U.K. retailer Game Digital's second birthday is approaching. Too bad it's missing out on all the fun.
Its return to the stock market in 2014 after a near-death experience was supposed to mark a rebound in fortunes of "clicks and mortar" chains -- combining e-commerce with traditional stores -- and for the video-games market in general. It all looked promising, with the global games market growing at a healthy 9 percent rate in 2015, according to research firm Newzoo.
But on Wednesday Game presented a batch of bad news under the heading "challenging U.K. market dynamics": a drop in revenues, a one-third fall in pre-tax profits and a slashed dividend for the six months to Jan. 23. To be fair, this didn't come out of the blue. The retailer warned in the run-up to Christmas that a slower take-up of next-gen PlayStation and Xbox consoles and a drop in footfall from British shoppers would hit profits. Game is pledging to review its U.K. operations and to respond to "current market trends."
If Game wants to prove that it is ahead of the curve in a fast-changing market, which is expected to see physical game sales shrinking further in the face of growing appetite for mobile downloads, streaming games and live events, it needs to offer a significant reboot. And that will involve convincing investors and creditors to wait for those investments to pay off.
This isn't quite the party shareholders signed up for when Game returned to the public market less than two years ago. Back then, Game said it had successfully completed a massive overhaul by shutting stores and cutting staff; it said it had a leading share of a market that was in growth mode; it said that it was well-positioned to take advantage of the new range of next-generation consoles.
Today's comments from management suggest those hopes have not been realized and that more restructuring is necessary. Equity investors could be forgiven for feeling like they've come down with a bad case of déjà vu.
The more worrying implication is that games market is changing too fast even for specialists like Game. The growth of app-based mobile gaming has outpaced the sluggish console market in recent years, according to PwC. And while once upon a time big-budget video games could only be bought as physical items from retailers, they are increasingly being downloaded online direct from the console manufacturers or from desktop portals like Steam.
Game is right to keep diversifying away from physical game sales. It is investing in live eSports events and in multiplayer game services; it also sells pre-owned phones and tablets. It may also get a future boost from new virtual-reality hardware. But these bets will take years to pay off and it's also not clear how much they can offset shrinking revenues from physical products.
Game needs to find something to show investors sooner rather than later. A review of its current stores and cost base is a good start but it's unlikely to be enough to significantly boost its share price, which is currently down more than 40 percent from its IPO price. If the company wants to earn points from investors, a bigger reboot will be necessary.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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