Will GameStop's new game just be a replay of its old one?
The video-game retailer's stock fell 10 percent on Friday after it reported a 10.6 percent decline in second-quarter comparable sales from the year before, missing analyst estimates and casting doubt on its strategy to diversify away from video games and into phones and electronics.
Back in April, I wrote that GameStop's goal of generating half its operating earnings from businesses beyond physical games by 2020 would buy the company more life.
GameStop's bet on selling and fixing gadgets through its 72 Simply Mac and 1,400 Spring Mobile specialty tech stores, which sell AT&T, Apple and other products, should help it evolve from the shrinking physical games business. It plans to expand its collectibles business and bet big on virtual reality, as well as create and publish its own games. On Thursday, it said it saw opportunities to partner with major film studios, as well as acquiring other kinds of retail businesses.
There are signs its plan is working. In the second quarter, mobile and consumer electronics sales made up 13 percent of GameStop's revenue, up from 10 percent in the first quarter. Revenue from its technology segment rose 55 percent from the year before, contributing 24 percent of its overall earnings. After an acquisition of 500 AT&T stores last month, GameStop is now the largest authorized AT&T Mobility re-seller. It said Thursday it wanted to add another 600 AT&T stores by 2019.
But while it still makes sense for GameStop to diversify its business, it may want to reconsider how big of a phone-seller it wants to become. Remember how Radio Shack tried to diversify its business by staking its future on smartphones, only to see the strategy backfire? I'll remind you that story ended in Radio Shack declaring bankruptcy.
Global phone sales fell to about $95 billion in the second quarter, down 7.7 percent from the year before, according to IDC. Meanwhile, the average selling price fell by 8 percent from a year ago.
The deeper GameStop goes into mobile, the more it may be setting itself up for a repeat of what happened to it in the physical gaming business. Then, it depended on game and console makers for much of its success, its fortunes rising and falling with new releases. When physical games fell out of favor, so did GameStop.
Ironically, GameStop's greater reliance on mobile phones comes as game sales seem to have stabilized -- physical game sales were flat last year after several years of declines, according to SuperData Research. And, thanks to growth in digital sales, total video-game sales rose 8 percent in 2015.
Video games as a whole are now growing faster than the market for mobile phones and tablets, where shipments -- and prices -- continue to decline.
Some Wall Street analysts came to GameStop's defense on Friday. Macquarie's Ben Schachter said, despite the sales losses, he thinks its turnaround story is "still on track." I tend to agree with him; the company realizes its legacy business is in decline and is actually doing something about it.
The worry now is whether its new businesses can grow fast enough to make up for that legacy decline. And its outsize focus on selling mobile phones -- as opposed to digital gaming, collectibles and other kinds of electronics -- suggest its diversification plans may be too narrow.
GameStop should pause to consider how smart it is to keep buying AT&T resellers and staking more of its future on mobile phones, as opposed to other areas of electronics and digital gaming. Otherwise, GameStop could see its playing time cut short.
--With assistance from Gadfly's Shira Ovide
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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