GameStop Wants OnLive To Play Dead

The smoking gun memo.

The followup memo.

This has to be one of the more unusual stories I've seen lately. Square Enix recently shipped Deus Ex: Human Revolution, and had worked out a promotional deal with streaming game service OnLive. Onlive gave them vouchers, which Square Enix put into every boxed copy they produced; the vouchers give you free access via OnLive to the streaming version of DEHR. I'm not exactly sure why Square Enix thought this was a great idea; why would you want to stream the game if you already owned the full version? I suppose because the streamed version might be higher quality than your PC could produce, since OnLive uses the gnarliest computers they can build to generate the streaming games, and unless you're a real gaming fanatic your PC probably can't match the graphics they can pump out.

Anyway, this all seemed like a typical cross-promotional marketing move. It was, until the boxes arrived at GameStop... then the memo went out to all GameStop employees: Open those boxes and pull out the vouchers and throw them away, then tape up the boxes and sell them as new. Later, word went out to just pull at the copies of the game and send them back to Square Enix. Square Enix acknowledged that they had failed to mention this voucher to GameStop, and bascially accepted the right of GameStop to refuse to sell the game with voucher.

As you might expect, once news of this hit the net, customers were not happy that GameStop was taking away something of value they thought they were getting. Now, GameStop's official position is that they don't want to support a competitor. I tried to check out GameStop's Facebook page where they had posted their official response, but it was not available. Probably swamped with angry comments.

OK, I understand that GameStop has purchased Spawn Labs with the intent of providing streaming game services at some point. GameStop also owns Impulse, a digital game distribution service. Would GameStop then pull Steam coupons from games? Where does this whole process stop?

GameStop's response was pretty hamhanded, and is going to generate a wave of bad publicity for them. Are they really that scared of OnLive? Seems like they are doing OnLive a favor by causing this publicity. If GameStop hadn't said anything and just ignored the voucher, it would have been gone and forgotten in a few weeks. They're going to have to compete against OnLive, but they're not ready with their competing service yet, so doing this doesn't get them any customers right now. If anything, it may lose a few. Or provide some nice PR value for OnLive.

Sometimes the best response is just to ignore something and continue with your own efforts.

GameStop Acts On Impulse

How to caption this graphic...GameStop Impulsively Spawns Labs?

Traditional game publishers are making more and more money from digital distribution. Even Activision, long known for sneering openly at anything other than a disc sold in a store, is now touting the fact that half their revenue in the latest quarter came from digital distribution (of course, I think they're counting WoW subscriptions in there). This may be good news for publishers hoping to see a bright future coming out of three years of down sales for the industry, but there's one player who's not so happy at the expansion of digital distribution: GameStop.

They are taking the threat seriously, and there's no better evidence than their recent purchase of Stardock's Impulse digital distribution service. Sure, it's not Steam (who has about 70% of the digital distribution market), but Impulse accounts for about 10% of the digital distribution business. GameStop should be able to expand that with their resources.

Interestingly, GameStop has also bought Spawn Labs, which has game-streaming technology that hopefully can compete with Gaikai and OnLive. While I'm on the subject of game-streaming, there's a new kid on the block called Happy Cloud, which has an interesting twist on the idea of streaming games. They don't want to stream you the game so much as make your download of the game happen a lot faster, in a way. They set the game up so you can start playing quickly (in a few minutes), and not have to wait until your multi-gigabyte download is finished (hours later, usually). This opens up the possibility of impulse buying, and Happy Cloud is open to licensing the technology to other digital distributors. This could really speed up the spread of digital distribution.

The upshot of all this news is a further expansion of digital distribution is in the offing, and GameStop doesn't intend to miss their opportunity. Having a retail presence does offer some interesting possibilities for merchandising that Steam won't be able to match. Kudos to GameStop for understanding how the marketplace is changing, and making some moves to try and adapt their business. Let's hope they pull off a successful transition to the future.

Downloadable Revenue For EA Hits 20% Of Sales

Electronic Arts CFO Eric Brown's been talking about the company's download revenue at conferences lately, and he's released some facts and figures. So far in 2010 EA has raked in $750 million in digital sales, compared to $430 million last year. Brown expects digital sales to account for 20% of revenue this fiscal year, and to be a major factor in future sales growth.


That's not surprising given how regular game sales have been for the past couple of years industrywide. It looks like 2010 will end up being about 8% lower in sales through traditional channels than last year's sales (which were down from the previous year).


EA expects to bring in as much as $100 million this year from full-game downloads. Which no doubt causes a little heartburn for GameStop and other retailers, which is why they're not losing any sleep when publishers complain about used game sales. Really, though, if EA didn't sell full games via download, then Steam would just take more of that audience. Digital sales are inevitable. Blizzard must have done quite well with Cataclysm sales via download, as the lines were down substantially at retail stores over expectations. Which is not great news for the PC market at retail stores, but Blizzard probably doesn't care.


The interesting thing about EA's experience is that much of their sales come from digital add-ons, like the FIFA Ultimate Team mode where players can buy trading cards that let them add players to their team for a few games. Some whales (borrowing the gambling industry's term for big spenders) spend up to an astonishing $700 on these card packs. FIFA 09 brought in $15 million from these trading cards, and FIFA 10 brought in $30, and FIFA 11 looks to bring in $40 million. The cost of developing those cards is a million or two, so this is a very profitable area for EA.


We can see the relentless advance of alternate monetization schemes continues. All of the high-growth areas of the game industry are in non-traditional areas; the classic console game is in the second year of lower sales, and 2011 doesn't look any different. Opportunities are expanding for small developers, but taking advantage of those opportunities will require new ways of doing business.

Wal-Mart Goes Big On Used Games

Wal-Mart is apparently not just dabbling in used games, they're jumping in with both feet. That's at over 500 stores in the US. Analysts expect them to focus on the under-$20 segment, in keeping with Wal-Mart's position as the low-price leader. Which is good news for GameStop, as they watch Target, Best Buy and others rush into selling GameStop's bread-and-butter product, used games. Best Buy is pushing the used game sales, as you can see from the photo. As new game sales have slowed, retailers are pushing the lower cost used titles as a way to keep gamers spending.

This may be great for retailers looking to goose their sales, but all it does for publishers is make a bad sales picture worse. A widespread availability of used titles means less incentive to purchase the title new. It's not like you can see wear and tear on the pixels; a used game plays just as well as a new one. The only difference is in the packaging; customers who care about that are probably buying Collector's Editions anyway, because they are, you know, collectors.

So what's a publisher to do? Publishers complain about used games, but they're certainly not going to be putting pressure on retailers to stop selling them, when ALL of their big retail customers are doing it. The online play pass is one answer, which seems to be working for EA. Many are looking at subscription models, but the market segment built around subscription revenue is the MMO game, which are busily heading towards the freemium model.

It seems clear to me that used games are becoming more widespread, which is forcing publishers to look even more swiftly to other revenue models. It's going to help keep overall dollar sales down for games, and keep downward pressure on new titles, which is going to make the chance for profitability even lower for traditional titles. Marketers are going to have to run to keep up.

Retailers Want To Let Off Steam

A retailer getting Steamed?

A UK game industry site, www.mcvuk.com, is reporting that UK retailers are threatening to keep PC games that include Steam off their shelves. Apparently the retailers are afraid that Steam, with 80% or so of the digital distribution market, threatens their business.

Well, yeah, it would... if their PC business was anything to speak of. Have you been to a retail store and looked for a PC game lately? Not a lot of shelf space allocated there, and it's usually poorly arranged and jammed with an assortment of non-gamer oriented titles based on game shows and such. It's been years since PC games at retail mattered all that much to the retailers; they make most of their money from console games. Aside from the occasional megahit, that is... like Blizzard's upcoming Cataclysm release. But such AAA titles are a market force unto themselves.

I think retailers are concerned about publishers concentrating on more downloadable content that the retailer doesn't get a chunk of, as we've already heard about from THQ and others. Major publishers are already heading in the direction of digital distribution, at least for add-on content. So retailers are trying to stop the tide from coming in... but it's going to come in regardless. Banning games from stores may just push customers to looking for them online, thus bringing about what the retailers fear.

I haven't heard of this revolt occurring in the US, perhaps because retailers here are already exploring ways to deal with digital distribution. (Like GameStop buying Kongregate, for instance.) It's really going to pinch retailers if publishers start pushing for the release of console titles through digital distribution, not just the occasional map pack or scenario. Perhaps that's one of the reasons so many retailers are exploring used games as a revenue source.

Retailers are nothing if not adaptable, though, especially the mass-market chains. Audio CDs not selling the way they used to? Reduce the shelf space allocated, expand the area devoted to something else. When it happens with games, we'll see the same thing. Publishers have to be concerned about visibility for their titles, and hardware makers are especially concerned about their retail presence. I expect there will be a lot of pushing and shoving going on between retailers and publishers over the next couple of years.

Finding Digital Games

This is what happens when a game loses Facebook communications.

The biggest problem for game makers and gamers today is the same: How do you find good games? At least recognition of this issue is spreading. GameStop's head of digital business seems to be pretty clear on where the problems lie in digital distribution. Here's the money quote:

"One of the key points that can't be underestimated is the increasing challenge of discovery. If you start off with presumptions on the percentage of consoles that are connected, are they as high as everybody would want them to be? No. The percentage of people that have purchased for their console games downloadable content for XBLA or PSN games is very low. It's barely above ten per cent,” GI.biz reports Petrovic as saying. "Discovery, much like in the Apple App Store, is as bad - if not worse - in the console environment because you've got such a limited form factor to work with."

Amen to that, brother. If you are annoyed at the iTunes store for its poor interface and weak search tools and almost non-existent help in finding apps you care about, you will become apoplectic when you look at the Android market or the console's lame excuse for a digital product marketplace.

Unfortunately, though GameStop would like to do something about this problem, they haven't mentioned exactly what they can do to help thousands of games find their way to gamers who would like them.  As a marketer I can come up with strategies to help an individual game break out of the sea of similar titles. But how you can do that for everything in the sea? Yet I see some companies making vague promises about ways to get your app in the top 100... of course, you have to pay them a big pile of money first. I guess that's right after you take care of that little bank transfer your new Nigerian friend wants you to help with.

Oprah can take an unknown novel and propel it to the top of the bestseller list... but she can't do that for every good novel, because if she promoted a thousand books the impact would be far less. A blanket solution to promoting all games is inherently flawed. I think the only logical solution for all games is for the service provider to do a better job, with a better interface design and better tools. I suppose Apple's gaming network is a step in this direction.

It's also possible a third-party like GameStop could step in and create something that would help customers find games they like. Or something already popular could help with this... Facebook continues to be the key factor in social media games and their popularity. (Notice how Monthly Average Users took a hit when Facebook started making it a little harder to get a zillion updates posted to your friends.) Check out here what happened to one social game company's users when Facebook cut off its communication channels. You can probably guess... the word "plummet" comes to mind.

It does come back ultimately to making sure you have a great game. Going viral is really only possible when that's true; you can throw all the marketing you like at it, but unless the quality's there in the first place you won't achieve orbit. Honestly, I'm glad we have gone behind the days of "We can sell dog crap in a box!". Now you have to have a good game... and then your marketing better not be the equivalent of dog crap if you want to get the most sales out of that game.


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GameStop's Game

So the news comes out in a press release that GameStop has put an iPhone game of their very own in the App Store, Buck and the Coin of Destiny, for 99 cents.

Many thoughts come to mind, but my comment on IndustryGamers was this:

"I don't know, 99 cents seems like a lot... maybe I'll get a used copy."

Could This Stop GameStop?

What publishers would like you to think.

A recent 9th Circuit Court of Appeals ruling could derail the used game business. The court has ruled, in the case of Vernor v. Autodesk, that software publishers have the authority to prevent the resale of their software to another user. The ruling directly contradicts previous court rulings that software could be resold under the "first sale" doctrine. (The "first sale" doctrine states that companies only have the right to dictate the terms of the first sale; once someone has bought the product it can be resold without constraint. This is what allows used bookstores to sell books, for instance.)

On its face, this could stop everyone from eBay to GameStop to you from selling a piece of software you bought from someone else. Of course, publishers hate the idea of used software, so they think this is a great idea. They've been trying to eliminate used game sales for years. You know those "license agreements" included with software you buy, that no one in the known universe has ever read? Those basically say you didn't just buy the software you just bought; instead you just have a limited right to use it for a while, and you certainly can't sell or transfer that right to anyone else, no way.

You can bet this ruling is likely to be appealed, so this may end up in front of the Supreme Court... if they choose to hear it. If not, or if the appeal is denied, then we may well see some publishers taking on GameStop and telling them to stop selling used games. Or, in other words, saying "you can't make a profit any more", which is they way GameStop will look at it. Ouch.

Of course, as packaged retail software becomes more of an endangered species, publishers will be moving to subscription revenue and non-transferable online usage rights (see EA's Sports Pass, where they charge you $10 to be able to play online... doesn't matter if you bought the game new or used). So the whole issue will be moot in a few years. Which is why GameStop had better accelerate their search for other revenue sources, and try harder to move online. And also why publishers had better move faster getting into digital distribution, or risk getting left behind in sales and revenue.

Of course, there's a simpler solution: Charge less for new games. If you were paying $20 for a new game instead of $60, you'd be a lot less inclined to look for a used game. Which is where the whole Classic game category came from; after a publisher feels it has exhausted the market for a game at $60, it drops the price to $20. Maybe they could sell even more if the price was lower to start... especially if it's a digital product without any hard costs to recover. Maybe Sony, instead of spending 5 years and close to $100 million to create 1000 cars and over 70 tracks for Gran Turismo 5 before releasing sometime in the hazy future, could just make, oh, 100 cars and 20 tracks and charge $40 for it, and release it in 2 years while spending only $40 million. Then sell other cars and tracks as they are completed, as digital downloads. Nah, what a dumb idea, trying to release a game quickly and minimize risk and capital outlay.

Yet another reason why software executives are having an uncomfortable time...

Used Games Triumphant

We've heard a lot of publishers complaining about the used games market, which has been mostly GameStop up to this point. In the past few months word has come out of used game efforts in 7-11 and Walmart, handled through a rack jobber. Now the situation is accelerating, with both Target and Best Buy announcing used game programs. Not great news for GameStop, especially in Best Buy and Target offer reasonably competitive amounts for the buyback.... because instead of just using the credit to buy games, you could be buying all sorts of other things. Flexibility is worth a lot to consumers.

The greater impact is to the console game publishers. Now it's looking like nearly 50% of the retail outlets for video games will be offering some sort of game buyback program. This means even more downward pressure on new game prices, and lower sales numbers since people will have more opportunities to buy lower-cost used titles. It all adds up to a very grim Christmas, with no recovery in sight for sales numbers.

Expect the publishers to respond with more efforts to get money from consumers, like charging for online access or going to subscription models. The development model is also going to be a target; with sales numbers dropping, 3-year development cycles look awfully long and expensive.

It's a great time to be pushing free-to-play games and low cost mobile games... if you have those. If you don't, it's way past time to be putting those together.

I believe that logo up above is on the backs of video game publishers...

GameStop Doesn't Like Used Games

GameStop says they really don't like being in the used games business, according to their CEO Niall Lawlor. "We discovered the used business was a way of preserving our margins," Lawlor said. "We don't like being in the used business, it's very difficult to manage. If we hadn't got the used business, we wouldn't be there." Lawlor added that GameStop "evangelizes" for the industry by its existence. "We have to be in it, otherwise if you take a look at our margins you'd realize we need to be in used."

Before you weep for them at being forced to peddle used games against their will, it should be noted that GameStop sales were up more than 5% their first fiscal quarter this year, as reported by Gamasutra here. So the used game business is doing quite well, thank you very much. Why should GameStop profess to dislike this part of their business (which has a 48% profit margin, by the way)?


They're trying to keep game publishers happy; well, maybe not happy, but at least keep them from getting too pissed off. Game publishers see sales of used games as a drain on their sales of new games, since the publishers get no revenue from used sales.


EA has already taken a step to try and get around this conundrum by implementing their online pass, where you have to pay $10 to be able to play their game online. So a used game buyer will still need to give EA $10 in order to play the game he just bought online against other players. There's been some griping about this, but it seems perfectly reasonable to me. Somebody has to pay for those servers, after all.

GameStop Under Fire

So 7-11 is now getting into selling used games. One more reason to think GameStop is going to have a tough time in the future. A company called Game Trading Technologies will be stocking cardboard displays in over 3,000 7-11 locations with games priced at $19.95 or less for a variety of platforms. Yet one more downside for games sold on physical media -- someone can resell it, and the publisher doesn't get any of that resale money. Wow, just think if it worked like that in the book market, nobody would buy new books! Oh, wait...

Of course, if the publishers were selling downloadable content for these titles, then maybe expanding the audience would be a good thing... they'd get a chance to sell the same DLC more than once for a single physical game. Thus turning game resales to their advantage, instead of griping how they don't make anything from those sales. Hmmm...

Game Distribution, 2015?

At a game marketing conference in San Francisco, some executives held a panel discussion on what game distribution will look like in 2015 (a report from Gamasutra here). As you might expect, the answers tended to be in line with what their companies are planning to do. So GameStop thinks that retail will become "more experential, something like an Apple Store"... really? I have a rather hard time visualizng GameStops becoming similar to Apple Stores. I can say my that my Hyundai econobox plans to become a Mercedes sport sedan, but that doesn't mean it's likely to happen. GameStop seems to think that it can ride the wave of digital distribution. Heck, Rich Hilleman (Creative Director at EA) is even feeding their illusions: "My opinion is that Target or GameStop or Best Buy or Amazon has nothing to worry about, digitally, because they understand their customers really well, and they know things we don't know." Rich, I think you know better than that. EA is already striving to establish direct relationships with customers, and in five years I would think that EA should know a hell of a lot about their customers.

Sure, Apple has taken the lead in digital music distribution... for that matter, in all music distribution. Partly because the music industry was bone-stupid about making the transition to digital distribution. They didn't want to believe that digital distribution would ever replace CDs. They saw their business as depending on the huge margins of CD sales, so they saw themselves as in the CD-selling business rather than selling music. So they let Apple determine pricing and presentation of their titles, and now many musicians are abandoning the classic model of signing with big labels.

Digital distribution of games is not exactly the same, of course. But many developers are beginning to wonder why, exactly, they need to sign a deal with a publisher when they could sell a game directly to consumers. And some are making good money with non-traditional models (see League of Legends, for instance.) It's a time of great change in the game business, and we will see many winners and losers emerge. I suspect companies that insist things will remain pretty much the same as they have been will be among the losers.