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GameStop, Without the Games

GameStop, Without the Games

(Corrects that prepaid phone plans run on AT&T’s network.)

In an effort to avoid the fate of Blockbuster, Circuit City, and others in the remainder bin of failed retailers, GameStop (GME) has embarked on a daring, if inglorious, strategy: refashioning itself from a console game purveyor into a repairer and reseller of Apple (AAPL) gadgets, betting that its retail visibility will prove an advantage.

Although Chief Executive Officer J. Paul Raines’s 6,600 stores raked in $9.55 billion last year selling the latest Call of Duty shooters, Madden football games, and other blockbusters, the company’s stock has fallen 30 percent in 2012 and is among the most shorted in the Standard & Poor’s 500-stock index. While GameStop still controls about two-thirds of the retail market, players increasingly download games from the comfort of the couch. Buzzworthy Web-based games such as Cut the Rope and The Sims Social are missing from the company’s portfolio, and its profits depend largely on reselling a shrinking pool of $60 titles.

Standing in the Refurbishment Operations Center, or “the ROC,” a $7 million, 182,000-square-foot facility down the road from Raines’s office in Grapevine, Tex., workers unload truckloads of ammunition for the turnaround battle. GameStop last fall began buying up consumers’ old iPhones, iPads, and iPod touches, shipping them to the ROC for cleanup and repair, then returning them to stores for resale at a nice markup. With tablets from Google’s (GOOG) Android operating system added to the mix, this year the retailer expects to tally about $200 million in mobile sales, Raines says. “This is a big bet on the future,” he says. “This facility gives GameStop a chance to expand into new businesses.”

Last year's revenue set a record, though growth slowed

GameStop already resells Xbox 360 game consoles, Sony (SNE) PlayStation 3s, and even old Nintendo GameCubes alongside used games. That pre-owned business accounts for nearly 46 percent of profits. The push into smartphones, tablets, and other electronics could reap bigger benefits through sheer volume. About 25 percent of mobile customers upgrade their smartphones every 18 months, according to research firm Compass Intelligence.

Apple products present the biggest opportunity. If GameStop eventually resells 5 percent of the 230 million Apple devices in U.S. consumer hands, it stands to bring in $1 billion in new revenue in the next few years, says analyst Michael Pachter of Wedbush Securities. “Where GameStop can absolutely kill is selling prepaid phone plans with the used iPhones, since a lot of their customers are teenagers with money to spend but no credit to get a regular phone plan,” he says. GameStop has already experimented with selling prepaid phone plans, which run on AT&T’s (T) network, in about 60 stores, Raines said.

Compared with its retail competitors’ profits, GameStop’s remain relatively healthy for now. While sales are expected to decline amid a slump in the video game market, gross margins are expected to climb this year to 28.96 percent from 28.06 percent last year, according to data compiled by Bloomberg. Rival Best Buy’s (BBY) margins are expected to fall to 24.61 percent from 24.83 percent, even though it also sells big-ticket appliances.

In March, GameStop purchased for an undisclosed sum. The website calculates the price of used cameras, smartphones, and thousands of other gadgets, then offers to purchase them from the user. “It gives us an Internet opportunity for people to trade with us, and a place where we can cherry-pick devices that will be sent back to the brick-and-mortar stores,” says GameStop President Tony Bartel.

With the Android tablets it resells, GameStop is also testing ways to cement its digital transformation. After refurbishing old Samsung, Asus, Acer, and Toshiba tablets, it adds preferred games and apps that help promote its rewards programs and its sales website. The cross-promotion has kept GameStop on track to post $675 million in digital revenue this year, up from virtually nothing two years ago, Bartel says. Another cross-promotion tool is its print magazine, Game Informer, which at 8.2 million subscribers has become the third-largest magazine in the U.S., according to the Audit Bureau of Circulations.

Back in the ROC, dozens of workers are assembling a wireless game controller for tablets that GameStop designs and sells. A handful of engineers peer at plans for other devices. Bartel says the gadgets one day may end up in stores that sell no game gear at all. “We have weapons with our stores, our buy-sell-trade, and our digital business that no one else has,” he says, “and we’re leveraging them in ways no one else is doing.”

The bottom line: There are 230 million Apple devices in the hands of American consumers. GameStop wants to be their secondhand Apple store.

Edwards is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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