Coming out of the annual trade show E3, the video game industry’s big three—Sony, Microsoft and Nintendo—are focusing on exclusive games to sell next-gen hardware like PlayStation 4, Xbox One and Wii U, while keeping the hundreds of millions of current-gen gamers happy with software for PlayStation 3, Xbox 360 and Wii. Tony Bartel, president of GameStop, the world’s largest specialty video game retailer, believes Nintendo is still in the race against Sony (SNE) and Microsoft (MSFT), even if they are further behind.
“Never count Nintendo out, especially around holiday,” said Bartel, who added that Nintendo did a nice job of showcasing their exclusive games at E3. “Nintendo’s success rests on two things. There’s still some confusion around how the Gamepad works and how they’re leveraging it. And the slate of first party games wasn’t as strong in the launch window. The recent launch of Mario Kart 8 was huge for us, and the upcoming Legend of Zelda and Super Smash Bros. games will be system sellers. We’ve heard a lot of excitement from our managers and associates around Mario Maker as well. And we’re very excited about Ammibo, Nintendo’s entry into the toys for life category. They had the foresight to be able to use the connected tablet with the little square on it for the Amiibo toys to connect to. A lot of our gamers are very excited about some of the innovations coming from Nintendo.”
Bartel personally believes — and based on conversations with gamers through the 27 million GameStop PowerUp Rewards members—that Wii U doesn’t need a price cut to drive hardware sales. It’s more about innovation and introducing more exclusive games. He added that many gamers used Mario Kart 8 as a reason to finally buy a Wii U.
In contrast, Microsoft did need a price cut to get more consumers interested in upgrading to Xbox One. Microsoft started selling the $400 Xbox One without the Kinect technology on June 9, while the original system with Kinect is still available for $500.
“Xbox Ones have been flying off the shelves since the price cut,” said Bartel. “We were the only retailer that was taking pre-orders an hour after Microsoft announced the new price. We had a significant amount of people picking up their Xbox One on June 9 and have seen a tremendous sales surge. It’s increased demand on games like Titanfall and Watch Dogs as well.”
Sony leads the next-gen sales race through June 2014 with approximately 8.2 million PS4s sold to date, followed by 6 million Xbox Ones and 5.5 million Wii U consoles, according to Wedbush Securities video game analyst Michael Pachter. Sony has been plagued with hardware shortages at retail.
“It’s been a challenge to keep PS4 in stock,” said Bartel. “We’re constantly shuttling product between 4,200 stores. Sony is doing everything they can to make sure we’re in stock. We believe both PS4 and Xbox One will be in high demand this holiday season. After the initial launch surges, we’re seeing strong sales increases with both consoles out of E3 and strong pre-sales of the big E3 games.”
The recent success of Ubisoft’s Watch Dogs, which sold 5 million copies in its first week at retail, could change the way the games industry looks at the calendar year. Traditionally, most of the big games launch in Q3 and Q4. Even Watch Dogs was originally slated to launch in Q4 of 2013, but was delayed.
“We’re constantly talking to publishers and asking them to spread out game releases beyond the September through November timeframe,” said Bartel. “The amount of gift cards given out around the Christmas holiday makes January a ripe time to launch a game as well. We’ve seen already this year innovative games like Titanfall and Watch Dogs do well in non-traditional time windows.”
That said, the bulk of the big games shown at E3, including Activision’s Destiny, Skylanders Trap Team and Call of Duty Advanced Warfighter, will ship this fall. One new piece of hardware that will be available at GameStop stores are the new Steam Machines, suped-up PCs designed for the living room.
“Steam is a great gaming brand and we have a great relationship with Valve,” said Bartel. “Steam Machines are products gamers want, and it wouldn’t surprise me if we start taking pre-orders for some of those devices as they’re announced. Gamers love the Steam ecosystem and we want to get them there. That’s why you see that business growing. It nearly doubles every quarter.”
With the growth of mobile, one of the newest trends is the migration of mobile gaming from smartphones and tablets to the big screen in the living room. GameStop already sells mobile gaming hardware that supports big-screen gaming like the Nvidia Shield. Android TV and Google’s push for mobile gaming on the big screen is something Bartel welcomes.
“Things like Android TV draw more people into gaming,” said Bartel. “We see that as a positive thing. If the gaming consumer wants it, we’re going to sell a lot of it. What’s important with Android TV is that it’s about discovering video games. All of these new mini console-like devices coming out, including PlayStation TV, Ouya and Shield, will allow us to quickly see demand from gamers.”
The demand for used games has resulted in Walmart entering the business this past March. According to research group NPD, sales of previously owned games accounted for $1.6 billion in the U.S. in 2013. GameStop had over $1.2 billion in trade credits last year with 72% of that credit going towards the purchase of new games.
“We’ve had people compete with us in the pre-owned games space multiple times with most retailers having tried it three or four times,” said Bartel. “When a new retailer enters the space we consider that to be a positive for our business. We’ve been at it for over 15 years, yet only 40% of people who walk into a GameStop know that we do trades. We see a surge in trade awareness when anyone makes an announcement, so now more people start thinking about trades.”
Bartel said GameStop has several key features that has allowed the retailer to fend off competition over the years.
“We want to make it as easy as we can to bring in pre-owned games and apply them as currency to games you want,” said Bartel. “To succeed you have to comply with the thousands of laws that each locale has and you have to be able to take everything the gamer brings. Other retailers will pick and choose what games they’ll accept, which is a difficult consumer proposition. We have a refurbishment center that millions of games go through every year to bring them back to new condition. It’s important to have that piece of the puzzle.”
Gamers have new ways to play games across all platforms, including next-gen consoles, for free thanks to titles like Riot Games’ League of Legends, Wargaming’s World of Tanks and Sony Online Entertainment’s DC Universe Online. Bartel said there are two opportunities at retail with free-to-play games. One trend is the migration of games like World of Tanks, Minecraft and Plants vs. Zombies coming from free to play to disc-based games, which in some instances is generating more dollars for publishers than the free-to-play business model. Then there’s the sale of in-game currency. Approximately 40% of Microsoft’s digital currency is sold through retailers. Over 60% of GameStop digital purchases come from non-credit card sources like gift cards, trade credits and cash.
“There’s a big market that wants to purchase free-to-play goods in brick and mortar,” said Bartel. “Digital games is a $750 million business, and a part of that growth is coming from mobile games like Clash of Clans and the sale of digital console games through PlayStation Network Points and Xbox Live Dollars. We sell digital upgrades like Madden Ultimate Team for Electronic Arts and with Blizzard’s World of Warcraft we give away the game and sell time cards to play it.”
According to NPD, the number one growth area for console gaming is DLC (downloadable content). Bartel looks at disc-based sales of games like Watch Dogs as “the best of both worlds” with the disc-based game selling for $60 and then an additional $60 value over time through DLC.
“Free-to-play can work in the console environment, but you have to make sure that the initial download is good enough that people are willing to fund it from a consumer standpoint,” said Bartel. “The expectation is gamers are okay with putting $60 out for Destiny or Call of Duty, and then spending additional money on DLC because they trust the franchise.”
GameStop owns free-to-play games site Kongregate, which also funds the development of mobile and casual PC games. Since January 2013, the $10 million Kongregate Mobile Developers Program has published nine mobile games, amassing millions of downloads through GameStop digital networks and featured prominently within Apple’s (AAPL) App Store.
GameStop announced in April that it will be closing 120 to 130 stores, but the company is expanding into new areas through its acquisition of Simply Mac stores as well as new mobile stores under the AT&T brands Spring Mobile and Cricket. The company expects to open 300 to 400 new stores under these brands.