Digital Survival

Without the benefit of hindsight, it’s tough to say where, exactly, a tipping point occurs. In years to come, we’ll undoubtedly look back at this period in the games industry’s history and confidently pinpoint the year, or perhaps even the quarter, when the transition became a landslide. Today, however, all we can say with any certainty is that it’s either happened already, or will happen in the next 18 months to two years. Freed from the realms of theory and speculation by dropping storage costs, rising broadband speeds and changing consumer attitudes, digital distribution is reaching a point of no return.

There are, of course, plenty of questions which still need to be answered - both from consumer and industry perspectives - before the digital takeover can truly get underway. Pricing, for example, remains a thorny problem, and there’s a strong possibility that right of first sale issues will face not only robust challenges from consumers, but also serious questions at a legal and even governmental level.

For one industry grouping, however, there’s a single question which dwarfs all of those concerns. If you’re a retailer, your only real question about digital distribution is straightforward - where the hell does this leave me?

The examples from other industries undergoing this transition are not promising, since they tend largely to focus on metaphors involving creeks and a distinct lack of paddles. Bricks and mortar retailers of music and movies have largely sat back and grumbled while their businesses were hijacked, first by online retailers of physical product and then by digital distribution services. Music is much further down this path than movies are, but there’s no question that they’re both headed for broadly the same destination.

Specialist games retailers who follow that model face little more than a decline into insolvency in their medium-term futures. Worse again, they face competing with far bigger companies to retain their slice of an already shrinking pie - as boxed game retail sales fall off in favour of digital distribution (not to mention the downward price pressures I discussed last week putting the thumbscrews on margins), supermarket chains are increasingly seeing high profile games as a worthwhile loss leaders.

Given that prospect, it’s hard to foresee any kind of future for the specialist game retailer. Their figures are presently propped up by second hand sales, on which they make huge margins (a fact which doesn’t endear them to the industry at all, of course, although industry figures have an unfortunate tendency to damage their own case by attacking the second hand market in general rather than specifically targeting the enormous margins and rather sharp business practices of the specialist retail chains). Initiatives like Sony’s decision to create retail boxes for PSP games which merely contain a download code are little more than a sop to the retail sector - it won’t delay the fate of game stores by much.

Yet not all media retailers are content to go quietly into the night. Where online retail was once a rival of bricks and mortar business, they are now kindred spirits - both selling physical products in an age when consumers increasingly think of media as intangible bits and bytes rather than a lump of plastic. So retailers should consider carefully the importance of Amazon’s recent launch of an extensive download store for music MP3s, a direct (and thus far rather successful) challenge to the dominance of Apple’s iTunes, and the Kindle, an e-book reader designed to keep the firm on top of the book selling game even among customers who don’t want paper any more.

Even more interesting is this week’s move by top US bookstore Barnes & Noble, who have joined Amazon in the e-book race with a fantastic looking combined hardware and digital retail offering. This is what retailers should really be looking most closely at. Barnes & Noble is not a technology company, or it least, it wasn’t until this week. Its core competence is running a vast network of retail locations, which has pretty much zero relevance to this new business venture. Yet the move into digital distribution makes perfect sense for one simple reason - brand.

In the minds of countless Americans, Barnes & Noble’s brand is deeply associated with bookselling. It’s probably a slightly painful realisation for a company which operates so many stores and warehouses, employing so many retail and distribution staff in the process, but in the digital world, that’s the only asset it has that’s worth just about anything - and for its survival in a new world where it will compete not only with Amazon but with Sony, and quite possibly with Google, Apple and Microsoft as well, it needs to pump that brand for everything it’s worth.

The same is true of top games retail brands, and some of them, at least, know it. GameStop, probably the biggest games retail brand on earth, is presently in the market for a digital distribution acquisition. Despite the powerful positioning of brands like IGN’s Direct2Drive and Valve’s Steam, digital distribution is still an open market - a solid service carrying the GameStop brand could take a major foothold.

The company’s acquisition options, however, aren’t quite as extensive as one might expect. In fact, there aren’t that many major players in the digital distribution space - not least because at present, it’s limited to the PC, with other platforms catered for by first-party stores. Direct2Drive is part of IGN, and as such, belongs to media conglomerate News Corp and is not for sale. Smaller players like Stardock’s Impulse could be of interest, but would require that GameStop effectively build a large part of the content catalogue from scratch - I suspect that they’d rather hit the ground running.

That effectively leaves two contenders - Valve’s Steam and Metaboli, a French service which bought GameTap from TBS last year and operates a variety of branded outlets on the web.

If you wanted to place a bet, my tip would be that we’ll see an acquisition deal between GameStop and Metaboli in the coming months, which will finally give the retail chain a major footprint in the digital distribution market. It’ll also serve as a boost to GameStop’s European ambitions, which have plodded along at a rather slower pace than everyone expected when they first set sights on these shores a few years ago.

However, it’s also worth watching closely what happens to Steam in the coming months. Unconfirmed industry scuttlebutt suggests that Zenimax - the parent company of Bethesda, which made headlines back in June when it acquired legendary PC studio id Software - is still on the acquisition trail, and has been making eyes at Half-Life creators Valve across the bar.

Whether Bethesda, a hybrid developer / publisher itself, would want to keep Steam on board, or spin it out to a third party, is unclear - as are many other aspects of a potential deal which would once again raise the awkward question of who, exactly, owns which parts of the Half-Life and Counter-Strike IPs.

Either way, however, it suggests that both Metaboli and Steam - two of the three biggest names in digital distribution - are potentially going to change hands in the coming months. How the landscape looks after those changes could have a powerful impact on which games retail brands survive the coming changes in the industry.