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Gaming the market

March 27, 2012

Everyone in the industry thought it was odd when the popular high street chain Game announced that it would no longer stock or take preorders for popular games.
Read on to see what this tells us about the rise of digital content.

All shops that have to hold stock, from greengrocers to supermarkets occasionally have issues with stock - maybe a delivery was a little late that morning or the bread oven has broken. In a world of just-in-time supply chains, it's often impossible not to pass this on to the customer.

Interestingly this has a direct analogy in the digital world where if a server is momentarily overloaded or a connection fails then it can be hard to prevent this having a direct impact on the users' experience of your product, but for today I wanted to concentrate on digital goods themselves.

What is a 'digital good' ? Well, it's anything that doesn't really exist, but which people will pay (real !) money for, from virtual clothes to power ups for your favorite Facebook game.

At the time Game announced its minor 'supply problem', little could we guess that the real reason was that EA and other major game producers were worried about Game being unable to pay for them, and so were cutting back the credit lines offered.
It's normal for goods to be offered to retailers with nothing to pay for 30, 60 or 90 days, or with a promise to return any unsold stock at cost. But if the retailer goes bust, this stock can often be locked up by the administrators, effectively becoming a loss for the producer.

Things came to a head at Game over the last week, which ended up with administrators being called in, the loss of over two thousand jobs and the closure of nearly 300 high street stores.

But what caused this ? Was it a management failure ? Maybe the pension scheme ? Or did an investor pull out causing a run on the shares?

In fact, it was none of these - the problem was that Game was selling stuff. And selling real physical stuff is becoming a funny way to do business, especially in the gaming sector.
Last year, a single company that sells nothing but digital goods raised a billion dollars when it took its shares on to the market. It was Zynga, the company behind time filler Facebook games like Farmville.

This is a symptom of a bigger change, where companies either have a full-on freemium model or deliberately subvert the normal distribution channels and go on-line only so they get a greater share of the revenue as well as control of reselling of pre-owned games. If you are popular enough, you can even resell the demographic data of your users or make money off embedded adverts.

These trends are only going to get bigger, and leave very little room for a dedicated high street shop that insists on charging you for little pieces of spinning plastic.
The trend is clear with a recent report showing that almost half a million jobs in the US alone are supported by smartphone apps. I don't think anyone knows how retailers like Game are going to be able to adapt to this, the online world moves so much faster and with more agility than a real bricks and mortar store.

Interesting times we live in, eh ?

Posted by Tom Chiverton

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