Question: Gamestop: While some gamers still preferredpurchasing physical copies from retail stores like GameStop,many were choosing to purchase digitalcopies of the most recent games.In fact,in 2017GameStop

Gamestop:

While some gamers still preferredpurchasing physical copies from retail stores like GameStop,many were choosing to purchase digitalcopies of the most recent games.In fact,in 2017GameStop announced that it was shutting down 2 to 3%of its 7,500 shops across the globe afternet income plummeted the prior year(see Exhibit 1). According to The Wall Street Journal, the company was affected by the shift to digital downloads. More and more people were preferring toinstall games straight from their console's online store instead of buying physical copies, which contributed to GameStop's 14%sales drop in 2016. Sales declined further over the 2018 holiday season, dipping 19%when compared to the 2017 holiday season. As a result, GameStops fourth-quarter profits fell 16%and its shares went down by about 12%in December 2018.iOn the surface, trends in the video game industry should have lookedpromising for GameStop. In a 2017 study from the Entertainment Software Association, 67% of US households owneda device that was used to play video games(see Exhibit 2).With that, 65% of US households were home to at least one person who playedthree or more hours of video games a week. As shown in Exhibit 3,the annual amount of money that consumers have spent on video games increased from $17.5 to $24.5 billion in a six-yeartime span (2010-2016), and 54% of gamers felt that computer and video games providedthe most value for their moneybecause of the vast amount of content and hours of playability compared to traditional entertainment methods, such as television and board games. While this typically would show very promising signs of growth in an industry where GameStophaddominated for many years, there wasone trend that had been the key factor in the closings of hundredsof GameStops worldwide(see Exhibit 4): the rise of digital downloads. In 2010, physical sales accounted for 70%of total game sales. Digital downloads were still relatively new to the industry, and only used for computer games through a then-new downloading platform called Steam. However,by 2016sales from digital downloads made up 74%of game sales, with physical sales totaling 26%a shift of 44% in only 4 years.ii

GameStop: Adrift in the marketCapstone Cup Spring 20192With only 25%of game sales coming in a physical format, it madesense to wonder why GameStop would only close 2-3%of their global stores. The reason behind this is because the sales shown were for all types of video games, which includedsubscriptions, digital fullgames, digital add-on content, mobile apps, and social network games that spannedacross multiple platforms. The majority of these digital downloads were from personal computers, smartphones, and other wireless devices. Steam, which was PCs online platform for digitally purchased games, accounted for vast sales of digital downloads, as well as mobile games that were played on smartphones, and social media games that were used on wireless devices. While some thoughtthat GameStop should create itsown online gaming market, it had ahigh probability of being a futileinvestment.Sony and Microsoft would not support an external system on their consolessinceit would decrease their own online sales. Simply put, going to GameStop to purchase a full-game download would have beenthe equivalent of going to Blockbuster to purchase a code for a digital movie you then redeemedon iTunes. Before digital downloads, GameStop was a prominent middle man for gaming systems who did not have their own physical stores through which to sell their content. Now that companies such as Sony and Microsoft soldgames through their own digital stores through personal consoles, GameStop hadeffectively been cut out asthe middle man.Another trend in the gaming industry hadbeen the surge in popularity of Major League Gaming, oreSports. With the increasing popularity of streaming services, such as and Twitch, talented gamers had gained cult-like followings from amateur gamers who marveledat their talent in specific games. Since GameStop was in the retail business, it was in their best interest to help draw more attention to specific video games. As a result,they began to sponsor eSports events and by the end of 2018 were the third biggest sponsor in eSports, behind IGN and Twitch. In the Spring of 2017, GameStop had its first opportunity to partner in support of a competitive gaming tournament. The company teamed up with Warner Bros. Interactive Entertainment to create the GameStop Hometown Heroes tournament, which featured the game Injustice 2.iiiThe event was held at the GameStop Managers Expoin Las Vegas and was marketed through Facebook Live. Competitive gaming, such as eSports had provided a potential new revenue stream for GameStop, who hoped that combining its online marketing presence, like Facebook Live and tournament streaming, with physical retail available at expos and MLG tournaments, would attract larger audiences to buy physical game copies at events. While this strategy showed interesting potential, GameStop was still looking for ways to capitalize on their investment in the Major League Gaming market to help grow their shrinking net revenues. GameStop: A Brief HistoryGameStop had a number of transformations in its 34-year history, changing with shifts in market demands and diversifying its revenue streams, see Exhibit 5.

GameStop: Adrift in the marketCapstone Cup Spring 20193Babbages (1984-1994)Starting in 1984, GameStop opened under the name Babbages,which was a small software retailer located in Tucson, Arizona. The founders of the company, James B. McCurry and Gary M. Kusin, were classmates who attended Harvard Business School and named the company after the famous 19th Century mathematician, Charles Babbage. After opening its first store in Dallas, Texas, the company began to shift their focus to video game sales for the popular Atari 2600. With the surge in video game consoles and popularity in the late 80s, Babbages began selling Nintendo games in 1987, and the rise in growth allowed the company to go public in 1988. By 1991, video games made up two-thirds of Babbages sales.ivNeoStar Retail Group (1994-1996)In 1994, Babbages merged with Software Etc., which was a company located in Edina, Minnesota that focused on personal computing software. The merger of these two companies was known as a stock swap, meaning that shareholders of Babbages and Software Etc. received shares of NeoStar, a holding company that had been newly formed for the merge. While both Babbages and Software Etc. remained subsidiaries of NeoStar, the holding company combined both subsidiaries in 1996 as a result of declining sales. In September of that year, after NeoStar was unable to secure the credit necessary to purchase inventory necessary for the holiday season, the company filed for Chapter 11 bankruptcy.vWith leadership changes not working, NeoStars assets of $58.5 million were purchased in 1996 by Leonard Riggio, who was a founder of Software Etc. and principal stockholder of Barnes and Noble. Babbages Etc. (1996-1999)Following his purchase of NeoStar's assets, Leonard Riggio dissolved the holding company and created a new holding company named Babbage's Etc. He appointed Richard "Dick" Fontaine, previously Software Etc.'s chief executive during its expansion in the late 1980s and early 1990s, as Babbage Etc.'s chief executive. Daniel DeMatteo, previously the president of both Software Etc. and NeoStar, became company president and COO. Three years later, in 1999, Babbage's Etc. launched its GameStop brand with 30 stores located in strip malls. The company also launched gamestop.com, a website that allowed consumers to purchasephysical copies ofvideo games online. GameStop.com was promoted in Babbage's and Software Etc. stores.viBarnes & Noble Booksellers (1999-2004)In October 1999, Barnes & Noble Booksellers purchased Babbages Etc. for $215 million. Several months later, Barnes & Nobles also purchased a company called Funco, which was a video game retailer based out of Eden Prairie, Minnesota for $160 million. Barnes & Noble assigned Babbages Etc. to be a wholly owned subsidiary of Funco to strengthen its video game background. Barnes & Noble also acquired Game Informer in 2000, which was a video game

A.) Assess the general (macro) environment impacting GameStop. Identify and note the impact those trends might have on the industry. (Use the PESTEL framework). Better answers will include at least three threats within at least two of the environmental segments. This translates into three opportunity bullets and three threat bullets for EACH segment you assess

Macro-Environmental FactorTrend & Projected Changes:

Opportunity (O) or Threat (T)?

Impact of Change On The Industry & Probability of Occurrence

B. )Threat of New Entry

-. Based on your analysis of entry barriers, the threat of new entry is low high.

-. How does this impact the costs for a firm in the industry?