|
|
|
Holiday 2003: Is the Industry Ready for the Mass-Market Consumer? December 16, 2003 Ahh, December in what is becoming the comfortably cyclical interactive entertainment industry. While the rest of the world is getting ready to make merry with holiday cheer, companies and analysts in the video game industry are busy issuing dire warnings indicating that signs at retail show sales may be well below expectations. As a result, so far in December, almost all video game company stocks are down significantly from November (see chart). The only notable exceptions are Activision and Midway (Midway was one of the only companies that did not see a strong stock increase in 2003).
These December warnings are not unusual. In fact it seems like déjà vu all the way back to December 2002 when stock prices were down on fears about holiday sales (see chart). We can only hope that the first part of 2004 brings some of the same good news we received in early 2003. Last January we learned that interactive entertainment sales for 2002 reached record levels. On top of that, Sony Computer Entertainment America announced December 2002 sales of 3 million PlayStation 2 hardware units. So far in 2003, video game companies have seen a healthy increase in their stock price as the economy rebounds.
Of course, if sales are really tracking well below expectations then there may be reason to worry. In our report Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry we forecasted the U.S. video game hardware and software market revenue for 2003 at between –2.0% and 3.3% versus 2002. Software growth we pegged at between 7% and 10%. See http://www.dfcint.com/news/prapril172003.html. When all is said is done we think the numbers will fall fairly close to that range. In our view the problem this holiday season has not been lower then expected sales, but instead a failure to understand the intricacies of the market and where we are in the current cycle of video game hardware. The new systems are at their peak and consumer spending is very strong. However, this is the time where the industry is driven by the mass-market consumers. These consumers spend a great deal of money but it is important to understand how different their spending is from that of the early adopter consumer. Wal-Mart is often considered the king when it comes to reaching the mass-market consumer, and rightly so. However, things have become somewhat more complex in the video game industry as a result of a strong expansion in the number of retail storefronts. A look at three retail chains in particular can help understand the changing market for interactive entertainment. These chains are Costco, GameStop and Hollywood Entertainment’s GameCrazy. Costco warehouse club stores are massive affairs that do tremendous volume. There are 317 Costco warehouses in the U.S. and another 62 in Canada. These stores have carried PC games for years, but it is only recently that they started to carry a wide selection of video games. For the 2003 holiday season, Costco is carrying a significant inventory of video games. These include both new titles and deeply discounted older titles. The most attractive thing about Costco for consumers is low price. In our annual retail surveys of interactive entertainment software, Costco is always the low price leader. On a new game title that is found at $49.99 in most stores, Costco will often offer a price of $44.99. Many PlayStation 2 “Greatest Hits” titles and Xbox “Platinum Hits” will be available at Costco for $17.99, instead of the usual $19.99. When a major new retailer offers this type of discounting the industry needs to take notice. As their names imply, GameStop and GameCrazy are specialists, focusing only on games. These two chains share two important characteristics: 1) they have a strong focus on used games and 2) they are increasingly being located in convenient strip malls. The latter point is extremely important. In the past almost every major retail chain carrying video games has been what we call a “destination” location. In other words they are either located in shopping malls or else stand-alone stores like Wal-Mart and Best Buy. Destination stores are those that consumers generally make a specific point of visiting. In contrast a convenience store is something that tends to be close to home where consumers can pop-in on the spur of the moment while visiting the grocery or drug store. The GameStop chain is the new name given to the established chains Software Etc, Babbagge’s and Funcoland. Software Etc and Babbage’s, owned by Barnes and Noble, were well-established shopping mall based competitors to Electronics Boutique. However, the growth for GameStop began with the 2000 acquisition of strip-mall based, used game specialist Funco. At the time of the merger, Funco had about 400 strip-mall locations and Software Etc/Babbage’s had about 540 stores based mainly in shopping malls. The combined company has been opening new stores at an incredible pace, but they have been almost all strip-mall locations. Today GameStop has 1,472 locations, 927 in strip-malls and 530 in shopping malls. About 250 strip-mall locations have opened in 2003. Hollywood Entertainment’s GameCrazy stores represent another attempt by the video rental market to get into video game sell-through. GameCrazy locations are actually within Hollywood Video stores. In 2002 and 2003 Hollywood Video stores have been adding GameCrazy stores on a rapid pace. Today 577 out of 1,864 Hollywood Video stores have GameCrazy locations (although Hollywood Entertainment recently announced they would slow this pace as earnings were suffering). Both GameCrazy and GameStop have a major emphasis on selling used video games. GameCrazy takes used games for store credit while GameStop will actually pay cash for used titles. Of course, both stores have a wide selection of new games so it is possible to bring in old titles and trade them for new games. So what does all this activity at retail mean for the game consumer and the interactive entertainment market in general? It means that not only do bargains abound, but now they are staring the consumer right in the face. In one of the greatest video game bargains ever, a consumer can now buy a Nintendo GameCube for $99 and also get the Legend of Zelda bundle, a disc that includes four of the most popular games of all-time. A consumer that jumps on this type of deal is likely to spend the next few months acquiring the established library of GameCube titles like Super Mario Sunshine, Metroid Prime, Super Smash Brothers Melee etc. These are all great titles and they are all widely available for $30 new, under $20 used. The same dynamic is at work for the other game systems. The consumers that are just now getting around to buying a PlayStation 2 obviously are not in a big hurry to get the latest and greatest. Instead of plopping down $50 for the latest release they may be more inclined to bargain shop at Costco where great games like Final Fantasy X, Ratchet & Clank, Spider-man, Xenosaga, Hot Shots Golf and many others are available for $18. Or on their way to the drug store they can drop by the local GameStop and pick up such titles as Gran Turismo 3: A Spec (used $8.99, new $20), Kingdom Hearts ($20) or Devil May Cry ($15). In many cases this holiday season, consumers buying a hardware system already own another hardware system (most likely a PS2). Once again, a PlayStation 2 owner buying an Xbox is probably going to start catching up on the must-have titles, games like Halo, Tom Clancy’s Splinter Cell and Dead or Alive 3. All three of those titles are available for $18 brand new at Costco. On top of that, there is now the option to take those old PS2 titles to the local GameCrazy and get new Xbox games without spending a dime. Casual observers of the interactive entertainment industry tend to look at the aggregate overall sales figures and draw broad observations. The fact is that consumer spending on video games continues to be near record highs. However, because of the dynamics of the game industry cycle, maintaining profit margins is currently very challenging. The mass-market consumers rack up big aggregate sales numbers, but on an individual basis they are frustratingly tight with their money. Unfortunately this dynamic is likely to continue for at least the next two years. In our first report scheduled for 2004, The Business of Video Games and Interactive Entertainment, DFC Intelligence will go into detail about the changing retail scene, game industry economics, the effect of online distribution and other issues crucial to making a profit from a growing, but extremely challenging industry. As part of our ongoing research efforts DFC Intelligence is delivering free monthly briefs on hot topics in the interactive entertainment and video game industry. You (or a colleague of yours) have signed up to receive these briefs. DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry. A sample of recent reports on the video game and PC game market include:: Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Released April 2003, this 500+ page report contains complete forecasts for all individual console and portable game platforms by region (Asia, Europe/PAL, U.S.) through 2007. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as new portable game systems. Market Leaders in the Video Game and Interactive Entertainment Industry This 600+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 15-40 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company. The Online Game Market This 475 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles. Other DFC reports include The Business of Video and Computer Games, The State of Game Technology, The Video Game and PC Game Consumer and The Executive Interview Series.
|
| ||||
