Day: 2012/03/14

GAME Group: Scenarios For The Future (If It Has One)

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I won’t retread the series of events that have led to today’s (dire) situation for GAME Group; instead, let’s look at the three most likely scenarios for how this story ends:

1) Recover and survive. This is looking less likely by the day. GAME is in the classic death spiral: 1) cash flow problems lead to 2) suppliers tightening financial terms, which results in 3) an inability to service customer demand, causing 4) even deeper cash flow problems. Add in the crash in the share price from nearly £3 in 2008 to just 1p, and raising additional funds from banks or the market seems unlikely. Some reports are saying that cash is so short that it’s unlikely GAME can pay the quarterly rents due at the end of March. Disposal of some assets like overseas operations (GameStop is reportedly interested in the Spanish and Portuguese operations) or prime retail locations could help the balance sheet long enough for the group to get back up to profitable trading, but this would be a long, hard slog, with suppliers and creditors continuing to view it suspiciously. Most recently, the FT reports (warning: pay wall) that OpCapita (the group that bought Comet for £2 last year) might offer GAME a financial lifeline – again, improving survival hopes or at least buying the firm extra time to come up with a strategy.

2) Get bought by another group (pre- or post-administration). If the current operations can’t be saved, selling the whole firm (or at least the majority UK arm) to someone else is a real possibility. After all, this is a firm with a healthy revenue stream (£1.6 billion for the financial year ending January 2011) in a vibrant market — although admittedly the high-street element is struggling — and with a wide reach across much of Europe (the second-largest gaming market after North America, according to VGChartz). Again, GameStop is an obvious buyer here but is reportedly only really interested in those Spanish and Portuguese gamers, so the price would have to be a real bargain.

This raises another issue: why would anyone buy GAME Group at the moment when they can wait a month or so and buy a more attractive ‘prepackaged administration’ firm without some of the baggage (i.e., creditors) that they will have to deal with in a straight purchase? The upside of purchasing it as a going concern (whether in or out of administration) is the continuity it allows the business; stores can stay open, staff be retained, and suppliers placated. Inevitably, efficiencies will be needed post-acquisition; stores will close and management jobs will disappear or be merged with the structure of the new corporate overlords, but this is still a much better outcome than the worst-case scenario . . .

3) Close down and be broken up. This is still a possibility, particularly given the difficult retail environment in many European territories. If a buyer can’t be found for the firm as a whole, the administrators’ duty is to get as much money back for creditors and shareholders as possible via any means. Overseas operations or the online store could be sold off as going concerns, but the UK may see piecemeal store-by-store acquisitions via management buyouts or selective site purchases by other retail chains (effectively what happened to Woolworths Group in the UK back in 2008/2009).

This last scenario is bad for the economy, bad for employment, and very bad for the game retail ecosystem. Without GAME in the UK, supermarkets become the dominant providers of in-person game sales, which means less title choice, fewer demonstration areas, and the loss of much of the secondhand gaming market. Sure, HMV (while it still trades) offers a good selection of games and more knowledgeable staff, but other than that, gaming retail risks being thrown back 20 to 30 years to a time when (usually excellent) independent shops struggled to make ends meet — but now with the added competition of online retail and digital distribution.

Scenario No. 2 is still the most likely outcome at this stage. This would mean that GAME survives (in some form) for years to come — with the question of whether it can adapt in the long term. Can videogame retail buck the depressing trend set by book, music, and DVD retail and stay relevant? I’ll look at that in my next post.

How The Videogame Market Has Changed Over The Past Decade

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In the 12 years that I’ve been following the global videogame market, it has gone from a sizable niche industry of $14.7 billion in 2000 to generating between $64 billion and $74 billion, depending on who you ask (after all, what’s $10 billion between friends?). The industry’s focus has also altered in this time:

Gaming hardware has shifted from PCs to consoles to ‘devices.’ Even 12 years ago, consoles like the brand-new PlayStation 2 had started to refine what ‘gaming’ meant, with sophisticated hardware — including one of the best DVD players at the time — and blockbuster titles. Much of the past decade has belonged to the console world. But in the past 1 to 2 years, we’ve seen the rise of non-dedicated gaming devices (such as Android smartphones and iPads) and the creation of mainstream ‘social gaming.’

The console’s ‘5-year rule’ has ceased to be relevant. Back in the day, new iterations of popular consoles came along every 5 years — making use of more powerful hardware and new storage technologies. Sony was the first firm to flex (if not break) this rule in the modern console age; although it continued to release new consoles, it also kept selling its old platforms for years. However, the current generation of consoles has well and truly broken the old rule. Neither the PS3 nor the Xbox 360 seems likely to be superseded any time soon, despite having been available since 2006 and 2005, respectively.

Connectivity has moved from being the exception to the rule. It’s sometimes difficult to remember what the gaming world was like in 2000. The PlayStation didn’t have any connectivity out of the box; you got an analogue modem with the Dreamcast; and the Ethernet-equipped Xbox was still at least a year away in most territories. Everything you did on consoles (and even on many PCs), you did with physical media — no friends lists, no DLC, no patches.

Digital distribution has made PC gaming interesting again. Given all this, has the PC become redundant as a gaming platform? Far from it! Two (diametrically opposed) trends have kept it interesting:

  1. The rise and rise of social games. As Zynga has shown, there is a massive appetite for social games either within social networks or via dedicated online portals. While mobile devices will, inevitably, become the dominant platform for these games, the PC currently still dominates as the device on which to play Farmville, Triple Town, or Bejeweled Blitz — aided, no doubt, by Apple’s iOS devices not supporting Flash.
  2. The digital distribution of ‘proper’ games — and the rebirth of indie developers. Led initially by Valve’s Steam service, the distribution of PC games electronically has grown hugely over the past 18 months. Interestingly, this has allowed small developers who stood no chance of monetizing a ‘boxed’ release in retail to do their thing; the Binding of Isaac, Super Meat Boy, and (my personal favorite) Dungeons of Dredmor are great examples here. Add to this great initiatives like the Humble Indie Bundle, and the PC gaming space is more interesting than ever.

Mega-publishers have been created. Firms like EA, Activision Blizzard, Square Enix, and Namco Bandai have grown from a decade of mergers and acquisitions — as some of their awkward names might suggest. This has been driven partly by games becoming multi-year, multimillion-dollar projects that favour larger-scale operations and partly by the need for diversification (as with Blizzard contributing World of Warcraft revenues to Activison).

Many other things have also changed, such as the rise of mega franchises like Call of Duty, battles over the second-hand market, MMORPGs, etc.; several of these warrant a whole post to themselves, but I don’t want to labor the point here. All these changes are putting an obvious strain on some of the traditionally successful firms in the space. Most notably, boxed-game retailing on the high street is in crisis, GAME group in the UK being the starkest example of this — I’ll look at their prospects in my next post.