GameStop: The retailer of the future?

The Digital Revolution

So other than growing pre-owned numbers, what else has GameStop got up its sleeve that seems to be pressing the right buttons? The second excerpt of interest is as follows:

"Expand our Digital Growth Strategy to Protect and Expand our Market Leadership Position: We expect that future growth in the video game industry will be driven by the sale of video games delivered in digital form and the expansion of other forms of gaming.

"We currently sell various types of products that relate to the digital category, including Xbox Live, PlayStation and Nintendo network point cards, as well as prepaid digital and online timecards and digitally downloadable software.

"We expect that future growth in the video game industry will be driven by the sale of video games delivered in digital form and the expansion of other forms of gaming."

"We operate an online video game platform called Kongregate.com which we acquired in August 2010. We continue to make significant investments in e-commerce, digital delivery systems, online video game aggregation, digital kiosks and in-store and Web site functionality to enable our customers to access digital content and eliminate friction in the digital sales and delivery process.

"We plan to continue to invest in these types of processes and channels to grow our digital sales base and enhance our market leadership position in the video game industry and in the digital aggregation and distribution category."

That's the elephant in the room for bricks-and-mortar retail, and one that must be addressed if retail is to survive well into any subsequent console cycle. Whether or not the diversification into online - with Kongregate and well as the Game Informer website and e-commerce solutions - will work out, only time will tell.

The Risk Factor

But some other interesting snippets from the lengthy 10-K include some entries in the section acknowledging risks to the business - and I suspect analysts and investors have a keen eye on these too. The three most pertinent seem to me to be:

"Restrictions on our ability to take trade-ins of and sell used video game products could negatively affect our financial condition and results of operations.

"Our financial results depend on our ability to take trade-ins of, and sell, used video game products within our stores. Actions by manufacturers or publishers of video game products or governmental authorities to limit our ability to take trade-ins or sell used video game products could have a negative impact on our sales and earnings.

"Technological advances in the delivery and types of video games and PC entertainment software, as well as changes in consumer behaviour related to these new technologies, could lower our sales.

"While it is currently only possible to download a limited amount of video game content to the next generation video game systems and downloading is constrained by bandwidth capacity, this technology is becoming more prevalent.

"If we are unable to respond to this growth in popularity of browser, mobile and social games and transition our business to take advantage of these new forms of gaming, our financial position and results of operations could suffer."

"If advances in technology continue to expand our customers' ability to access and download the current format of video games, PC entertainment software and incremental content for their games through these and other sources, our customers may no longer choose to purchase video games or PC entertainment software in our stores or reduce their purchases in favour of other forms of game delivery.

"As a result, sales and earnings could decline. While the Company is currently pursuing various strategies to integrate these new delivery methods and competing content into the Company's business model, including hiring employees with experience in digital gaming and making investments in and acquisitions of digital gaming and technology-based companies, we can provide no assurances that these strategies will be successful or profitable.

"We may not compete effectively as browser, mobile and social gaming becomes more popular.

"Gaming continues to evolve. Recently, the popularity of browser, mobile and social gaming has increased greatly and this popularity is expected to continue to grow. Browser, mobile and social gaming is accessed through hardware other than the consoles we sell.

"If we are unable to respond to this growth in popularity of browser, mobile and social games and transition our business to take advantage of these new forms of gaming, our financial position and results of operations could suffer.

"While the Company has been and is currently pursuing various strategies to integrate these new forms of gaming into the Company's business model, we can provide no assurances that these strategies will be successful or profitable."

Again, only time will tell if GameStop is really the best-placed traditional retailer to survive the fundamental changes that the games business is undergoing. Knowing how to tackle risks is a fine art, but at least identifying them accurately is a solid first step.