Death watch: GAME unlikely to survive current problems

With GAME's business looking increasingly unsustainable, is the writing finally on the wall for brick and mortar retail in video games? Maybe not entirely, but GAME's time is up, says Patrick Garratt.

GAME is in serious trouble, and it's likely it will cease to exist in the near future. It may have negotiated stock for releases this week, but what about next week? And the week after that? It will be difficult for GAME to be able to navigate these problems quickly enough to survive.

Don't pretend you're shocked. In the past two days, a report of GAME's difficulty in maintaining credit insurance has been backed up by a statement confirming the UK retailer is in talks to secure lending. The well-known high street chain has also said it may sell off overseas concerns.

Questions are now being raised as to whether GAME has a future at all. If a retailer's credit insurance fails, it will ultimately mean it's unable to stock new products. This would have a serious affect on GAME being able to operate in any way.

Speaking to MCV yesterday, GAME moved to assure that it's working with separate publishers to ensure flow of stock. But while Metal Gear Solid: HD Collection, Final Fantasy XIII-2 and Soul Calibur V will be sold in GAME stores tomorrow - the games vanished from the firm's website yesterday - there can be no doubting the company is facing a serious test of its ability to remain viable.

To illustrate the seriousness of the matter, EA said in its Q3 earnings call last night that it was concerned about the situation, as it'll lead to decreased sales and increased debt if GAME's trouble becomes terminal.

The larger question is whether or not time is finally up for specialist high street games retail. GAME is not the only one under potentially fatal pressure. HMV admitted in six-monthly results at the end of 2011 that general economic malaise “may cast significant doubt on the Group’s ability to continue as a going concern in the future," reporting both wider losses and a double-digit revenue drop.

While it may be comforting for stores like HMV and GAME to blame international depression on what's happening to their businesses, anyone with even a passing professional interest in media retail knows it's not the whole story. And in the games space specifically, it may very well be that time for the specialist brick and mortar boys has finally run out.

Those with loaded guns, and those who dig

The problem is hardly revelatory: people are shopping in increasing numbers on the internet. We are in a transition period between a man walking into a shop and buying a video game, and a man buying a video game from a website. This has nothing to do with whether or not discs have a future in games going forward; it's about where people are buying discs right now. There's no question: the internet is winning.

Total retail sales in the UK were up 3.65% last year, while online sales grew 14%. While the trend is general, the situation in the games trade has clearly become untenable for GAME.

GAME is now apparently unable to offer publishers credit insurance. By way of explanation: when a store like GAME stocks a product, the publisher of that product is normally insured. Soul Calibur V is out tomorrow, for instance. If GAME cannot offer Namco credit incurance on the stock it intends to sell, that means Namco has no guarantee it will be paid for its games. If GAME goes bust next week, and the credit on Soul Calibur V's GAME stock isn't insured, Namco will lose a great deal of money.

The issue of credit insurance in games retail is of particular importance for two main reasons. Firstly, there are the license fees publishers have to pay platform holders, such as Sony and Microsoft. Secondly, developing a triple-A video game is extremely expensive. If, for example, HMV can't supply credit insurance on stock of a music CD, the risk to the publisher is nowhere near as acute as it would be on a video game. As such, any sign that a retailer has failed to secure credit insurance will stop supply of games stock very quickly. Especially in the current climate, risk on a stock large enough to supply 600 UK stores could easily kill a mid-range publisher, and even the very biggest - EA, Activision, etc - will take a very dim view.

Show me the exit

No stock, no business. GAME does have some options, although they're essentially futile. It could close stores and fire staff. This is only a short-term solution that could be made in an effort to balance books, and doesn't fix the fact that it's clearly failed to manage the transition from high street to internet. While the packaged goods business is declining and online sales are increasing, GAME.co.uk has failed to gain enough market share to prop up the business. GAME faces particular difficulty in this area as it doesn't ship from Jersey, as do Play and Amazon, meaning its consumer-facing costs are generally higher.

Merging GAME and GameStation into one brand? This is basically the same as closing shops and firing staff.

In short, GAME is in serious trouble, and it's likely it will cease to exist in the near future. It may have negotiated stock for releases this week, but what about next week? And the week after that? Publisher have known GAME's been experiencing difficulties for months, but it's only in recent days that the severity of the situation has hit the press wholesale. It will be difficult for GAME to be able to navigate these problems quickly enough to survive.

Is this is end for games on the high street? Of course not. Many people still want midnight launches, and they want to be certain of games on day one, but specialists like GAME are being bullied out of relevance in the "event" release space by massive general stores like Sainsbury's and Tesco. GAME's niche as a shop which stocks a wide variety of games has traditionally kept people walking through the door for all their gaming needs, but the whole concept is failing. If you want an historic game, do you go to your local store and find it's almost certainly not in stock, or do you buy it online? You buy it online. GAME's business of being a catalogue retailer is becoming void. Day-oners will almost certainly go to a supermarket for the next Call of Duty: it's cheaper and there'll be more stock. So you go to Sainsbury's for your triple-As to ensure you get them on time, and you buy Assassin's Creed II and Halo 3 from Play.com.

And where does that leave GAME?

Someone once told me that for an business to succeed it must be one of three things: faster, cheaper or better. GAME can't be faster. Day one is day one. It can't be cheaper on the high street because it's competing against multi-national giants, and it doesn't have the set-up to stay below competitors online. A games retailer that doesn't insure stock will find it difficult to be "better," to say the least.

Watch the clock. It's starting to tick at double-time.