3 Ways the Video Game Business Could Bounce Back

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GamestopFolks aren't buying video games the way they used to -- and that's a problem, at least for the companies in the industry.

GameStop (GME) reported quarterly results on Thursday morning and it wasn't pretty. Same-store sales declined 3.6% and the video game retailer is targeting a 7.5% to 9% slide in comps for the current quarter.

The same company that was expanding throughout the recession now expects to close more stores than it opens this year.

GameStop expects its performance to improve as the new fiscal year goes on. Its used-game sales also continue to improve, and that's important because it's where GameStop makes its meatiest margins. However, it's really just a matter of time before the plunge in hardware bleeds into a dive in the sales of new and used games.

It's Been a Long Way Down

Retail sales tracker NPD Group has been chronicling the three-year slide in video game sales. Every month, NPD takes a look back at the carnage from the month before. It's not for the weak of heart.

There was a 20% slide in hardware and boxed software last month. Gamers were looking at a huge 34% drop in sales of hardware, software, and accessories back in January. These are bad months that are being pitted against years of bad months.

Believers will argue that things may not be that bad -- and they would be right. The NPD Group data doesn't measure digital sales and some online retail traffic. Even in the brick-and-mortar world, GameStop's store-level performance never appears as bad as the NPD data would seem to suggest. However, it's clear that the trend isn't getting any better. Console makers and game developers better think of something before they run out of time.

What This Industry Needs to Do

Let's go over a few ideas that may help the industry battle its way back. Some may seem more outrageous than others, but video game companies have to do something drastic. They can't just keep hitting the "continue" button and expecting to be brought back to life forever.

1. Make Console and Handheld Games Cheaper.

Paying $60 for a new console game or $40 for a handheld title is out of touch with reality. We live in digital days when these same boxed games are competing against 99-cent and free ad-supported downloads.

Obviously console games can't function with those models. Developers are making layered gaming experiences, and that costs a lot of time and money. The console and handheld makers command juicy royalties on every title sold. You will never buy the latest shrink-wrapped Call of Duty game for $9.99. It's too late to make it up in volume.

However, the high prices are sending mainstream players -- those who aren't diehard gamers -- off to tablets, smartphones, and Facebook when they want a diversion. The games may not be as intricate, but they'll do.

One way to help stem the migration is for software and hardware companies to come together to drum up models with low initial prices to get gamers into their realms. Then the publishers and hardware companies can explore ways to share ad revenue or virtual goods to enhance game play.

Isn't this the model that social gaming giant Zynga (ZNGA) is excelling at? It works. Zynga is now the most valuable game software company outside of Activision Blizzard (ATVI). Initial prices need to come down. Incremental revenue streams need to creep up. Hardware and software companies need to make concessions so everybody is happy and development isn't stymied along the way.

2. Update the Controllers to Make Them Relevant.

The days of analog buttons and controllers are numbered. Sure, they're more practical than touchscreen controls, but remember all of the BlackBerry owners who swore by their physical smartphone keyboards? The future doesn't always have to make sense.

"Users with a gaming console and portable console said the iPad was their favorite for gaming," Apple (AAPL) CEO Tim Cook said in introducing the new iPad earlier this month.

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The comment turned heads, and rightfully so. How can a combat game or sports title be more effective on a flat tablet than it is blown up on a TV screen with traditional controllers? Well, Cook would be silly to lie so early in his tenure as CEO of the world's most valuable tech company.

Nintendo (NTDOY) is already thinking that way. When the Wii U hits the market later this year it will feature a controller that has some traditional controls but is also a touchscreen.

You may as well beat Apple to the punch. When it rolls out its own line of high-def smart TVs, you just know that folks will be able to use their iPads, iPhones, and iPod touch devices as gaming remotes. Throw in the ubiquitous convenience of the Apple's App Store and an already bad scene for traditional gaming companies is about to get worse.

Anything that the console makers can do to make their platforms compete with tablets and PCs will make them that much more relevant in the future.

3. Take Gaming to the Next Level.

More console and handheld games need to introduce casual and social gaming elements. We're not talking about Xbox Live or Activision's Battle.net here. The field has to evolve to the point where a console game gets stickier because players can advance the game play when they have a couple of minutes on their smartphone waiting in the dentist's office or during a commercial break.

There are already signs of this happening. Sony's (SNE) PS Vita is already thinking this way with its "never stop playing" tagline, but how many people are going to fork over $250 for another device to carry around? Gaming companies need to swallow their pride and enhance their titles through apps and social networking games. It may be the best way to win the casual gamers back.

Something needs to happen. This three-year path that the industry has been taking isn't going anywhere pleasant. Gamers are smart enough to know that. Now it's time for the industry to wake up and see it that way.

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5 Big Retail Chains That Will Be Gone in 5 Years
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3 Ways the Video Game Business Could Bounce Back

Click through to see 5 Big Retail Chains That Will Be Gone in 5 Years

By Rick Aristotle Munarriz, The Motley Fool

1. Barnes & Noble (BKS)

When the last of the Borders stores closed its doors forever a few months ago, it was only natural to view Barnes & Noble as the obvious beneficiary. Bibliophiles would just flock to the other gargantuan bookstore chain, right?

Wrong. Things aren't going so well at B&N. Sales actually fell in its latest quarter, as sales of the lower-margin Nook e-readers can't make up the sharp decline in physical books.

Yes, B&N is ready for the passing of bound books, but what will this mean for its cavernous stores? Store-level sales will continue to decline, and folks will continue to download their books from a wider variety of sources.

2. Sears Holdings (SHLD)

Lousy sales for Sears and Kmart during the holiday season proved that both department store chains continue to fade in relevance for bargain-seekers, and in late December, the parent of the two struggling retailers revealed that it would be closing as many as 120 stores.

Sears Holdings is in a lose-lose situation. It needs to update its stores if it wants to stand a chance against its "cheap chic" rivals. Unfortunately, the company just began tapping its credit line, so it's not as if it can afford the necessary upgrades.

Sears itself has been around for several generations, dating back to its mail-order catalog. Could it really disappear in the next five years? Well, Woolworth was around for more than 100 years when it was liquidated in 1997.

3. Best Buy (BBY)

Everyone seems to be buying smartphones and tablets. They're just not buying them at Best Buy. Shoppers are finding cheaper prices online, forcing Best Buy to shave its already meager margins just to remain competitive.

It gets worse.

"Best Buy's worst fears are coming to fruition," I wrote after the consumer electronics retailer's latest quarterly report. "The same shoppers whom it has armed over the years with smartphones, tablets, and laptops are now using those devices to find better prices online. Even when folks do walk into a store, they can seamlessly compare prices on their smartphone to make sure that they're getting the lowest price."

Let's also not forget that these are also the same devices that are making all of the shelf space that Best Buy has been devoting to CDs, DVDs, books, and video games obsolete.

For growth, Best Buy has turned to smaller stores that sell only mobile products. That strategy may or may not pan out over time, but either way, the gargantuan Best Buy stores as you know them now are toast.

4. RadioShack (RSH)

If Best Buy focusing on bite-sized stores emphasizing wireless handsets through different carriers and related accessories sounds familiar, welcome to RadioShack. The small-box specialist got into that game awhile back, after realizing that folks just don't need to stop by a strip-mall shop anymore to pick up some batteries or a remote-controlled car.

Is this market wide enough for both RadioShack and Best Buy Mobile?

Forget about the future. RadioShack's situation is ugly right now. The retailer has missed Wall Street's quarterly profit expectations all year long.

5. GameStop (GME)

Today, GameStop has one of the most profitable retail models around. The growing retailer's stores stock the latest gaming systems, video games, and accessories. Margins aren't that hot on hardware, but they're pretty sweet on software.
However, the juiciest part of GameStop's model is where gamers trade in their tired games and systems for store credit. GameStop goes on to resell those items at huge markups.

GameStop stores don't need a lot of selling space given the compact nature of their merchandise, so they fit conveniently in the middle of strip malls where rent is cheap. Sales have held up reasonably well, even though video game industry sales have been largely languishing since 2009.

GameStop definitely doesn't seem very endangered now, but now that even Best Buy and Amazon.com (AMZN) are accepting trade-ins, the most lucrative part of the GameStop model is under attack.

Let's also flash forward a few years. As console makers shift to digital delivery of software, where does GameStop fit in? The retailer has made some intriguing acquisitions in digital delivery, but the days of GameStop's physical stores are numbered.

Add It Up

Some of these chains will last longer than others. GameStop's balance sheet is a far cry from Sears Holdings, where credit ratings agencies are biting their nails as they ponder downgrades. However, all five of these concepts just aren't built to last in today's retailing climate.

Enjoy them while you can.

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Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of GameStop, Apple, and Activision Blizzard. The Motley Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Apple, Nintendo, and Activision Blizzard. Motley Fool newsletter services have recommended writing covered calls on GameStop, creating a bull call spread position in Apple, and creating a synthetic long position in Activision Blizzard.


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