The news that GameStop stores are buying used Apple devices alongside traditional consoles and video games hit the Web this week and went viral almost immediately. Many bloggers began stating outright that the chain will also sell new Apple devices, such as the iPod and iPad, but the company has not confirmed this.
Why the fuss over what seems a benign change to a game retailer’s inventory? It may be the endless appetite for Apple (AAPL) news, but GameStop (GME) CEO Paul Raines told Fortune he sees the move helping evolve the company’s business. “We’re selling refurbished iPod Touches like crazy,” he said. “What everyone wants to know now is whether we will become a distributor of Apple products, but that’s something we don’t want to answer yet.”
The retailer has made a business out of taking in used game systems like Microsoft’s (MSFT) Xbox 360 and Sony’s (SNE) Playstation 3, refurbishing them and selling them back to consumers at a discount. GameStop does the same with video game software designed for consoles by independent publishers like Activision Blizzard (ATVI) and Electronic Arts (ERTS) as well. It has created a lucrative secondary market for all manner of digital products, boosting its coffers and driving traffic to its stores, even as it has sometimes complicated relationships with manufacturers and software publishers. Now it hopes to do the same with Apple devices, estimating that U.S. consumers have some $7 billion worth of them in their homes.
The Grapevine, Texas-based retailer has been looking for ways to boost its business. Its stock is hovering between $22 and $24, a fall from a high of $28.21 in late-May, its two-year peak. Shares have seen a slight spike in the last week on the Apple news, but the company failed to makes its numbers for the second quarter. During the second quarter, GameStop sales declined 3.1% to $1.74 billion, where estimates had been $1.83 billion. Wedbush analyst Michael Pachter notes that the industry at large is down, though. “The stock struggles mostly because there’s a widely held investor perception that packaged products are going away, and that’s hard to overcome. But I don’t think they’re going away completely for a long time.”
This latest development with Apple devices may prove beneficial. Pachter says the GameStop move is “a really smart business. I don’t know that it even matters if [they] make any money from this, as much as they become a new destination for a whole bunch of households looking to sell their old iPods.” Pachter is skeptical, however, of whether or not GameStop will soon sell new iPods, iPads and iPhones. “Apple doesn’t have any need to distribute new devices through GameStop. I don’t think it would even be a particularly high-margin business for GameStop.” Instead, the likelihood is that trade-ins of Apple devices would boost purchases of used games at the retailer.
GameStop first began accepting Apple devices in its Dallas-Fort Worth stores last April as a test, but will go national on Monday, September 12. Members of the company’s PowerUp Rewards program received early notification via an email last week. “Did you know that GameStop now buys your old iPod, iPhone and iPad devices?” it asked. “Trade them in at GameStop for in-store credit… Plus, you’ll score PowerUp Rewards points on every item traded.”
Raines said the idea appealed to him as one more way to strengthen its already large buy-sell-trade business, through which the company gave customers $1 billion in trade-in value last year. “If you think about GameStop, our vertical strategy is gaming. What we’ve also learned is that our stores are exceedingly good at buy-sell-trade, so a horizontal strategy is emerging around that,” he said. Launching the program now, he noted, will also allow the company to get ahead of the upgrade cycle spurred by a new iPhone model, widely expected this fall.
Aside from Apple devices, a spokesperson did say that the company “will have a curated offering of tablets by holiday.” Whether that offering will include iPads remains uncertain. Raines suggested the possibility of a GameStop-specific tablet that comes pre-loaded with games selected by the retailer. “What’s happening in tablets is there’s an excess of production, and lack of distribution,” said Raines. “We believe that leaves big potential for gaming-specific tablets. You have your whole gaming library on there, it becomes very appealing.” GameStop bought the casual gaming site Kongregate in late July 2010, another strategic move aimed at cornering the digital market. The purchase price was not disclosed.
The Apple-related news comes at a time when the company is making an effort to have a net of zero new store openings this year, as the industry moves toward DLC (downloadable content) gaming. Rob Lloyd, GameStop’s CFO, explained that although the company still does the bulk of its business from in-store purchases, “The challenge we gave our real estate team this year was, get as good at closing stores as you are at opening them.”
Perhaps, if the welcoming of used Apple devices proves a big success, they’ll want to open some new stores after all.