spent one college summer working at a Blockbuster, in 2005 after I wrapped up my freshman year at the University of Minnesota. Around this time, Netflix was still only beginning to assert itself, but already Blockbuster was playing catch-up. Their competing DVD delivery service was a step behind, and they weren't doing much of anything to differentiate the in-store experience. (I can't say I helped much for those three months.)
It was obvious even then, even to a dope like me: Blockbuster was toast. They were woefully late to react to the market's evolution, and their pivots proved insufficient. Five years later the video rental goliath declared bankruptcy. Today, the only remaining Blockbuster store exists as a novelty Airbnb in Oregon. If you take an Uber to go stay in it, you will be pulling off the Meta Millennial Industry-Disruption Combo Royale. A rare trophy!
If I'm being honest, it feels to me like GameStop is heading down the same path as Blockbuster. Cohen's theoretical online trade-in model may have some merit, but the bigger impediment to GameStop's rebound potential is an inexorable movement toward digital distribution.
Gaming industry analyst Daniel Ahmad tweeted some statistics last summer that placed the trend in perspective:
Already more than half of all game sales had shifted digital; that was when the pandemic was still relatively young, and before Sony and Microsoft released new consoles with digital-only models. This graph via the aforementioned Quartz article illustrates the story even more starkly:
(Image via Quartz)
Assuming the disparity continues to grow, and physical games get further nudged into the realm of collectors and traditionalists, is there a place for GameStop? Where does a physical retailer fit in a world of digital downloads and streaming experiences? Why would gamers need anything other than Steam and the online stores from Sony, Microsoft, and Nintendo? (Not to mention publisher-based streaming services like EA Play, which are sure to keep sprouting up.)
It's a question GameStop will need to answer if it is to survive against the mounting onslaught of The Free Market. Sadly, I'm not sure Reddit is enough to turn the tides.
In Chapter 25 of VERSUS: 25 Battles that Shaped the Evolution of Video Games, we take a hard look at the future of video games, and digitalization is a central subject. Learn more about this emergence, and the entire journey leading up to it (beginning with Pong in the 1970s) by snagging your copy in paperback or ebook. Oh, and be sure to subscribe to our newsletter so you never miss future posts on the blog!