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Feature Article

Digital Games Are Popular, So GameStop Must Die: That's Not True, Exec Says

GameStop has plans.

"Physical software is being disrupted with digital, therefore GameStop is dead."

This line, or some approximation of it, is a popular comment in discussions about retailer GameStop's fortunes and future. It's one that GameStop chief customer officer Frank Hamlin brought up and acknowledged in recent interview.

But it's a short-sighted and incomplete story of GameStop's outlook, he believes. Hamlin spoke with GameSpot recently about the present and future of GameStop. The conversation takes place with the backdrop of tough times of late for the Grapevine, Texas-based outfit.

The company's share price is at close to an all-time low, hovering around $4 currently. That's down from around $55 back in November 2013 around the release of the PlayStation 4 and Xbox One, and it's down from a high of $60 USD back in 2007. It's clear the company has seen better days.

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Hamlin, who returned to GameStop in August 2018 following his initial run at the company as chief marketing officer from 2014-2016, told GameSpot that it's too simplistic--only an "inch-deep" analysis in his words--to say that GameStop is doomed because of the proliferation of digital games and services.

He spoke to us about how GameStop is pushing even further into the collectibles category, while he also expanded on GameStop's plans to become the "local church" or "Mecca" for gamers through its in-store educational campaigns including its partnership with Complexity Gaming for gaming workshops. Not only that, but GameStop is branching into a new area with its launch of prototype stores with very different layouts; the company is also experimenting with stores that only sell retro games and wares.

Physical game sales are still big business. But the percentage of game sales that are digital are increasing at all the major publishers. Not only that, but digital subscription services are poised to take a bigger share as offerings like Xbox Game Pass, Uplay Plus, and EA/Origin Access, along with Google Stadia and Microsoft's xCloud coming in the future. There is a generally agreed-upon expectation that video games will eventually edge closer and closer to the movie, TV, and music industries that skew even higher toward digital and away from physical. Hamlin says GameStop remains agnostic in regards to meeting the consumer wherever they want to be and however they want to spend their money. When the video game industry more fully adopts digital, it will need a distributed sales force, and Hamlin maintains that GameStop is well-positioned to deliver that.

At the same time, Hamlin points out that the video game business is unlikely to embrace digital completely anytime soon. Microsoft's new console, Project Scarlett, is capable of delivering 8K graphics, and this could make a game like Red Dead Redemption II balloon to a 400 GB file size, Hamlin estimated (this is only a speculative projection, however). This, combined with internet connections not being available or capable everywhere, means that discs will remain popular for some time to come, Hamlin argues. Not only that, but games to some people are similar to tattoos or trophies on the shelf; something to collect and look at daily. The idea of owning a physical product will continue to be important for some portion of the game-playing audience, he believes.

GameStop is experiencing some friction in this new, more digital world, however. The company is refusing to sell Microsoft's all-digital Xbox One S. Hamlin declined to go into specifics as to why, but he said conversations are ongoing as to how the two companies can come to terms.

Also in the interview, Hamlin teased that the retailer is investigating, at least in a preliminary stages, a manner in which it might be able to re-sell digital games. He also spoke about GameStop's recent decision to wind down ThinkGeek, what happened with the GameStop sale discussions, and what it means to have a new CEO, George Sherman, at the helm.

You can read our interview with Hamlin below; it's been edited and condensed for clarity. The interview took place the same day as Nintendo announced the Switch Lite. All of the answers are from Hamlin excerpt where noted.

The Nintendo Switch Lite model was announced over night. I was wondering if you had any reaction to that first, before we dive into the questions.

Hamlin: We're incredibly excited about it. I think it's a real opportunity to grow the Switch penetration within a family. I think it's really also a good adjunct if you haven't gotten into the Switch yet, as a way to get into the Switch ecosystem, if you're presently playing on other systems. We're very excited about it.

You guys were obviously trying new things. One of which is the further investment into eSports. Can you talk to me about your thinking behind that, and what kind of opportunity you see going forward in esports specifically?

What you'll learn about me ... Sometimes helpfully, and sometimes to my own detriment I speak in tongues, and metaphors, and clumsy analogies.

You go to E3, you go to Comic-Con, you go to these places, and you see the people at those events celebrate video game culture in real life. It is a really powerful thing to witness. My question around GameStop is, if you take the analogy of that Vatican, or Mecca, or the Wailing Wall, why isn't GameStop the local church, synagogue, or mosque?

A similar analogy I think is appropriate when it comes to esports. esports is no secret at all, but it's this massive cultural phenomenon. It is punching way above its weight I would argue, in terms of its cultural importance. It is attracting a boatload of eyeballs. The breath of those eyeballs is predominantly folks who are gamers themselves. If you go to an Overwatch League event, you will see virtually 60, 70 percent of the audience is somebody who is a hardcore Overwatch player.

If that Overwatch League, to use a similar analogy is, the equivalent of the NFL in traditional American sports... Why isn't GameStop the amateur sports, YMCA, Pop Warner league, that's taking advantage of the long tail of all of the consumers who enjoy video game competition, but don't have a forum to do it? The strategy for GameStop esports is to become that virtual Pop Warner league for esports. It's not about the professionals, in the sense that we're running a sponsorship, and we're glomming off of the professionals to get name recognition for the GameStop name.

Rather, what we're doing is harnessing the expertise that those individuals have in playing the game, and presenting that exclusively to our customer base so that they can learn to become better competitive players themselves.

Obviously related to that is your investment in your Performance Center, and then your gaming clinics for top pros in competitive games. Can you talk about why you wanted to move in that direction in terms of ... what you just said, but as it relates to, there's a lot of this content that people can find on YouTube, or other places where they look for tips and tricks. What does GameStop offer maybe people can't get elsewhere?

Well, as we move forward into this, it's going to be an almost curriculum-based education. It's a lot more formal instruction as we get into a given game, and we're going to go into it more deeply. As you move forward into us becoming the cultural center of gaming in every neighborhood, and we're the local church using that metaphor.

Eventually we will be hosting tournaments and education. In there consumers will be able to badge themselves as, "I'm a green belt, yellow belt, or black belt in Fortnite. I've been through a training regiment." Much like somebody who goes to, here's an Australian analogy, John Newcombe's tennis camp in Texas, and comes out of it they're a better tennis player.

They may or may not have any desire to become a professional tennis player, but they're trying to become the best tennis player they want to be. Given their time, and money constraints, and how interested they are, and then their own physical limitations.

The Complexity center, what that is, is a beehive of activity for us. Another analogy is we're the Jimmy Kimmel Show, or the Jimmy Fallon Show. That's the studio. That's the streaming center. A lot of the content that we're going to be producing is with the Complexity team, but we've also done partnerships with team Envy, with Optic Gaming. We've already hosted over 250 tournaments online. We've partnered with the Collegiate Starleague. All of these things are building the foundations so that we become, part and parcel of how an amateur competitive player goes down their journey of game competition.

The bet that we're making is people doing these things in real life is a more fun, obviously more visceral, and more meaningful experience.

We've seen a lot of investment from other retailers and publishers in general into eSports. It's not always a money-making initiative. Is this going to be something we see on GameStop's bottom line ... Are you making money from this, or is this more a marketing effort?

I'm a marketer so marketing makes money. The initial money making of that is ... we're aggregating an audience, building a community, building magnetism within that community, becoming an authority within that community. Which has a hail effect in terms of traffic, and sales to the core business. As we get into new conceptual store designs, and those kind of things, I think you'll see ways that it's more thoroughly monetized.

Right now it's ... Think of it just like you would running a social media channel. It's a worthy marketing expense, and we can measure ROI on it, but the ROI is the magnetism, and the relationship that you build with that consumer, and measure that over the lifetime of that customer.

Obviously it is a rich, massive market, with lots of interesting storylines and things like that. I think everyone is coming together with it now, trying to figure out best practices.

It's very much a brave, new world. I don't think there is an [anyone involved in eSports] there that would say, "The future full revenue model of eSports is fundamentally known at this point." I will say, as a retailer, I'm not interested in doing sponsorships that get me a logo in front of a bunch of eyeballs. I'm interested in doing activations that generate foot traffic, and magnetism to my brand, and my location. I think it's actually a great sponsorship for that, when you look at who the consumers of the esports content are: is they're players themselves.

In regards to the way you'll be communicating this out, is this going to bet email blasted out to your PowerUp Reward members, or will it be associates in the stores? How are you getting this message out there?

Yes. All of those notions. Through our app, through our communications at the store level, through our channels themselves. Much of it is also happening in partnership through the social channels, and influence ability of the team members themselves through Complexity's social channels etc.

GameStop was in the news recently for the moves you made with ThinkGeek [to wind it down]. I think you've said part of this was a strategic business transformation aimed at helping secure your position in the future. What does that actually mean without all of the business legalese? Why did you make this move to scale down ThinkGeek in the way that you did?

I think we've been public around our cost structure, our desire to focus more intently on gaming. ThinkGeek, it's a way to streamline our business platform. The products from ThinkGeek are still available. ThinkGeek.com is an experience that exists within the GameStop website. We're still operating ThinkGeek stores, and we're big proponents of ThinkGeek. Collectibles is a very meaningful business for us. This is just a business redundancy thing that you work through from a streamlining perspective.

"Collectibles as a component of our business is the highest growth component." -- Hamlin

As you kind of just alluded to, is GameStop still committed to growing its toys and collectibles business? I think there was a statement put out years ago, that GameStop wanted to transition its business to have the mix be moving more towards toys and collectibles. Obviously not away from video games, but having toys and collectibles be a bigger and bigger mix of your sales. Is that still the case?

That is very much still the case. Collectibles as a component of our business is the highest growth component. I would have to say it's our fastest growing business. It's a massive opportunity. The way forward I believe is to make GameStop this cultural center, and collectibles is very much a big part of delivering on that value proposition. There's souvenirs for your own gaming cultural passion, or pop culture passion.

Is the main thinking there, the margins, or the opportunity profiles are just better on toys and collectibles, you're really doubling down on that? Is there any other reason you want to push so hard in that direction? Further to that, what specific plan do you have to grow this toys and collectibles business?

We're just following customer demand, and there's insatiable customer demand for unique, personalized, interesting collectibles according to any individual fandom. The psychology of it is similar to a tattoo. Which is, these things help badge me as an individual unique, and separate from my best buddy who doesn't like the collectible I have. I think this is a burgeoning, cultural phenomenon that ... Yeah, there's definitely money in it. The money is because we're being customer centric in learning what customers are excited about consuming.

I guess I'd also like to ask what are you hearing from consumers in any kind of surveys you put out about? The past few times I've gone into GameStop stores in America, and here in Australia as well at EB Games, you go in there, and it looks like GameStop is purely becoming a toys and collectibles business based on how much space they get in the store. What's your response to that kind of perception that maybe GameStop is becoming more toys and collectibles, and less video games?

I don't think it's true. You look at the financials it's not ... it's the fastest growing category within the business. I don't think that the name of a company ... it's GameStop. The reason people [come into the store] is around video game releases, product releases etc. Collectibles are very much fun items to buy when you're in the store. They're not necessarily the main motivator for traffic to our stores.

Obviously the toys and collectibles you sell now are coming from different companies. You've got Funko Pops to T-shirts, everything. Have you ever considered creating these things in your own centers, building these products on your own?

That's a great idea. Yes. That's very much in consideration. I think you need only look, there's numerous businesses out there that play a very interesting role in customized collectibles. Clearly we think that's a potential opportunity for us.

"When the industry moves to digital subscriptions, and all of those things, the industry will need a distributed sales force to do that, and we think we play a very vibrant role in doing so." -- Hamlin

The video game industry is increasingly moving towards digital in almost every sector. How is GameStop adapting, or evolving its business model to follow this?

We believe that we are the distributive sales force for the industry. We have 3700 locations in the United States that are within a car ride, or skateboard ride in 85 percent of the U.S. population. Within those stores are 40,000 associates that are dedicated exclusively to video games, and video game culture. Clearly an eyes wide open industry. The consumption of digital in many cases is an appropriate occasion for the consumer. In other instances the consumer wants physical. We are agnostic as to how a consumer wants to consume. What we know, and what every partner in this ecosystem that we partner with knows, is that we are the proselytiser for the industry that helps create discovery, and awareness of new IP.

And, [we help] direct the consumer with a real human being that understands human motivations as to what's the next appropriate game for me to buy, or console for me to buy, or accessory for me to buy, or collectible for me to buy. When the industry moves to digital subscriptions, and all of those things, the industry will need a distributed sales force to do that, and we think we play a very vibrant role in doing so.

Related to that we just saw Microsoft release a console without a disc drive. Which was a big deal, because they were one of the first to do that. Is that something you're excited about?

We're absolutely excited about it. We're not presently selling it. Microsoft is a wonderful partner, and we are in conversation about how that could be a possibility.

Is there any update that you can provide on what those conversations are like? What would Microsoft have to do? Would it be come kind of digital attach ... what would make it more attractive for you?

I don't want to get into it, but it's in the negotiations. I'm sure you can understand that.

Another question about digital would be, as you alluded to, there's a lot of streaming services coming out that are poised to be potentially the next big sector in games. Is that something that GameStop ... given your relationship with so many publishers around the world. Theoretically it seems GameStop would have the infrastructure, and the expertise to be able to work in a space like that. what are your thoughts on getting into subscription based gaming, or if you're not doing it what are your thoughts in general?

We believe that ... Exactly as what you described, we're agnostic as it relates to the consumer and how a consumer wants to consume gaming. We're also agnostic as to all of our wonderful vendors in the ecosystem. We're an interesting match-maker between those two constituencies, because any other channel that you go through for a subscription is going to be somewhat myopic according to the content creator. That's not how the consumer wants to ingest the subscription we don't believe. We feel that we have the relationship with the customer to design the appropriate subscription that bundles the right games from multiple publishers, and the first-parties. Yes, we think that's an enormous opportunity for us.

Something else that comes up in this more digitally focused world, is that GameStop's lucrative business model of buy-sell-trade doesn't exactly carry over or adapt in a digital world. What's your thinking on maybe potentially evolving the buy-sell-trade model, could this ever work in a digital landscape?

Yeah. There are companies out there, that right now are experimenting with using blockchain as a notion of provenance within digital gaming. It's not necessarily a path that we desire to go down in the short run, but it's something that's interesting, and we're keenly aware of and watching it. The other thing that I would point out is, there is a rabid continual used business in hardware, accessories, controllers, headsets, etc. I don't see that business going away for a very long time. We are an enormous purchaser of used mobile phones, used electric devices that creates trade currency that ploughs back into your digital experiences.

I agree that as the world gets more digital, physical software as a pre-owned source of revenue is not as important as it used to be, but there's plenty of other categories where they're extremely vibrant. As you get into the next console cycle, the ability to trade in an old console for a new cycle for a new console is a really compelling proposition.

I think you've said in the United States, you have the biggest share of new console sales. It must be a very exciting time for you guys now. Looking to next year when these new consoles are said to be coming out, in addition to the fact that, they both said they're both going to have disc drives. Do you have a response to these new consoles coming, and what it means for your bottom line, and your thinking going forward?

It's widely known in the industry ... the customer behavior associated with the release of a new console. As you get right up to the release of the console, developers hold back on releasing games, because they want to release it on the latest and greatest technology, the best video card, best processor speed etc. We're keenly aware of that nature of this business, and very much prepared to help initiate the new relationships with all of the video game world as these things come out. To comment on the disc drive notion ... I think both Microsoft and Sony are keenly aware that the consumer needs that optionality. We're very much a believer in helping our customers and our guests ... sell them a physical game when they want it, because there are occasions, and we know through our research the main reason folks wouldn't want a physical video game is when it's a compelling experience they know they want to remember for a long time, it's much like a collectible. They like the collectability, the trophy on the shelf.

That tangibility is something that's extremely important for the right game experience. Not giving the customer the privilege of having that is something I think both Sony and Microsoft are aware, would be a foolish thing to do.

"These games become more and more immersive, and as they do their file size gets exponentially larger." -- Hamlin

The technical notion of this as well is ... Sony hasn't technically announced, but Microsoft is announcing [Project Scarlett is] an 8K experience. It's a geometric increase in file size when you go to the number of pixels, and then multiply that times time over the game. The file size is going to be geometrically larger for an 8K experience. Then means transfer from that large file size ... Unlike movies, these are massive, massive files. For the larger, more immersive games, I think a physical experience is actually going to be a better get-you-gaming quicker experience, even on increasing bandwidth speed. Which remains to be seen.

I think that's why the customer doesn't want to throw away that optionality. It's not like movies, where the file size of a movie is pretty much the same file size for every year after. These games become more and more immersive, and as they do their file size gets exponentially larger.

Just stepping back a bit. You guys obviously have new CEO George Sherman now running things. Can you talk about what's new, and what's changed? I think I heard in a past interview, you said he is myopically and maniacally focused on gaming.

Certainly, Gen Zs and millennials, just the way that they go through life... I've got a son who is a big Fortnite player, and Fortnite, for him, has become almost as much his social media forum than it is just the fact that he's playing the game. It's the way that he interacts with this friends. Which is a really interesting, important role that video games now are playing, and as this industry evolves and becomes more intertwined in the fabric of our lives, that's an enormous opportunity. The role for a specialty retailer, to me, is an incredible optimistic role and we just have to re-envision ... where this world is going, and what is the retail experience that moves to how consumers intertwine gaming into their everyday life. We think the bet that we're making is this cultural center of gaming bet, and George is 100% a proponent of that. And so to me, it's very exciting to have him on board.

And then on your own personal career trajectory. You're obviously at GameStop. You left and then you came back. What was it that encouraged you to come back? What was the opportunity that you saw at GameStop?

It's that very thing. I wasn't... and this gets in the business strategy, but this is a personal comment... the notion of diversification, to me, was leaving an opportunity on the table, which is, in any business, you have only so many resources and where do you deploy those resources. And I felt like our resources were better deployed within the category that got us there, rather than trying to deploy those resources elsewhere. And through conversations ... through George coming back... this myopic, maniacal focus on video gaming is the thing that's attracted me back, because I fundamentally believe that that's where the opportunity lies.

And we have millions of customers we already have a relationship with. We already have traffic track patterns dealt with, and we just need to rethink what's the magnetism between our stores, our associates, and those customers. And I think there's an incredible way forward for that.

As you look forward to the future of the business, do you see GameStop retaining its existing level of scale, in terms of headcount and store count? Just basically, what are your ambitions, in regards to scale?

I'd say that's a first derivative question, and the first question should be, "What is the role of GameStop in the brave new world of modern digital video gaming?"

And once we've answered that question, then the first derivative question is, so what does that mean, in terms of what is the appropriate size of the store, what is the appropriate footprint of stores, how many locations do you need, et cetera, et cetera. If you put a gun to my head right now, I would say that the way we are distributed is a very appropriate way to be the local church, which is... it's a very flexible real estate model with small boxes that are extremely convenient, and they're not in places that are hard to park. And you can just go right up to it. If you want to sit down and play some games, you can do that. If you want to attend the cosplay event, you can do that. It's all just very, very convenient and conducive to being a cultural center in every neighborhood. I would knock that chip off my shoulder, before I said we would need to fundamentally change the architecture and footprint of our store.

There was a period of time last year when you... obviously pursued a sale to an outside company. People were speculating, in numerous ways, about what this could have meant. Is there anything more you can say about that process, now that you're on the other side of it? Obviously not looking for business particulars or anything like that from the inside, but just at a high level, what was this all about and what have you learned, now that it's over?

I wasn't here when that happened. I didn't return until August of '18. Anything I'd say, it would be speculation at this point. The thing you said, I don't think is necessarily true. I think we were approached, I don't think we were pursuing.

[Joey Mooring, Senior Director Corporate Communications]: As you probably saw on the news during that time period, third-parties that were interested did approach us. As a publicly traded company, we have to entertain all those opportunities, explore what's right for the shareholders, and for the business. And so as we engaged with those third-parties doing their due diligence, when the decision was made... we announced that they were not able to secure the financing that they were looking for, we realized that we had, as Frank shared with you, we see opportunities to continue to grow and expand our presence in the gaming industry, and really growing our collectibles and toys business. We saw that as a viable opportunity for us to really focus and double down on video games. And that's where we're marching. That's the story that we told, once we shared with the folks in Wall Street that the conversations had ended.

Would you be open to these kind of acquisition talks again in the future? Or as you said, it's just something you have entertain as a publicly traded company. But is that door shut going forward, or would you still consider those things?

[Joey Mooring, Senior Director Corporate Communications]: We don't really get into the practice of speculating on what-ifs and look-what-happens. I just would say that again, as a publicly traded company, you pursue those opportunities and avenues that make sense for the business and for its shareholders. As far as speculating what the future holds and what opportunities... it's truly not a practice that we do.

Okay. And then Frank, one of the things that you've said in a previous interview was, Wall Street overlooks or doesn't completely understand the impact of lower income gamers, who oftentimes pay in cash, as opposed to card. So I was just wondering, what's your response to those? After telling me everything that you've said today, what's your response to those people on Wall Street or in general who doubt GameStop's ability to turn things around and get back on a good path?

I don't want to take issue with it. I think it's an inch-deep kind of analysis that says the old business model was based on physical software. Physical software is being disrupted with digital, therefore GameStop is dead. I think there's a lot more there there, and it starts with the human relationships that exist and are incredibly magnetic, and continue to be incredibly magnetic ... between our store associates and our customers. And the reason customers love the GameStop brand is that associate that's in that store, and it's a... often a dumb analogy, but it's the sherpas that help each individual get up whatever gaming mountain they're trying to climb. That is the beauty of GameStop, and I think that's... not an impenetrable fortress, but I think it's pretty damn close to impenetrable.

And then a lot of the analysis is yes, on the shift to digital, like we're just talking about the new console. Imagine... Red Dead Redemption [2], I think last year was well over 100 gigabytes. Imagine Red Dead Redemption at 8K. I think it's more than double the size.

From what I understand, and I'm not a technical individual, but I think it's probably something like four times the size to get to 8K. So then you're talking a 400 GB file. If you're low income, imagine the bandwidth cost that you have to pay to be able to have a decent download experience for 400 GB. And then go run the model on how many people have that level of bandwidth in the world.

Yeah, I mean I can just speak to here in Australia, specifically. The Internet is not as great as it was back home in America. So yeah, and this is a major market in this part of the world.

Yes. The point is, these are huge files. Certainly AAA games.

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