When most U.S. gamers think of brick-and-mortar games stores, they think of GameStop. The Grapevine, Texas-based company operates more than 4,000 stores across the country; it owns the Game Informer magazine; and its used game business is unrivaled. Once a fully brick-and-mortar retailer, GameStop is now adopting and embracing a multi-faceted digital strategy, which has proven lucrative for the firm.
GameSpot recently got the chance to speak with GameStop CEO Paul Raines during a media tour of the company's refurbishment center in Texas. It was the first time the refurbishment center was opened to the press.
During our time with the Fortune 500 executive, Raines talked about how hardcore gamers "love" GameStop and that the lifestyle of gamers "requires" there be a second-hand market. He also said physical games are not going away any time soon, and will "evolve" to a point where the boxed copy is needed to play digital content.
Additionally, Raines spoke to how GameStop has found success with used games while its competitors have fallen by the wayside. He also said next-gen consoles that block used games don't make economic sense, GameStop is not interested in the rental business, and that the current economic troubles in Europe is a potential threat to GameStop's business.
Check out GameSpot's full interview with Raines below, and look for our photo feature of GameStop's refurbishment center later this week.
GameSpot: Why are you letting press in now?
Paul Raines: I think historically, GameStop invented this kind of business. If you look at our history, we get copied a lot by competitors; people who want to jump into the business and so forth. We’ve been real cautious about people seeing what we do, simply because we are trying to keep competitors from jumping into the business. But now what’s happened, is I think…we’ve had every major competitor attempt and fail at the preowned business, and many of them are exiting, so we kind of feel like we’ve built something that’s pretty defensible. At the same time, there’s a lot of myths out there about the used business, and we want to bring them in and let them see. And we’re pretty proud of it; it’s a very high-tech operation that is allowing us to pivot into electronics beyond just video games.
GS: Why has GameStop been able to crack the used game market where others have failed?
PR: Refurb is a huge part of it. I think…strategically, we are absolutely committed to video gaming. One of the things that people don’t talk enough about is that we are, at our core, a video game company. And I say this to our employees and to our colleagues all the time: don’t forget we are authentic about video games. I play about 4 hours of video games per week. We are all into it. Our founders are into it. What that means is that we are strategically committed to [games], so when I see that Take-Two wants to do a launch of a game with us, and it’s going to require an investment of X, Y, Z, this isn’t a situation where a buyer who runs the video game category in a huge conglomerate has to go fight with the appliance guy. I’m into it. I’m talking to the Take-Two CEO directly. This facility is a huge weapon for us. No. 2 is we’ve been at it a long time. We know how consumers think; how to get them to bring trades in. No. 3: PowerUp Rewards now is a massive, massive relationship driver with consumers. And [No. 4]: we understand pawn shop legislation and all the rules around the country and how to run it. [No. 5], the pricing. It’s extremely complicated and we manage it far better than anyone else. Most, if not all, of our competitors are outsourcing this operation to a third-party.
"I play about 4 hours of video games per week. We are all into it. Our founders are into it. What that means is that we are strategically committed to [games]."
GS: Why isn’t GameStop operating this refurbishment center in Mexico?
PR: It probably would be cheaper. Quality, we think is important. You’ll see on the tour, we spend a lot of money and time making sure quality is where it is. We think we have the highest quality rating in the industry, and we are also very committed to this community. So as long as we can do it, we will.
GS: What do you make of the rumors that next-gen consoles may block, or in some way curb, used games?
PR: Well, they’re rumors. I guess we’ve said we don’t think it makes business sense. The $1.2 billion trade credits are funding growth of the industry. If you look at our PowerUp Rewards community, just in the United States, not including Europe, Australia, and Canada, there’s 24 million consoles in people’s homes. That 24 million consoles at current trade prices is about $1.8 billion of trade credits that we can use to drive the launch of Wii U, PS4, and Xbox next. So our console makers know that and they don’t want to miss the opportunity to use that to drive the market. And it doesn’t make economic sense. It’s a consumer problem. There are a lot of people who love pre-owned games. But if it were to happen, it’s like anything else in the business. You react accordingly. The preowned business will not go away any time soon. Even if new consoles don’t play preowned games, people are going to be playing PS3 games, and we still have a ton of people playing PS2. That’s a huge part of our pre-owned business.
"The preowned business will not go away anytime soon…even if new consoles don’t play preowned games…"
GS: Have you seen that GameFly commercial that skewers GameStop’s trade-in prices? Do you think there’s any truth to the thought that your trade-in prices are not where they should be?
PR: Well, we do two things around that. One is we spend a lot of time talking to consumers about how they feel about our value. We have great feedback from consumers about our value. Second is that we look at our competitors and where they stand. Those are main two things driving it. On a title-by-title basis, you can always find examples. As far as GameFly, it’s a small business. They’re going to run ads. We looked hard at rental; we think pre-owned is a better customer proposition that rental.
GS: So rental is not something you’re interested in?
PR: We’ve done tests on it several times; we just don’t think it’s as good a value for the consumer as the pre-owned business is. And when we talk to consumers, most of them will tell you that. These guys run some interesting ads, and they spend money on ads, so it’s going to happen.
GS: A transition from boxed to digital is certainly happening. Is GameStop interested in the resale of digital goods?
"The world is going to evolve particularly with the new consoles…to the physical copy becoming the client, which you have to have to play the digital content."
PR: It’s very interesting. There’s some technologies out there in Europe, and we’ve looked at a couple that are involved. We’re interested; it’s not a meaningful business yet. I think that if you look at the digital business, we’re spending a lot of time with publishers right now developing downloadable content (DLC) launches with this. And I think what’s going to happen is the world is going to evolve particularly with the new consoles and as dense as new games are becoming and as rich as they are, the world is going to evolve to the physical copy becoming the client, which you have to have to play the digital content. So we think the real action, or consumer demand, is going to be attaching digital content to physical content. Do people want to re-sell that? Right now we’re not seeing that as a huge market, but I think we’re on the leading edge. There’s a few companies, a few start-ups, out there that we’ve talked to that are doing this.
GS: You’re not naming these…
PR: No, we wouldn’t want to disclose that and have our competitors rushing in.
GS: Another thing that strikes me as interesting is GameStop's perception among hardcore gamers. If you only read message boards and comments section of stories, you'd get the idea that they hate GameStop, and yet they react with disgust at the idea of used games being done away with. What's your reaction to this?
PR: Hardcore gamers love GameStop. We measure customer service a hundred different ways. Remember, we have the PowerUp Rewards community, with a membership around 18 million, and they represent 35-40 percent of all video game consumption in the United States. They’re not the most active bloggers, maybe (laughs), but our position with consumers is very, very strong. Far stronger than any of our competitors, so we feel really good about that. We’re always trying to do better and resolve issues, but I think the pre-owned business is a very important business to people. You try to take it away and you see what people do. Our customers tell us that every day. The lifestyle of the gamer requires pre-owned business, because I’m buying a lot of new titles, I have to have a place to dispose of them so I can go and buy more new titles. That’s absolutely what we’re trying to do.
"Hardcore gamers love GameStop."
GS: Sony recently bought Gaikai, leading some to believe cloud-gaming may be a big part of Sony’s future gaming plans. GameStop purchased Spawn Labs a year ago. What’s GameStop’s position on cloud gaming, and can you give an update about Spawn Labs?
PR: As far as Spawn Labs, we’ve not disclosed…we’re trying to wait until our earnings call to really update people. But the latest thing is we’re in a beta test that plays great. We’re in six data centers around the country. Several hundred GameStop managers have played the service; it runs great.
GS: What exactly is happening there?
PR: It’s a console. It’s a GameStop PowerUp Rewards library. And you pull it up and click on the game you want to play, and you can play the game. We sell you a controller for your Internet-enabled device--tablet, laptop, etc.--and the technology works very well. Where we’re at now is developing commercial agreements; who we’re going to launch with, et cetera. And then we’ll disclose more of that as it gets closer. Certainly streaming gaming has not…if you go back to E3 four years ago, cloud gaming was going to take over the world. It’s an interesting business. It’s an early, early business. We don’t see a ton of consumer demand yet there. But we’re trying to position ourselves for it. I think you get into console streaming, PC streaming, PC downloads and tablets, and all of these have different consumer adoption curves, but I can’t say that console streaming has seen a huge adoption yet. As far as the Sony deal, Sony has said the Gaikai technology will be used primarily as part of an online gaming service. So that will be interesting.
GS: Traditional packaged games have had a brutal 2012 so far. When does GameStop expect this trend to reverse course?
PR: Well, I think the fall and holiday is where we expect to see improvement. And the Wii U is a big part of that. As we think about the Wii U, we think that’s a very significant player in what could happen at holiday. Certainly, the first half of this year has been tough on the NPD data. I would also caution everyone that [those] six months represent a third of the year sales-wise. So the media has had a field day, and investors have really been spooked by the NPD data. But we still have most of the sales year ahead of us and there’s a lot of positive signs.
GS: [Electronic Arts CEO] John Riccitiello has said before he doesn’t have a ton of faith in the NPD data, as it only shows boxed games in the US. What’s GameStop’s take on NPD data?
PR: We’ve said before, NPD measures less than half of GameStop’s business. It doesn’t measure pre-owned, it doesn’t measure our digital business, and it doesn’t measure now our mobile business. Yeah, it’s a metric of new software, and it doesn’t measure really the majority of what we do. Having said that, it reflects the reality of where the industry is. But I don’t think it signifies the end of console gaming by any means. I think the point is it’s a metric, not the metric.
GS: Do you see a point in the future where traditional boxed games cease to exist? Is GameStop preparing for a future outside of used games?
"We do not see a point where boxed games cease to exist."
PR: We do not see a point where boxed games cease to exist. I think you will continue to see a variety of formats of games; games are getting bigger, not smaller. Consoles are going to provide unbelievable new capabilities for rendering, speeds, et cetera. That will require physical games. At the same time, the digital business is growing. The digital console is the fastest part of the digital business for us. So we’re preparing for that through the investments we’ve made in digital spaces. As far as used, we continue to believe there will be a preowned business for a very long time. We think the next consoles will support [used games] and we’re planning accordingly. We also believe there is room for a preowned electronics business.
GS: How has the extended current-generation console cycle impacted your business?
PR: If you look at our financials for the first quarter, the extension of the console cycle has driven us; it’s put pressure on the top line, it’s put pressure on hardware sales in the industry. At the same time, preowned business has become a bigger part of what we do. Digital has become a bigger part of what we do. And global is a new business that we’ve launched. You’re seeing margin expansions in the business, but top-line declines. And that’s kind of what happens at the end of the console cycle. If you go back and study console cycles, although this is the longest we’ve seen, this is what happens at the end of a console cycle. We think this new console cycle that’s emerging with the Wii U and hopefully next year we’ll see more [Microsoft and Sony], is going to be typical of what we’ve seen.
GS: How much investment is GameStop allocating for Wii U?
PR: We’re excited about Wii U. We think Wii U is going to be a very significant part of the holiday period. If you played the games at [the Electronic Entertainment Expo], it’s pretty cool. I went upstairs and played Pikmin for like an hour with the tablet and the controller, and it’s pretty cool. I mean, the rendering, the graphics are fantastic. So I think Wii U is exciting; we’re eager to get started on the launch and we’re doing a lot to plan for that.
GS: How much more complicated has it become to deal with publishers now that they have new ways to seemingly combat used games like online passes and DLC tickets?
"I think our relationship with publishers is better than it’s ever been."
PR: I think our relationship with publishers is better than it’s ever been. Online passes are an interesting thing. The media loves to talk about it; it’s an interesting thing. We’re selling online passes in the store, and I think some consumers want that. I think digital content is a far better way to sell consumers more of what they want. But it’s another wrinkle in the process. We’ve not seen a lot of impact from it. I think publishers today working with GameStop have a much broader set of tools at their disposal. Think about the PowerUp Rewards; our marketshare is at an all-time high. The reason is, PowerUp Rewards have given us new ways to connect with customers. Digital content is offering new ways to offer consumers a bigger experience. Instead of giving them a T-shirt, now you can give them digital content, levels, et cetera. And then lastly, we are far more integrated around the world than we have ever been. When we launch a title now, it’s more and more a global launch. And that helps. People like EA, our good partners at Activision, and some of the other companies, they need us to be more integrated globally with what we’re trying to do.
GS: Between retailer-exclusive preorder bonuses, one-time use pack-in codes, microtransactions, DLC, and the like, the user experience for any given game is splintered a dozen ways. What kind of feedback have you heard from consumers about this? Confusion? Frustration? Enthusiasm?
PR: I think that our customers feel like they’re getting more innovation from us than they’ve ever gotten. As far as other retailers copying what we do, we can’t change a lot of that. So what we’re trying to do is say, "buy from GameStop, we’re going to bring you the very best, innovative content that we possibly can, and along the way, we’re going to provide you the most benefits." Our consumers tell us they’re more excited than ever about that. Add to that our ability to sell what we think will be exciting mobile games, tablet games, we think we have the best position we’ve ever had.
GS: What is the biggest opportunity for GameStop moving forward?
"In this day, when people say console gaming is dead: It’s not dead. It’s a great business, and it’s a cyclical business. People have to understand that."
PR: I think the biggest opportunity we have is to continue to be very good at console gaming. It sounds counter-intuitive, in this day, when people say console gaming is dead: it’s not dead. It’s a great business, and it’s a cyclical business. People have to understand that. The business goes through console cycles, and we are at the end of one, and the launch of another. We will continue to be very good at console gaming. The biggest opportunity is to deepen our relationship with customers and to offer them the products they want. If you are a PC gamer, and you really love PC gaming, then we’ve got to do the best job to offer you the best experience on PC gaming. If you’re one of these people who likes to dabble in multiple electronics, we’ve got to offer you the best opportunity for a tablet. And digital content. We’ve got to keep growing our ability to drive digital content. So I think if I could characterize us as anything, we know more about what customers want than we ever have, and we’re trying to give them more of it.
GS: The biggest threat?
PR: I think the macroenvironment is tough: the economics around the world. I just got back from Europe, and there’s lots and lots of things going on there. So that’s a threat. I think the rest of it is all about our ability to continue to innovate. I like to say our rate of change has to be greater than the external rate of change. Our internal rate of change has to be greater than the external rate, and I think the biggest threat is if we slow down. We’ve got to continue to innovate and drive change as an organization.