ANALYSIS: Why did we lose GAME?

Tenshi Consulting’s Ian Baverstock explores what led to GAME’s decline, how it could have been averted and how the troubled specialist’s plight compares to that of similar retailers.

This artcile was originally published on Tenshi Consulting’s website.

GAME has announced their intention to appoint administrators. GAME Group (GMG.L) has spectacularly failed to prepare for the inevitable change that the introduction of digitally distributed games was going to have on our industry. This powerful retail giant, once cash rich and hugely successful, seems to have made no serious effort to diversify away from its core offering over the last few years.

They could have tried something, couldn’t they? Surely anything was better than doing nothing? How could they have diversified the offering to help protect against the current outcome? Selling a wider range of content (music & DVDs for example) was one option.

Another would have been to put a lot more emphasis on hardware. But in the UK these are both sectors that are suffering their own traumatic upheavals. A casual glance at the fate of Dixons and HMV shows why this was not a serious option for Game.

I don’t think GAME did fail to anticipate the impact or timing of digitally distributed console games. Whatever developers might want, the total sales of downloaded console content is still not significant. Indeed recent sales numbers for XBLA and PSN have been disappointing.

GAMEbelieved they had more time than turned out to be the case but it wasn’t digital console game delivery that killed them.

In their financial report for 2010-11, GAME’schairman said The video games market continued to be tough in 2010. In the UK, hardware revenues were down 25 per cent and entertainment software revenues were down 5 per cent. However, the launch of new peripherals from Microsoft and Sony, along with another year of strong Christmas software releases, provided the market with some support …”.

If the last few console cycles were the norm, we should be well into the early phase of a new generation of consoles by now. Both Microsoft and Sony, for very different reasons, chose to lengthen this console cycle. The ‘mid-life update’ that was Kinect and Move simply did not work at re-invigorating the consumer and their subsequent demand for software; especially from a specialist like GAME.

Of course Microsoft sold a lot of Kinect hardware but even a casual glance at the charts shows this has not been the game changer that would make new and old consumers part with fresh cash. Last week’s chart had 3 essentially physical movement games in the top 40. Even the more family oriented Christmas chart had only nine; of which seven were dance/fitness games.

GAMEneeded new consoles on the old cycle timeline and they just didn’t arrive. Consumers are tiring of the old formats. Nintendo recognise this and at least have a plan with the Wii-U. The fact that Sony and Microsoft needed much more time to get their money back with this cycle dealt GAMEone early severe blow that was beyond their control.

Of course consumers are still spending lots of money on entertainment devices and content. They just aren’t spending it with the same people and the hardware is being purchased through totally unrelated channels.

The key year for GAMEwas 2009-10. Profits fell in 09-10 to 90.4M from their peak of 126.2M the year before. This was the start of a dizzying change in fortunes that saw profits fallto 37.8Min 10-11 as consumers found other places to spend their money.

By comparison, another company went from doing well to spectacularly well in 2009-10. Apple’s recent rise is timed exactly to GAME’s fall and I don’t believe in coincidences.

GAMEmade mistakes: The hubris of the Gamestation acquisition in 2007 when everyone knew big changes were coming; too many stores on too long a lease; maybe even the golden goose killing antics of their promotion of second hand games sales at the expense of game publishers’ and developers’ revenue.

But in the end it would have been incredibly hard to anticipate that smart phones and tablets would become so important so quickly and that, simultaneously, the console manufacturers would take their foot off the collective pedal of innovation and new product launches.

Having said that, Gamestop (GME) as the nearest comparable company have managed the situation much more effectively albeit in a different retail market.

It will be interesting to see if whoever buys GAMEout of administration has a plan. My belief is that the retail presence they have, even at a reduced scale, has tactical value but I can’t see the long term strategic future being any rosier.

I think the management will buy it; make a lot of money from a leaner operation through the first few years of the next generation but eventually end up in the same place they are now.

If someone else comes in and buys them; then maybe there’s an alternative, someone with more retail knowledge than me who knows how to transform this business.

The platform holders and big console publishers will be looking on with concern; for all GAME’s faults, launching big console titles – and even more so, launching new consoles – is going to be much harder in the UK without them.

Ian is a founding partner atTenshi Consulting.He has been growing and leading businesses in the games and technology sectors since 1989. This has included a 4 year spell as CEO of 300 man game developer Kuju Entertainment, an IPO on the AIM market, several trade sales of businesses and various fund raising exercises.Outside of his commercial roles, Ian was Chairman of TIGA, the UK games developers’ trade association, for 4 years. He is a Director of the South East Media Network organisation, a member of the Game Developers Conference Advisory Board and a Director of the One Big Game charity initiative.