GameStop (GME) sells video games (software), hardware and accessories (consoles and related items), and collectibles. About 80% of its sales come from selling games, along with gaming hardware. That's a real problem because it's hard to see a big future for hard copies of software, and hardware appears headed to being a subscription relationship, not one where you buy a device from a store.
And while GameStop loves to talk about blockchain, NFTs, and all sorts of other areas where it makes no appreciable money, that's really just to distract you from the slow death of its core business. Anyone with a decent internet connection can download the latest games from their living room via each console's digital marketplace. You don't need a store or any sort of middleman anymore.
Microsoft (MSFT) has taken things a step further. It offers a subscription-based service called Game Pass that gives both Xbox and PC owners access to a full library of games, many brand new. That may not mean that subscribers never opt to go into a store to buy a title that's not part of their subscription, but it certainly diminishes the need to visit a store.
That leaves GameStop as a seller of collectibles, a business that the company has grown, but it's still only 20% of its total sales. And, aside from moving into collectibles, nothing else the retailer's leadership has talked about has provided any sort of meaningful revenue.
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GameStop Has Buzzwords, Not a Plan
Before it became a meme stock, GameStop was a declining retailer with a decent balance sheet and mostly short-term leases, giving it a lot of flexibility. The company knew it needed to pivot as the video game business changed. But short of chucking everything and becoming a frozen yogurt chain that also sells collectibles, there's no real plan that works when the product you sell won't need to be sold anymore.
The company has cut corporate overhead, improved its supply chain, and fixed its systems. Unfortunately, that just makes the legacy business more efficient and CEO Matt Furlong understands that. So, that's why he talks about business areas built around ideas that probably won't work, but sound innovative.
"On the product front, our enhanced tech capabilities allowed us to follow the launch of our digital wallet with the launch of our new marketplace that allows gamers, creators, collectors and others to buy, sell and trade NFTs," he said during the company's second-quarter earnings call. The launch of our NFT marketplace supports GameStop's pursuit of long-term growth in the cryptocurrency, NFT and Web3 gaming verticals, all of which we expect to be increasingly relevant for the collectors and gamers of the future."
NFTs have largely proven to be more hype than actual business. They may be a revenue driver for certain players (musicians and sports leagues) but the public doesn't seem overly interested in digital collectibles,
And, don't worry, Furlong also talked about blockchain while not actually saying anything.
"We're building on the momentum established by our previously disclosed partnerships with organizations like Immutable X and Loopring, whether it be through new relationships that support our commerce business, blockchain group or both. The deal we just announced with FTX is a byproduct of our commerce and blockchain teams working together to establish something unique in the retail world," he added.
GameStop Is About Managing a Slow Decline
Furlong has bold plans because no CEO can admit that his business is in a death spiral that may be impossible to pull out of. He acknowledged that to a point in his remarks.
"I want to finish by reinforcing that we're working to accomplish something unprecedented in our industry, transform a legacy brick-and-mortar retailer into a technology-led organization that meets customers' needs through stores, e-commerce properties in both digital marketplaces and new online communities. Our path to becoming a more diversified and tech-centric business is one that obviously carries risk and will take time," he said.
GameStop's CEO may be able to pull this off, but it's an extreme longshot and the company that comes out on the other side -- if that ever happens -- will be something very different. There's no path forward over the long term selling physical video games and hardware, especially with digital adoption and subscription models quick becoming the norm.
And while NFTs and blockchain sound nice, they may not actually be markets where a retailer, even one trying really hard to evolve, can make meaningful money.
