Unusually negative analyst report on Gamestop/retail game sales

[Rangers]

I dont have the original report here, just the Neogaf post. However the qoutes, speaking of Gamestop in particular and gaming in general. Perhaps most controversially, he implies this may be the last console generation.

On GameStop:
Quote:
It's clear that business trends are negative & prospects are fading. July quarter results were only slightly short of expectations. We believe FY10 sales, store comps and EPS guidance appear achievable, but risk is to the downside. We expect the swift shift from off-line to on-line digital entertainment will continue as the current video game cycle continues to decline during the next few years. In our opinion, industry-wide packaged goods game sales peaked during 2008 and GameStop's ability to continue to take domestic share has become more difficult - company is already over-stored.

The recent acquisition of a social gaming company makes little sense to us and actually clouds our view of forward strategy. Although GME valuation and cash flow characteristics look attractive, we find it difficult to recommend a business in which we see little long-term earnings growth.

The company's digital initiatives are sketchy, but we expect the company will try multiple efforts to take share

We believe GME will experience peak income at some point during the next 18-months.

On the Industry:
Quote:
We remain cautious on GME given growth outlook of packaged goods video game sales: Each month it becomes more evident that interactive game sales are shifting from packaged goods to digital. Packaged goods game sales have declined from ~85% of category sales to ~70% during the past two years. We expect the shift to digital entertainment will continue as the current video game cycle declines during the next three years. We expect industry-wide packaged goods game sales peaked during 2008 and will decline over the next 3-year period.

On console cycles:
Quote:
The current video game hardware cycle is about to shift into permanent decline, in our opinion, and no new game consoles are expected to launch until at least 2013 - if ever. Second, 35% of cell phone sales during 2010 are expected to be smartphones and will take further share from sales of Nintendo DS & PlayStation Portable products. Third, increased use of single-use codes by game publishers is expected to ramp as they attempt to recover profits lost to the resale of their video game content. Even if retailers sell single-use codes, that alone presents risk to the sale of used games. We project that industry packaged goods game sales will be relatively flat during CY10 (0 to +5%) and decline ~10% during CY11/CY12. Simultaneously, we estimate that digital entertainment sales are growing at 30% and will account for 30%-plus of interactive entertainment sales during CY11 (up from 15% CY08).

Interesting stuff.

 

[AlphaWolf]

How does digital distribution growth spell the end of consoles? There's no logical connection here. Smartphones are certainly not a replacement for 'in home' entertainment (3" display vs 60" display, real controls, vs multitouch with a couple of buttons).

Sounds like a doom and gloom editorial designed to farm hits. I'm actually glad you don't have the source.

 

[Rangers]

I certainly hope (and expect) you're right. However, Japan has shifted a lot away from consoles for example.

 

[Shifty Geezer]

How on earth have they managed to look at Nintendo's financials and conclude that Nintendo don't want another console?!

 

[Rolf N]

Digital entertainment as in Compact Disc Digital Audio? Or DVDs?
And what the hell are the other 70%?

 

[RancidLunchmeat]

Uhh... Wouldn't this current generation have to be considered the best console generation in history? In terms of total numbers of sales, as well as profits for the manufacturers?

Seems like an odd time to make a proclamation that the most successful generation would be the last.

We've been debating the importance of digital distribution in the next generation for the past couple of years around here, (as well as the coinciding need (or not) for optical drives). I still maintain that next generation won't use an optical format, and digital distribution or solid state tech will combine to replace it.

However, stores will still need to carry those solid state physical media. Although, they'll probably be smaller in size, require less square footage in the store and that might enable new distribution channels that would be unfavorable to Gamestop along with digital distribution.

 

[Sonic]

The current video game hardware cycle is about to shift into permanent decline, in our opinion, and no new game consoles are expected to launch until at least 2013 - if ever.

That right there invalidates this entire editorial.

 

[djdev]

That right there invalidates this entire editorial.

Yeah, that quote is especially stupid conerning that consoles have digitally distrubuted games on them. Also, it's not like there are making a AAA games (ex. Gears of War) for cell phones that would match the quality of a console version.

 

[MfA]

Hardware cycle ... ie. income generated by hardware sales.

 

[obonicus]

And from the context it seems that he's talking about many of these things from Gamestop's POV.

 

[RancidLunchmeat]

And from the context it seems that he's talking about many of these things from Gamestop's POV.

I was under the impression that this was taken from a market analyst's review of Gamestop's future stock performance. Which is obviously clearly linked to the console industry. So sure, it's from Gamestop's point of view.

 

[darkblu]

How on earth have they managed to look at Nintendo's financials and conclude that Nintendo don't want another console?!

nitnendo have always wanted to go third party, duh.

 

[NathansFortune]

This is the problem with financial analysts and tech markets. They just don't get it. The reason Pachter has so much notoriety is because he is an analyst that does get it to some degree, better than any other financial analyst.

I agree that GameStop and other game retailers are going to have a hard time as software sales decrease offline and increase online, but to say there will never be another hardware generation once this one is over is silly at best and at worst he is giving misleading analysis to potential investors in tech companies.

If anything I think this will probably be one of the last gaming generations where geeks and nerds rule the roost. I think gaming is going to go mainstream, and all three consoles will offer much the same experience, but on Xbox you will get Halo, Nintendo you get Mario and PlayStation you get Gran Turismo. The only wildcard is whether Sony can get 3D to be widely accepted with glasses by then in which case PS4 will probably offer more/better 3D gaming than the others.

 

[Danalys]

Even if after the industry crash after the 2600 you predicted no new generation you'd be wrong. There'll be new generations until there's Turing test beating AI. photo realistic graphics, physics that approximate the results of a grand unified theory and control schemes that give the option of a matrix and/or holodeck interaction.

 

[Squilliam]

If the analyst believes digital distribution is taking retail market share, who is taking it? Obviously its not Nintendo so are they counting console online sales, handheld online sales, or both?

 

[Shifty Geezer]

The only wildcard is whether Sony can get 3D to be widely accepted with glasses by then in which case PS4 will probably offer more/better 3D gaming than the others.

Nah. If 3D looks like taking off, the other companies can easily cater for it. Sony won't have a more 3D capable console next-gen because they've managed to squeeze a bit of 3D from this gen. Unless there's actually a hardware choice to put in twice as much hardware as the rivals and render true stereoscopy - but that's a cost thing that anyone can do. Nintendo might decide to go with the most powerful console ever, brimming with expensive tech that they sell at a loss to win everyone over. Unlikely, but it's an option they and any console company has, meaning no-one has a real advantage in 3D.

 

[Rolf N]

I was under the impression that this was taken from a market analyst's review of Gamestop's future stock performance. Which is obviously clearly linked to the console industry. So sure, it's from Gamestop's point of view.

Feels more like the "okay I'll look at the market leader only and assume everyone else is following the same trajectory without checking" kind of analysis.

edit: I meant they project Wii's YOY decline in the US onto other platforms, where actually the opposite can be observed if you bother checking.

 

[AzBat]

Didn't know about this, but evidently with the release of the new Lara Croft game GameStop announced their in-store DLC kiosk system...

The addition of Lara Croft and the Guardian of Light coincides with the completion of GameStop's in-store rollout of Downloadable Content (DLC) Centers throughout the country. Currently more than 45 different DLC SKUs, including game add-on content such as extra game maps and new levels, full games and arcade titles, are available at the GameStop DLC Centers.

"The beauty of our DLC Centers is in the convenience and options it offers our customers when they are looking to purchase add-on packs or full-length DLC content of top-selling titles for console games or popular Xbox Live games," said GameStop President Tony Bartel. "Customers pay only for the specific content they want, such as $14.99 for the Lara Croft game, rather than buying bulk points they don't immediately need and will subsequently have to manage. Also, customers can pay for DLC with any form of payment we accept, including cash, credit or even trade credits."

Customers can visit GameStop's DLC Center in any store to see the catalog of additional Xbox Live content that's available for purchase. Orders are placed at the register, and customers are given a code printed on their receipt along with instructions on how to download the digital content to their consoles.

Funny how this coincides with Amazon getting out of the XBLA code selling business...

http://kotaku.com/5618948/amazon-ends-xbox-live-arcade-game-sales

Tommy McClain

 

[NathansFortune]

Nah. If 3D looks like taking off, the other companies can easily cater for it. Sony won't have a more 3D capable console next-gen because they've managed to squeeze a bit of 3D from this gen. Unless there's actually a hardware choice to put in twice as much hardware as the rivals and render true stereoscopy - but that's a cost thing that anyone can do. Nintendo might decide to go with the most powerful console ever, brimming with expensive tech that they sell at a loss to win everyone over. Unlikely, but it's an option they and any console company has, meaning no-one has a real advantage in 3D.

True enough, but I think Sony have got better vertical integration to leverage 3D than the competitors. They can push it on more fronts, and associate PS4 with 3D content better than other consoles because of it.

 

[eastmen]

Gamestop is changing. My local gamestop is completely diffrent in the last month. They used to have one kiosk of game cards. Now they have a huge summer of arcade stand with game cards for all the big xbox live titles on one wall talking up a good quarter of the floor space xbox 360 used to have.