​Jeff Kagan: The GameStop Transformation

Jeff Kagan |

GameStop Corp. (GME) is in the middle of a great transformation. If successful, it will continue to grow for years to come... but it will look much different than it does today. Their current growth wave has crested, and is now falling. The company is transforming itself and riding a new and different growth wave going forward. So what does tomorrow look like for GameStop?

They are forecasting a larger drop in same-store sales for the holiday quarter. The reason is revenue from selling video games is declining as the technology continues to change and customers are increasingly downloading and not visiting stores. That is not a new threat. That has been happening recently.

GameStop understands the ground beneath them is shaking, so they are transforming themselves for growth going forward. I think the future of GameStop can still be on the growth side of the wave, if they do the right things now. Before we look at that, let’s pull the camera back and look at the bigger picture.

GameStop Faces Threat and Opportunity

The pressure GameStop is now facing has happened before to other companies in other sectors. Some have transformed and won. Others have not. So, the real question is, will GameStop be a winner going forward? They could if they do this right, so, let’s take a longer-term, historical perspective look at what’s happening in industry after industry.

Let’s look at winners and losers in other sectors. The video rental business is one good example. There were plenty of growth companies, large and small in this space. Because of a change in technology, yesterday’s leaders like Blockbuster and Hollywood Video eventually closed.

Riding the Growth Wave Up Until It Crests and Falls

Blockbuster was founded in 1985 and ceased operations in 2013. It rode the growth wave up, until it crested and fell. It was a strong, national brand in the movie rental business. The technology changed many times from different size tapes to different type disks. Blockbuster managed to keep up with the change wave for a while. However, they didn’t create the next growth wave, so they eventually failed.

The music, movie and book business have gone through an enormous shift. This started with many smaller companies which for the most part no longer exist. Today, this industry is led by online giants like YouTube, Google (GOOG), Amazon (AMZN), Netflix (NFLX), Apple (AAPL), Hulu and many others.

AT&T DirecTV Mobile TV Reinvents Pay TV Industry

The transformation of the cable TV space is also huge. Yesterday the leaders were Comcast (CMCSA), Time Warner Cable (TWC) and Charter (CHTR). Before that, there were many, smaller competitors in this space. Today, it is still changing - phone companies are becoming big competitors. They are growing while most cable television companies are losing customers.

AT&T Uverse and DirecTV are big challengers. In fact, AT&T is innovating with mobile TV or letting viewers watch TV over their wireless devices like smartphones and tablets over the wireless network, anywhere. This is transforming the entire pay TV space. This is sending Comcast and Charter back to the drawing board to find an answer. Verizon and CenturyLink are also players in this space to a lesser degree.

The book business also changed. Today, Amazon.com is the leader and is an online service where you can download a book or have it shipped to you in 24 hours. This changed the book buying business model. Before Amazon.com there were loads of bookstores, from smaller, privately owned stores to the giants like Barnes & Noble (BKS), Borders, Books-a-Million and the like. This is the kind of change and transformation that reinvents and entire industry.



Wireless Handsets Face Same Threat and Opportunity

This same thing has happened in many other industries as well. Think about wireless and smartphones for example. This was an industry that was led by Motorola (MSI) for decades. Then in the 1990’s, Motorola didn’t make the shift from analog to digital handsets fast enough and Nokia (NOK) took over the lead. Then Blackberry (BBRY) created the smartphone and took the lead.

Then, a decade ago, Apple iPhone and Google Android entered the scene and took over the number one and two positions, sending Blackberry and Nokia to the back of the line with Motorola.

GameStop Must Successfully Ride the Changing Growth Wave

So, as you can see, this kind of sudden industry-wide shift happens quickly and happens all the time. GameStop can learn from other companies in other industries. It does not mean yesterday’s leaders are doomed. But it does mean yesterday’s leaders are challenged to change. To cannibalize themselves. They must radically change themselves and transform into new leaders of tomorrow. Either they do this to themselves, or a competitor will do it to them.

Think of how AT&T transformed itself from a dying long distance company to the telecom, wireless, internet and television giant of today. Can GameStop follow the same AT&T success story? That’s the question.

How AT&T Transformed Itself into A Leader Once Again a Decade Ago

When technology changes, existing leaders have a choice. If they can cannibalize themselves, and if they can hit the new target, they can continue to be a player, even a leader. If they cannot, then their days are numbered. Things change. Markets shift. Innovation always wins. Always changes everything.

This is the threat and opportunity facing GameStop today. It is the world’s largest retailer for video games in a world where increasingly customers are moving from a retail model to a downloading model. Sounds just like the challenge faced by the music, video and book business.

GameStop Must Follow AT&T and Cannibalize Yesterday to Succeed

However, GameStop can go to school on what happened in those industries. It can avoid the same potholes. It can reinvent itself the same way AT&T and AT&T Mobility have done. It has the brand. It has the market power. It has the ability to transform itself into a company which is a leader going forward.

The company is expecting to expand its operating earnings through diversification. They have been growing their digital and wireless phone business as well as other electronics. Because of this, their tech business rose 54 percent in 3Q16 compared to a year earlier.

So, expanding their portfolio and customer base into new areas is a great way to keep the existing brand on a growth curve. The challenge is to keep milking the existing retail gaming business for as long as possible, while rapidly transforming to a new and different business model.

What we have to remember here is that this is not news. This is the same threat and opportunity GameStop has had on their radar for a while. They have a plan to transform the business and to keep riding the successful, but declining growth wave of selling and renting physical games.

So far, so good. GameStop is changing who they are. This is not an easy thing to do. It’s a careful balancing act. They must grow in new areas more quickly than their existing area is declining.

We Know Who GameStop Was, but Who Are They Tomorrow?

However, GameStop is not doing a good enough job communicating this transformation to the marketplace. And as we all know, either a company gives the media and analyst community something to write about and talk about, or they will come up with their own topics. And they are never as good to the bottom line.

This means GameStop has to continue to update the marketplace on their changing brand meaning. The important question being asked today by customers and investors is this. Who is the GameStop of tomorrow and how is it different from the GameStop of yesterday?

GameStop Needs to Do a Better Job Keeping the Marketplace Up-To-Speed

The problem that I see which needs addressing by GameStop is they need to do a better job keeping the marketplace up to speed on how they are changing and what they are changing into. They must modify their brand and they must educate the marketplace, customers and investors about what the new brand means.

We know who GameStop was, but who are they, going forward? This is a question they must answer for themselves, their investors, customers and the media. I think they know the direction they are heading in. However, the other side is that they must keep the marketplace up to speed... or investors will lose interest.

Jeff Kagan is an Equities.com columnist. Kagan is a Wireless Analyst, Telecom Analyst, Industry Analyst, speaker and consultant. He follows wireless, wire line, telecom, Internet, cable TV, IPTV, Cloud, Mobile Pay, FinTech and communications technology. Email him at jeff@jeffKAGAN.com. His web site is www.jeffKAGAN.com. Follow him on Twitter @jeffkagan

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
TWC Time Warner Cable Inc n/a n/a n/a 0 Trade
AAPL Apple Inc. 169.98 -0.17 -0.10 16,259,732 Trade
AMZN Amazon.com Inc. 1,126.31 -3.57 -0.32 2,163,793 Trade
GOOG Alphabet Inc. 1,018.38 -0.71 -0.07 953,470 Trade
GME Gamestop Corporation 16.44 0.13 0.80 3,796,717 Trade
NFLX Netflix Inc. 194.10 0.90 0.47 3,826,664 Trade
CMCSA Comcast Corporation Class A Common Stock 35.83 -0.33 -0.91 19,409,381 Trade

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