Talking Shop

The fact that GameStation has been acquired comes as no surprise since its previous owner, Blockbuster, has been hawking it around the marketplace for quite a long time. The fact that its new owner is local rival GAME, as opposed to American mega-chain GameStop, is more surprising - on more than one level.

Perhaps the most surprising aspect is that GameStop has passed over the opportunity to establish itself instantly in the UK market, despite its stated intent to move more aggressively into Europe. GameStation enjoys a healthy, positive reputation with gamers in Britain, and would have given the US chain an immediate mind-share on the high street in this country.

Instead, GameStop has allowed GAME to consolidate its leadership in Europe with this acquisition - which feels distinctly like a missed opportunity, as US analyst Michael Pachter opined earlier this week.

What's also slightly surprising, though, is that GAME was attracted to this acquisition in the first instance. Despite the goodwill which backs up the GameStation brand, the UK's second high street chain is completely dwarfed by its first. GAME's £74 million acquisition will buy it a slightly larger share of the specialist high street market, certainly, but one has to question whether it's the domestic, specialist, bricks and mortar market which GAME should be building on right now.

After all, the largest threats to GAME's business don't come from rivals like GameStation. Rather, it is the increasing influence of cross-media retailers such as HMV and Virgin, of mass-market outlets like supermarkets, and of online retail both in terms of delivery services and digital distributions, which are gradually shrinking the pond in which GAME has now become a larger fish.

Indeed, it's not hard to envisage the possibility that GAME's ascension to being the only major specialist chain in the UK will actually accelerate the shrinkage of that very market. Although the consumer-facing element of the GameStation business will reportedly retain its unique branding, the type of consumer who frequents specialist stores in preference to media retailers is likely to be aware that the chain has changed hands.

Plans to merge the head offices of both chains will inevitably result in gradual merging of business practices as well. This reduction in consumer choice may, it could be argued, drive some consumers to seek alternatives - even if only for price comparison purposes. It's a small factor, perhaps, but it's just another pressure on the specialist market - already being squeezed by non-specialist stores and various online distribution methods.

What remains to be seen, then, is how exactly GAME will combat those pressures on its market. The firm's last big acquisition, which saw it taking over the Gameplay.com online retail business, was a definite step in that direction, but more emphasis on diversification beyond specialist retail is definitely needed if the company is to retain its lead in the marketplace.

Otherwise, GAME risks being consigned to the status of, essentially, an oversized indie games retail chain - with the largest attendant risk being that, as the overall importance of the specialist market reduces, GAME's ability to continue thumbing its noses at publishers with its hugely profitable second hand business will be compromised. Right now, few publishers would risk squeezing GAME over new stock or trade marketing budgets just to make a point over second hand. This may not always be the case.

In defence of GAME's management, however, it seems that the chain is by no means ignorant of this situation. CEO Lisa Morgan has characterised this acquisition as purely an attempt to build the company's presence in the specialist market, and acknowledges that GAME faces many competitive pressures from other sectors. Tellingly, she also refers to a three to five year outlook for future investment - which could see GAME making a push back against those sectors, rather than sitting back and watching the specialist market shrink around itself.

Although Morgan denies it, it's probably safest to categorise the GameStation acquisition as an attempt to deny GameStop of an easy mass-entry to the UK high street. This is certainly the context in which GAME's move makes the most sense - and perhaps, in view of our misgivings about the future of the specialist retail market, GAME is making a very sensible move here.

After all, GAME cannot hope to bring the fight to its new rivals if it is having to deal with emboldened competition in its home market, the specialist sector. By consolidating its lead on the UK high street and denying GameStop a chance to move in on its turf, GAME is ensuring that it can strike out at new markets - be they online, non-specialist, or international - without the risk of being distracted by an expensive battle at home.

The firm's shareholders will, undoubtedly, be keen to see where GAME goes from here, and how it uses the freedom granted by its newly complete dominance of the UK specialist market. After all, the media and retail markets are littered with the corpses - or the withered forms - of companies which were unable to break out of the mentality of being a big fish in a pond that shrank around them. The biggest test for GAME will be to see whether it has the wherewithal to beat this trap.