Does GameStop's future lie in publishing?

Star Wars Battlefront's holiday sales notwithstanding, the video game industry is rapidly heading towards an all-digital future. Much like the music industry, retailers of physical products are going to feel the pinch if they can't evolve. To GameStop's credit, the company has already done much to diversify its business, selling games digitally, offering exclusive DLC, operating the online platform Kongregate, and selling gadgets and gear via ThinkGeek. One of the newest steps the retailer has taken to branch out is to enter the publishing business, entering into a partnership with Insomniac for Song of the Deep.

But will GameStop become a major publishing force or will this simply be another small component of its evolving business strategy? Interestingly, if GameStop continues to pursue the publishing side of the industry, it would inevitably be competing with the partners it's been selling games for all these years (aside from already competing by selling used titles).

DFC Intelligence boss David Cole does not believe GameStop is headed down that road, however. "I would characterize this as a small experiment. GameStop is doing a lot of experimentation and I don't see this as competition," he commented. "GameStop's ownership of Kongregate is a much bigger entry and possibly more competitive because it focuses on digital games.

"GameStop clearly needs to find a successful diversification strategy... The company's stock has been on a decline since reporting lower than expected 2015 holiday software sales"

Patrick Walker

"I really see this as right now a one-off experiment and not part of a larger trend. EA and ATVI still need GameStop and vice versa. This title is too small to impact that relationship and if it is a bigger title I imagine Insomniac would have used a more established publisher to get full international distribution."

EEDAR's VP of Insights and Analytics, Patrick Walker, does not believe GameStop is seriously considering publishing as a major business either.

"GameStop clearly needs to find a successful diversification strategy as the games industry follows the more universal economic trend of increased digital distribution. The company's stock has been on a decline since reporting lower than expected 2015 holiday software sales," he said. "However, I think game publishing will remain a secondary strategy versus increasing digital distribution and increasing scope of their stores.

"GameStop has already made significant investment in increased digital distribution and diversified product lines by purchasing the Impulse digital platform, Kongregate, and ThinkGeek, and bringing mobile products into its stores. As you point out, growing a publishing business to a significant level for the bottom line would create complications with the current cash-cow software business. I think that because of this GameStop will push into publishing relatively slowly compared to its other diversification efforts."

That being said, one reason GameStop may have pursued the deal with Insomniac is that it's facing increasing pressure from others in the retail space. Amazon, in particular, is making a bigger push with exclusives and discounts on new titles via its Amazon Prime program, noted IDC Research Director Lewis Ward.

"The old adage that content is king is now playing out on the brick-and-mortar retail front. There's been exclusive game hardware bundles in the past of course from retailers; there's even been some exclusive add-on content and so on, so on the one hand GameStop's new direction is an extension of an existing pattern. Of course Amazon, on the e-tail side of the distribution business, has also branched out into exclusive game availability, so this trend probably also played some role in bringing about this GameStop-Insomniac arrangement," he said. "On the other hand, it's a unique deal in that I don't recall a retailer ever tying up just the physical rights to a game - and letting the developer publish wherever they want digitally."

"At the end of the day, I don't think it's a big risk for either party and if the physical game sells well at GameStop I'm sure we'll see more experiments along these lines. Since this is a new IP, I doubt it'll sell in big volumes, but it does let GameStop throw around the 'exclusive' term and perhaps Insomniac's new title will prove a surprise hit," he continued. "On the potential downside, GameStop has a history of making side bets that go nowhere (see their Spawn Labs investment from 2011), so I'm definitely in a wait-and-see mode regarding their latest experiment."

If GameStop does pursue more publishing deals for smaller scale digital titles, it would also be directly competing with numerous firms who now offer publishing and marketing guidance for digital platforms. Tilting Point is one such company. Jesse Divnich, former EEDAR analyst and current VP of Product Strategy at Tilting Point, does not see GameStop's latest move as a threat though.

"This is just as much GameStop protecting themselves as publishers have been through digital distribution... The worst thing GameStop can do is nothing"

Jesse Divnich

"GameStop has been competing against publishers since they decided to sell used games. In 2010, they acquired Kongregate, which competed against publishers who were starting their own online platforms.  In the same respect, publishers have been competing against physical retailers by digitally selling direct to consumers, either through their own platforms or through the platform operators," he argued.

"The distribution and entertainment content business relationship can sometimes be adversarial, whether games, movies, music, or television. I do not think this experiment by GameStop will have any major ripple effect or impact on the industry. This is just as much GameStop protecting themselves as publishers have been through digital distribution," Divnich continued.

"This shift to a digital commerce environment has been a risk to GameStop for years. The worst thing GameStop can do is nothing. You always need to be moving and we'll see in time if this is a step in the right direction or a step back for them. I believe them choosing Insomniac is an excellent selection and this deal is likely in Insomniac's best interest."

Ultimately, the entire discussion may be much ado about nothing. At least, that's what Wedbush analyst Michael Pachter thinks. In fact, the only reason GameStop is a publisher on Insomniac's new title, he believes, is that Insomniac couldn't land a deal with the traditional publishers.

"I don't see what they gain from this. The game will be offered digitally, and they could carry the physical version without being the publisher. I am not sure how they are better off as publisher instead of acting solely as a retailer. I don't see them safeguarding anything, and don't think it will be a major part of their business ever," he remarked.

"Had one of the major publishers offered Insomniac a deal, I'm sure that it would not be published by GameStop. I think you're reading more into the 'competition' angle than is there; more likely all of the majors passed on the game."