Analyst: GameStop Expects $1.5B Digital Revs By 2014, Streaming Games

Leading U.S. brick-and-mortar video game retailer GameStop is taking its adoption of digital models seriously, outlining steps toward a digital future at a recent investor day. The company plans a strategy that loosely follows Netflix's hybrid physical-digital business model, according to a Monday research note form Lazard analyst Colin Sebastian. That strategy will lead GameStop to $1.5 billion in digital revenues by 2014, management said. GameStop revenues for the most recent fiscal year were around $9.5 billion, with used games making up nearly half of $408 million in profits. The increase in digital focus would be a measured ramp-up of the company's digital business. Sebastian said GameStop's digital forecast implies a 4 percent overall share of the digital games market, up from 1.5 percent in 2010 -- a "reasonable view," the analyst said. Last week's surprise acquisitions of game publisher Stardock's Impulse digital distribution platform and streaming technology firm Spawn Labs was the latest move in the retailer's adoption of digital models. "While not necessarily best of breed technology in the market, both services should benefit from the scale that GameStop can provide," Sebastian wrote of the acquisitions. "Following various beta tests in 2011, we expect GameStop's streaming service to go live in early- to mid-2012 with 'try before you buy' options and possibly purchases or subscriptions, in cooperation with game publishers," he added. "We view the current lack of multiplayer options as a potential roadblock for widespread consumer adoption." Sebastian said GameStop intends to leverage Spawn Labs' technology to stream console games on tablets, laptops and other internet-enabled devices for users to demo. The retailer also plans on driving more e-commerce through tablet devices with new apps. Taking the tablet focus further, Sebastian said the retailer will offer a buy/sell/trade model for tablets -- "either in-store sales of third-party tablets, or possibly GameStop-branded devices (think Kindle or Nook for games)," he explained. GameStop also said that its PowerUp Rewards program will be a key factor in maintaining customer loyalty going forward. The program currently has over 8 million members, according to the retailer. [UPDATE: In a Monday conference call, GameStop president Tony Bartel explained that the streaming initiative will develop as part of a close relationship with game publishers. For now, streaming technology will be used to promote and market games. "We like the try before you buy model," he said. "All of our efforts are going to continue to be focused on selling that game, whether it be a digitally-downloaded game or whether it be a physical good. What we'll be using the streaming service for is to sell the games that we sell today." Management explained that eventually the company wants consumers to be able to take, for example, a Bluetooth-enabled controller, connect it to a mobile device and play a demo of a streamed game from a tablet. The company plans on offering such services to its PowerUp Rewards users. Spawn Labs' David Wilson explained customers will be able to scale games based on available bandwidth. Full 720p resolution will require around 5Mbps, while standard definition will require around 1-2Mbps. Wilson added, "We feel very comfortable that around five datacenters in strategic locations in the U.S. will let us serve the majority of the market in the U.S." for streaming games. Bartel said GameStop will be able to adjust to the needs and desires of its streaming game users by pulling data such as location and popular games from its PowerUp Rewards database. "We're not shooting in the dark here," he said. The Impulse digital distribution platform, headed up by recent hire and ex-id Software exec Steve Nix, currently has 1100 games, and the platform will eventually integrate with the GameStop.com website as well as the PowerUp Rewards program. Bartel acknowledged that Valve's competing Steam digital distribution platform is a "very large player in the marketplace," and did not reveal how much revenue Impulse currently generates. GameStop expects digital growth in 2011 to be similar to 2010's growth, which saw a 61 percent rise in digital sales.]