The Marginalization of Video Game Retailers

Apple showed, with iTunes, that making products available on an online store not only curbed illegal downloads but actually made them the top music retailer in the nation, every retailer and intermediary's red-flags went sky high. And, if they did not, they should have.

The benefits are obvious: Lower prices for the consumer, infinite stock, convenience, the ability to backup purchases, and access to exclusive content are just too good to pass up. There is very little reason to purchase a hard CD. Along with that, Apple has just released that 50,000 movies are rented or purchased a day from iTunes!

With the ability to disseminate digital copies at will companies are reducing costs associated with the storage of products, the purchasing of materials, transportation, and all the associated overhead costs that go into the very expensive world of intermediaries and retailers.

Now the trend is becoming pretty obvious, with the Amazon’s Kindle and other similar products poised to change the book industry the way the iPod changed the music industry, it is becoming increasingly clear that anything that can be made digital and then subsequently downloaded is doing so.

The logic is even simpler for video games. This is a product that is already an electronic media; its only inhibitor has been its monstrous size. But, with flash drive sizes being several gigabytes and hard drives reaching into terabytes even the impressive capacity of Blue-Ray is well, not that impressive.

Microsoft has long offered full legacy titles from the original Xbox for download on Xbox live, with the announcement that they will now begin offering full Xbox 360 titles for download they are clearly testing the waters for larger download integration. It will not be long until major releases will be available for download on Xbox Live simultaneously with the retail launch.

Sony’s announcement that the PSP Go will exclusively be stocked by digital downloads is interesting, but comes as no surprise. It is the obvious next step in video game distribution. The recent PSP title, Patapon 2, was a digital download only in the States, and it led the sales of PSP games on its game launch. Clearly the target audience has no problem with downloading.

Further examples of this are plentiful. Valve has long offered full game downloads on Steam. The iPhone currently leads the market in mobile video games all of which are exclusively downloaded from iTunes. Nintendo, like Microsoft, offers past games for download on the Wii. The DSi is offering downloadable games. As you can see, dear reader, the trend is prevalent and now an integral part of the way video game companies are getting their products to the market.

But, what does this mean for retailers? It is my opinion that, not only is the move towards downloading the natural evolution of the industry, but that it is a pointed action towards retailers, particularly GameStop, the leading retailer of video games in the USA. The long argument between game manufacturers and GameStop's pawn shop practices is well documented.

A quick re-hash: GameStop allows their customers to “sell” back used games for cash or credit and then re-sells the game at a higher price. As a result developers feel that they are unfairly getting cut out of revenue being generated by their work. GameStop retains all of the income from used game sales, and they sell the used games at a reduced price from the MSRP to entice the customers to purchase the used games.

As a result, although two transactions have occurred, the developers only see revenue for one purchase. And, to be fair, this is not a small amount; over 40% of GameStop's gross profit is from their used product sales. The conflict is obvious and it seems that developers and manufacturers are moving in a direction to marginalize retailers as much as possible and keep the game revenues to themselves.

The PSP Go is just the first gaming system to make the move completely, the retailers will only be involved in the initial hardware sales and their piece of that pie is very small. I believe that the next generation of consoles will, most likely, be download exclusive, meaning retailers are indeed in for very dire straits.

In all likelihood the days of industry specific retailers like GameStop, are numbered. Other electronic outlets like Best Buy and Wal-Mart, that can mitigate the small revenue generated by console sales with the sale of other, unrelated products, will lead the way in video game console hardware sales and developers will handle the sale of the games themselves.