Tuesday, November 21, 2006

The retail games business sucks.

I've been a retail video game buyer for almost a year now, and I've learned one thing: There is no money to be made in this business. As a retailer, margins on hardware are pathetic (usually around one percent, and by the time you count shipping costs, you lose money on it). But you sell the hardware in order to sell the software, right? Well, the game software has margins that are comparable to retail DVD, which is typically around 18 to 20 percent, if you sell the product for the manufacturer's suggested price. Accessories (controllers, AV cables, memory cards, etc.) have a little more margin, but they usually sell the least amount of units. The best money to be made is in used games, but you have to turn your inventory quickly, as the shelf life of video games is pretty short.

So, having said that, the biggest game retailer around (GameStop) just posted their Q3 financial results. Even without the Playstation 3 and Nintendo Wii launches, they did ONE BILLION DOLLARS in total sales. Pretty impressive. However, if you read further down the article, they made $13.6 million in net revenue. That's only 1.3% margin, and they also have the most robust used game business in the nation.

The company I work for isn't doing any better. Last week, my boss asked me to tell him what's so great about this business. The answer I gave him then was, 'Unless you're a gamer, nothing's great about it.' I've thought about that question quite a bit since then, and I haven't been able to come up with a better answer. Unless you work for one of the top five retailers, you got next-to-nothing from Sony on PS3 hardware. Nintendo took a similar approach. Software and accessories are also hard to come by. So how is a smaller company supposed to keep any customer loyalty, when the biggest suppliers of the product you sell don't give half a fuck about them, or you?

I miss my old job. The film industry has plenty of down sides, but at least the studios didn't make a point of working against the smaller guys.


CowboyLaw said...

Interesting insight into the industry. I agree with your answer. To give you another view of the world, here are the economics of my world. My firm sells my time at around $210 per hour. I am required to bill 2000 hours per year. My firm pays me $73 per hour for my time. Factor in benefits, social security paid by the firm, firm contributions to my 401(k), and you have $80 per hour, tops. I have 1/3 of a secretary, and an office that's approximately 100 square feet (10X10). Figure that in, and at most, the firm's total cost for my time is $100 per hour. So, their margin is better than 100%. And people wonder why everyone seems to want to be a lawyer.

Now, there is one drawback. No company, of any kind, can make all that much just from billing its workforce hourly. The largest lawfirm in the world barely clears $1 billion in annual income. There are literally tens of thousands of companys that do more business than that. So, while the margins are great, the gross income is not so good.

Lord Bling said...

So, it's the opposite of the game industry, where the gross income is fantastic, but the margins suck ass.

So, the real question now is, if you make $73 an hour, plus benefits ... how much does that translate to in a high cost of living place like San Fran? I'm sure it was worth it for you to make the move that you did, but was it THAT much more? Not meaning to be nosy, but since you put a number on the salary...