source: https://thirdbridge.com/transcripts/gamestop-e-commerce-transformation-structural-business-overview-30-march-2021/ GameStop – E-commerce Transformation & Structural Business Overview – 30 March 2021 Specialist Former divisional leader at GameStop Corp Agenda Key competitive dynamics in the video game retail industry – GameStop (NYSE: GME), Walmart (NYSE: WMT), Best Buy (NYSE: BBY) and Target (NYSE: TGT) Revenue analysis of GameStop's existing business segments – new, pre-owned and accessories Digital transformation efforts – online sales and penetration growth methods Foot traffic recovery trends post-pandemic Near-term risks highlighting public image and longer-term outlook Transcript Transcript 1.What is your overview of the video game retail industry? Are there some key trends and themes you think the investment community needs to pay attention to right now? Specialist (SP): Yes, I think it’s greatly digital. When you look at that, it’s not going to be a surprise to anybody, but when you look at where things are going, not only is it more convenient for publishers, console manufacturers, to have the customer download the game directly from the console, but you’re also seeing a move where, Fortnite did this very famously, League of Legends has done this as well, where you’re offering a free game and then you’re making all your revenue with microtransactions or in-game purchases. That’s a big thing that actually cuts a retailer completely out of the ecosystem, which can be concerning. Other video games are sticking with that model, where it is a USD 60 game, but, as I mentioned previously, these games can be downloaded directly from the console or the PC. The one time during the year where we are seeing physical retail be very relevant is around Christmas. Part of that is that all the video games, or the majority of the video games, are released in the fall, and you want to unwrap a gift for Christmas. You don’t want your child to get a notification on their console or PC that you downloaded the game that they’re going to get on 25 December. Also, mum and dad have a hard time understanding what is the right game or the safe game. That period of time makes GameStop very relevant. The associate there is absolutely the advantage over the competition, and the other thing I’ll add too, that we’re really seeing, is mobile gaming. We’re seeing not only more people getting into gaming because of a lower barrier to entry, not having to purchase a console, but we’re also seeing publishers recognise this trend by creating a lot of games to be mobile-first. We are seeing League of Legends doing this with Wild Rift. We’re seeing mobile grow extremely fast, especially internationally. That being said, the physical retail proposition has a place around Christmas, but it’s pretty difficult to make that argument the rest of my year in my estimation, and I can go deeper on any of those things if you’d like. 2.Could you assess the last console cycle for GameStop? How much market share do you think the company picked up? How might this develop over the next few months? SP: I can’t speak specifically on the market share, but I can say that, yes, absolutely, the new consoles coming out, it’s a lifesaver for GameStop. You know what? I saw many challenges toward the end of the previous console cycle because people are holding off. “Why would I buy a PS4 today when in a couple of months the PS5 is going to be coming out?” It’s that razorblade model with the consoles and video games. The opportunity to sell a new console, to have some exclusives, I know that PlayStation especially, Xbox sometimes, are very limited with their inventory. They love to be able to supply bundles. They love to be able to have an announcement and say, “Look, we’ve got some and they’ve been out for months. This is the only place you can get them.” I think the new console release is the thing to be most bullish on most recently, because that creates a lot of sales opportunities where previously they were declining. The thing that also is a benefit, or to be worried a little bit about in seven years, whenever the next consoles come out is, it’s very likely the next stage of consoles are not going to have a disc drive. The disc drive is one of the most expensive pieces of the console, so it would reduce the cost to create these things. We saw Microsoft released an Xbox console previously that had no disc drive, for a lower price. I think while it’s a short-term saving grace that, “We do have something to sell and we do have something to attach other products to,” I think it’s the last time that it’s going to be that saving grace for GameStop. 3.Could there be a significant drop in demand across GameStop’s product portfolio after customers have all bought the two new consoles? SP: Sure. Part of that is going to be based on the games that are released and the strategy from publishers. Like I said, if publishers are pursuing the Fortnite model, where they’re offering a free game and they’re planning to make all their revenue consistently over time with micro transactions, that’s very troubling for GameStop. A lot of these publishers currently are going to stick to the current model where they are charging something initially, so that they’re getting money right away from all the customers. That doesn’t give GameStop something to sell, but what I always go back to here is the digital purchase of a video game is the most convenient thing in the world, and the fact that you can quite literally download them directly from the console into the PC that you’re playing on and that during the betas for these games, before the game is officially released they’ll let a number of people play the beta, and they are pushing the customer right then to buy the game digitally, so it will download automatically. There’s no standing in line. When you see the emergence of 5G, that’s something also that’s going to hurt physical video gaming, and the consumer sentiment is being very much the first to play the game. That’s one of the things that we value in the gaming industry. Having the hard disc used to be a way to play the game first. It would download faster than relying on your wi fi, but 5G is another thing that’s going to lengthen, or I should say decrease those download times. I really think we could go more deeply into this if you’d like, but as I see from a consumer behaviour standpoint, the only thing that supersedes convenience is love for a brand, and unfortunately, GameStop has lost the positive sentiment and the brand love from the gaming community for a number of years. That’s something that I don’t think the leadership saw or recognised, whether it refused or didn’t see it as an opportunity or a need to really support the gaming community over the last number of years, I don’t think there’s any willingness from the customer base to supersede convenience with love for GameStop, because they see that the brand has betrayed them in a way, primarily from the pre-owned and trade market, which is the primary profit driver for GameStop. I can go more into that as well if you’d like. If I get too far off, go and rein me back in. 4.Can you elaborate on GameStop’s brand erosion within the gaming community? How challenging will it be to build back up the brand image with the gaming community? SP: It’s a great question. The erosion over time has primarily been a focus on stockholders rather than community, and also a very transactional way of speaking to the customer, and also, like I was saying earlier, greatly the trade and pre-owned policy. I’ll start with that. It’s no secret that if you trade in a used game at GameStop, they don’t pay you very much for it, and then when they price it for pre-owned in the store or they’re reselling in the store, the pre-owned price is very high, and what this has done is that it has made the community very dissatisfied. It’s created a lot of memes, but it has made people see GameStop as a greedy company, not giving them anything but then pricing the pre-owned just USD 2 below a brand new game, many times. This does not just dissatisfy the consumer base, it’s dissatisfied the publisher partners as well, and the reason being is, obviously with a new game, part of that sale is going to the publisher. The reason why profit margin is so high with pre-owned games is because it’s all going back to GameStop, minus what was paid to acquire that used game and refurbish it. The publisher partners are not happy that GameStop is pushing pre owned games that they’re not getting a cut of, and the consumer base is not happy that GameStop is not giving them very much for their games and also pricing the games that they’ve purchased at a low cost at a very high cost. That sole aspect has really turned away the gaming community. The other thing is simply there has not been a focus on supporting the community in the past. All the marketing and communication efforts have been very much transactional, “Buy the game here, here’s the weekly ad.” Very little, “How can we support your game play, and enhance your experiences?” When I was at GameStop, my job, part of it, was a focus on e-sports, like I mentioned earlier, and our goal there was really the brand marketing effort. It was to support the community to do deals with Complexity Gaming, owned by Jerry Jones of the Dallas Cowboys, to give people a unique experience, to come to this headquarters and train like a pro, to have fan experiences with Overwatch League teams all across the country, to facilitate more college tournaments with Collegiate StarLeague, who we partnered with, and to quite literally flood the grassroots level of competitive gaming with Matt Turino, by enabling players and tournament organisers to make money doing it. We thought we had crafted a great strategy that would be greatly accepted by the community, and sadly, when we announced our five big e-sports partnerships, the response from the community was, “I thought GameStop was bankrupt. How do they have any money for partnership?” Essentially a too little, too late sort of a response. I would love it if Ryan Cohen and his team, if their strategy was able to turn around the sentiment, but what I’ve seen from personally supporting the gaming community through GameStop and seeing their response, it looks like they’ve turned away and they’re turning towards other retailers, other companies, like Amazon who owns Twitch, who are actively supporting their gaming lifestyle. What more should Ryan Cohen and the company’s management team think about to win back the gaming community? Do you see them doing the right things here? SP: I think it comes down to the experiences of the gaming community. I consult a lot of brands and agencies on how to do this with the e-sports community. It’s difficult, sceptical group to reach, and what you have to do is you have to enhance their experiences. We know young people value experiences more than owning products. For a company that owns products, you need to really lean into that. What I share with companies all the time is if you help a community attain what they can’t get without you but they desire greatly, and your brand can take credit for giving that to the community, that’s a way that you’re embraced and that’s a way to overcome the convenience. When I look at what GameStop can do, I look at what are the video game release events that are happening? How can I have that unique experience, whether to play the game first or to meet the developer? How can I support education? One of the things around e-sports and broader gaming is that a lot of traditional roles fit into those industries as far as marketing, coding, art, communications with broadcasting around e-sports events and things like that. What we’re seeing with a lot of, you want to win back mum and dad as well as the kids as well, as well as the children. One way to do that is, I think, around education, STEAM and STEM through junior high and high school and college. I think if there was an opportunity to lean into that, you’re going to have parents happy that they are finding the positive ways for their child to interact with gaming, because every kid is going to be gaming anyway. The negative aspects of gaming are very easy to identify, sedentary lifestyle, you might have toxic conversations online, there are some games you don’t want your kids around yet. The positive aspects are less obvious, but there are a lot of things with teamwork. There are a lot of things with competition, with learning to win and lose, the communication that’s required on these multi-player games, and then when you look at what can be done from an education standpoint, you see a lot of roles in traditional sports also apply to e-sports and gaming as well. I think a little more leaning into benefiting learning and the future careers of young people in gaming could be a way for GameStop to be relevant to parents and children, and then you plus that up with the entertainment side, with game releases, with new releases in-store. How can you experience these things in a more engaging way? How can you experience them in a more engaging way remotely? A little bit of production there, as far as working with publishers and saying, “Can we do something exclusive for the audience through GameStop, where the audience says, ’Wow, I got this because of GameStop.’” At that point, when you do it consistently over time, it’s not going to happen if you do it once or twice, but consistently over time, they say, “Okay, new leadership. A new focus on the customer. Now I see that they support me, I’m willing to give them a chance.” If that happens is a big question, but that’s what I would like to see throughout the company. 6.Do you think publishers would even be willing to sign up for an exclusive rights deal with GameStop, as you discussed? SP: If there’s a greater benefit to them. GameStop, historically, has really been a great driver, a great promoter for publishers. It’s a different relationship than other retailers because the employees at the stores are gamers themselves. They’re building relationships with the community. The ideal scenario would be, “That’s my GameStop.” Your friend is the guy who works there. You go there to hang out. I think a lot needs to happen with the customer experience in the store for that to really come to life, and I know there was some work in the market of Tulsa that they’re working on, that seemed positive, before COVID. GameStop, at the peak, had about 40,000 associates. If you can say, “We’re going to promote your game. We’re gong to reach people. We’re going to give them these experiences that you can’t do on your own,” there’s something there. GameStop has got to make it really appealing for publishers, because in this remote world, they’re able to do these things on their own. They’re able to do these video game release events. I think GameStop needs to lean in a little, give a little to the publishers, to make it worth their while for there to be a middleman and I think that’s the whole thing here, is the middleman age of business is going out of business, and that’s what we’re seeing with GameStop. It’s purely a middleman in an industry that doesn’t really need one outside of Christmas gifts, like I was talking about earlier. Yes, I think it’s publisher by publisher. We saw Microsoft had some interest in a partnership with GameStop. That makes me wonder how PlayStation and Nintendo feel about that, but yes, if I was GameStop, I would very much want to incentivise a publisher to give me something exclusive and that to be around experiences, because that’s what the community responds to. Does that make sense? 7.Does entering the e-sports market still make sense for GameStop, given that was its pre-pandemic strategy? How would you assess this opportunity? SP: Yes, I thought it looked better from a competition standpoint pre-COVID than post-COVID, and I go back, number one to the sentiment of the community, and then with the competitors. Let me just start with the competitors. There are two major competitors who are going to be building gaming arenas all over the country, and this is public knowledge. Belong Gaming Arenas was acquired by Vindex, they seek to to build out hundreds across the country over the next five years, and then you also have Nerd Street Gamers, who have partnered with Five Below, which is a retailer, and they’re planning to build gaming arenas or land centres next to these retail locations. The difference that I see with those two, a couple of things. Number one is the sentiment. You can say, “GameStop can build out larger stores.” They did this in Tulsa, more experiential stores, but Belong Gaming Arenas is owned by the godfathers of e-sports, Mike Sepso and Sundance DiGiovanni, who are beloved by the community. If you at all had a choice, you’re definitely going to the Belong Gaming Arenas. Belong was one of those models that GameStop looked at. You looked at all experiential arenas, barcade-type concepts, to evaluate what to do, and Belong really rose to the top as probably the best in the world at what they do. What they did in the UK was amazing. Branded arenas that can compete online with each other in those experiences, they were owned by Game, which is the competitor at GameStop’s EB Games in the UK, and they had the arena below the retail, so that there was that fit. In retail, where you’d go play the game. You could play the beta. You would go up and buy the physical copy, etc, in the store. I believe Belong will have a minimal retail presence, but we’ve rechecked with them to confirm. I’m not as up to date with what Nerd Street Gamers is doing with Five Below, but I do know from a sentiment standpoint, they are also beloved by the gaming and e-sports communities. You could say, “Would I partner with someone like a Belong?” I don’t know that Belong needs it as much as GameStop needs it. I think GameStop’s leadership would probably say, “We just did this ourselves. We’re not sharing in the revenue.” It keeps coming back to the fact that the gaming community does not like GameStop and that can’t be overstated, and if their trust can be won over again, I wouldn’t bet on it, if it was up to me. 8.What are your thoughts on what Ryan Cohen and the leadership team have talked about around GameStop’s e-commerce transition? SP: Yes. What I see, I see a couple of things that are positive there. I obviously see Ryan’s success with Chewy.com. I think they’re saying the right things. They’re bringing on some new executives who I’m not super-familiar with, but when I see their backgrounds with Google, with Amazon, you think, “Okay, these are people who’ve done it in the past.” What I’m not too high on is seeing who’s leaving, and Frank Hamlin, who was Chief Customer Officer, just left. Frank, based on my experience there, was the one person in the building who values the customer and sees what the customer wants and knows it. For a long time, I thought, “GameStop will have a fighting chance as long as Frank is continuing to fight those wars with the board on a daily basis and convince them that the customer is more important than just the stock price, and the stock is an output not an input. I’m not too positive on seeing Frank’s departure. I don’t have the experience with the new people, but they have impressive backgrounds. I think with what they’re going to do, a lot of the optimism is potential for the future. I think there was a lot of disappointment on the last earnings call, that there weren’t any questions taken or any strategies delivered. That’s a big red flag there. I would say that GameStop’s website has been very poor in the past. The e-commerce has just been completely overlooked in the past, and I think you’re able to apply a lot of best practices that will at least steady the ship for a short time, because there are so many inefficiencies that can easily be shored up. When you look long term, I keep going back to the purchase of, number one, the digital purchase of a video game is the most convenient thing in the world, directly from your mobile phone, console or PC. The other thing is, as GameStop strives to become the Amazon of gaming, there’s already an Amazon of gaming and they’re called Amazon, and they own the number one gaming streaming platform, which is Twitch. The big benefit with Twitch is this is where all the eyeballs are going outside of YouTube. YouTube is greater from a VOD perspective, but from streaming, obviously Twitch is the destination. Twitch can push people directly to Amazon with a two-day shipping on their Amazon Prime account at any time. The big reason why we weren’t able to ever partner with Twitch is because you can’t get a purchase outside of the Amazon ecosystem. I think in the short term, they’re saying the right things. I’m interested to see what their latest strategy is when they deliver more on that, but unless they’ve built a time machine, it’s very difficult to get ahead of the consumer behaviour, which is already going to Amazon, is already downloading on the console and already purchasing directly from Twitch to Amazon. 9.Is there a risk that GameStop is overpromising in its online business and can’t deliver? How much execution risk is there here? SP: I think there’s great risk there, because you have to hope that consumer behaviour is not baked, digital online purchases are not baked into the customer, and as we look through COVID, Amazon pretty much became a utility during the last year. As you look at the consumer behaviour from young people, people in their 30s and 40s, they have great memories of GameStop from when they were children, of going into the store, being in-store, getting to know the employee, etc. Young people do not have those memories and they don’t have positive memories of GameStop, and they haven’t been on their website. They’ve just purchased directly from the console, the mobile or PC, and what is everybody’s consumer behaviour when they’re buying something online? It’s going to Amazon, because if I’m going to buy a pair of sweatpants and I want to buy a TV and I want to buy a phone charger and I want to buy a game, I can do those all on the same website there at Amazon. Best practices can go a long way in the short term, like I was saying. There’s a lot to shore up there with inefficiencies. If you’re just betting shorter term, I think it looks better, but if you’re betting long term, to say, “Is this completely going to turn around?” Simply the way that video games are purchased digitally and the competitors out there and the consumer behaviour, I think it’s about seven years too late to be making this pivot. 10.What do you think of PowerUp Rewards, GameStop’s recently launched membership programme, given the company’s turnaround? SP: PowerUp Rewards has actually been around for quite some time and it’s one of the largest loyalty programmes in the world. PowerUp Rewards, yes, they have, I don’t know if the number of loyalty members is public so I won’t state that, but it’s extremely large. They have great contactability with many, many people. That data is valuable, not just for GameStop but for potential partners who are trying to reach the gamer. I would say that one of the positive aspects of the business is that loyalty programme, and if Ryan and the team can leverage that more effectively than it’s been done in the past then, yes, I think that’s at least the way to continue to engage current customers. That’s something I’m positive on. Yes, PowerUp Rewards is fantastic. 11.How could GameStop gain greater value from PowerUp Rewards? Are there specific additions or changes that could help the programme fuel the company’s turnaround? SP: Yes, I think if they can make it a driver to the website. It used to be driving in-store traffic, because then you had access to the competitive advantage, which was the associates. If you could get a customer in the store, we liked the chance of closing the sale, because the associate knows more about games than any associate for any other competitor. One thing I would state is that a downside of the digital strategy is it kind of cuts out the competitive advantage, which is the GameStop associate, but to go back more specifically to your question, if you want to be the Amazon of gaming, you need people to come to your website or to your app. I think a focus on exclusives, whether that’s content, whether that’s see the game trailer for the first time, whether that’s, they’ve done a great job from the collectible standpoint of exclusive Funko Pops and things of that nature, but also looking at, “How can we leverage this data for partners?” I think. What I’m seeing a lot in my day-to-day currently is seeing a lot of companies, a lot of agencies, wanting to get in front of kids because they’re all playing video games, and that’s a big question. The viewership of traditional television is declining. Viewership of traditional sports and participation is declining. Every kid is playing a video game. How can we get in front of them? GameStop has everybody’s contact info, to a point, of course, but a very robust loyalty programme. I think to just a high level, I’m not a loyalty expert, but there are people who are, whether it’s Ryan, whether it’s his team, who can leverage these very large numbers that they have, to make that a much more positive piece of the company. 12.How do you assess the viability of GameStop’s pre-owned gaming business? Do you think this business could shrink as a percentage of the company’s revenue? If so, where does that leave it in terms of profitability? SP: Yes, that is what one of the bigger concerns I have. A lot of people don’t think about, you have all these digital video game purchases, so you have less physical inventory, so you have fewer pre-owned games that can be turned in that can then result in pre-owned sales. Not only is GameStop losing physical sales and sales overall to digital options like directly to publisher, the consoles or Amazon or things like that, but as they do that, their biggest profit margin, like we’ve talked about before, is the pre-owned games, because they are purchased so low and they are resold at such a high price. Not only is it a decline in sales, but it’s a decline in sales with the largest profit margin of what they’re selling. It’s really a doozy because, yes, you can’t sell a pre owned digital game and you have GameStop or Amazon going in there. Are they going to offer to purchase games at a higher price to get that inventory? I wouldn’t be surprised. They can use a lot of things as a loss leader, so that could be way for them to cut GameStop, cut into that pre-owned market share. Yes, I think one of the more concerning pieces of the whole business, I should say, is that that pre-owned inventory is declining because of the rise in digital sales, and not only is that lower sales but it’s lower high-margin sales. Not only do you have a decease in sales, you have a decrease in margin, which is very concerning. 13.Is there any way GameStop can make up the margin decrease from pre-owned inventory declining? Will this revenue and profit have to come from ventures such as e-sports and e-sport leagues? SP: E-sports is really difficult to make money in as a whole, so that’s a whole other nother conversation or topic. They do have the opportunity to push the peripherals that are relevant to any game, your headset, your mouse controller keyboard. There’s an opportunity to do content with e-sports around those products and to feature those, to push those sales, but as far as something that is as high margin as a pre-owned game purchase, I don’t really see it. I would like to see a focus on lifestyle apparel in GameStop stores or online. That’s something that, in the e-sports market, the customer has really responded to, and apparel is really a high-margin category. When you see lifestyle apparel companies like 100Days, FaZe Clan, Alt, e-sports apparel this is another way to shore that up, but as far as the same scale as pre-owned game, it’s hard to see something that’s really going to completely replace that. 14.How can GameStop drive up accessories purchases in 2021, particularly accessories purchased with consoles? SP: Yes, bundles has definitely been a strategy that has been seen in the past, where you’re going to bundle a game with a console, bundle a headset or a controller with a console. Those things happen all the time. What we saw with the rise of Fortnite, which is an online game, is a lot of headset sales. A lot of this, I think, maybe has to do with SEO strategy, being the number one place to go when you want to get a headset. If you can replicate some of that knowledge from the associates to be on the website, so mum or dad, shopping for the right product that they’re not too familiar with, can find the right answer on the website, that’s the way to plus that out, but I think accessory sales are not going to, once again, fill the need or the lack of sales from the pre owned games, but is there opportunity to feature those more through e-sports? Absolutely, just because a lot of the games nowadays are these online multi-player games, that you need the headset to have the communication. Yes, there’s something there, but I don’t see it as a saviour for the company. 15.How would you assess GameStop’s real estate strategy and footprint, especially coming out of the pandemic? I know historically it was very mall-skewed. SP: What I would like to see, there were so many stores that when you see them, the number of the stores that are reduced, oftentimes it’s a small percentage, or you can flood the market with too many stores. I think right about where they’re at now, maybe slightly lower, is probably a good place to be, as you decrease your dependence on stores and you want to increase the online sales efforts. I think the most impactful thing that they could do is focusing more on the larger stores that can be more experiential, for a couple of reasons. The smaller stores, you can’t do anything in there from an activation standpoint. If your goal is to push in-store traffic, which it has been in the past, it’s very hard when you can’t do anything special in the store that would drive that traffic. They do have a number of extra-large stores. I don’t know if that number is public, so I won’t share it, but I think you’ve decreased a lot of these smaller stores, you don’t need one within a 10-minute drive of everybody in the US anymore, necessarily. You’re going to be focusing more on, “Can I provide a unique experience in the location, and am I still in the right spot when Christmas rolls around and mum and dad need to find out what the safe game and the right game is for their child, without he or her knowing that they’ve purchased that game for them?” Yes, I think you could decrease the number just a little bit more, but focus more on larger and experiential would be a good way to support the online strategy at the same time. 16.What do you think is the GameStop store’s role in the company’s more online future, given what Ryan Cohen and the management team have spoken about? SP: It’s a great question. I’ve said a bunch of times here, once again, around Christmas, that’s where we see GameStop as their highest sales in Q4 typically, because that’s when all the games are coming out, number one, but like we said earlier, that’s when mum and dad don’t want their child to know they got them a game, but they don’t know what game to get, and so they have to go and talk to that associate. The associates at Walmart, Target and Best Buy do not have the knowledge that the GameStop associates have. I really think it needs to become, Starbucks uses the term “your third place”. What is the place you’re hanging out at that’s not at home and not at work? I think GameStop created that atmosphere where, “This is my third place. This is where I’m hanging out.” Why are people coming to the store if there’s not a video game released? The people who are still purchasing physical, that is. I think if you can make it an atmosphere where, okay, you can come and you can play, one thing you’re going to see, which I think Belong Gaming Arenas and Nerd Street are going to capitalise on this market, but a lot of high schools are going to have e-sports teams very soon. Some of them already do, and they’re going to need a place to compete. If GameStop is able to partner with all these high schools all around the country and say, “This is the place where you get to practice and you compete,” then you’re going to drive that natural foot traffic. Then you’re going to build positive sentiment with a younger generation who doesn’t currently have a lot of experiences with you, or positive experiences or relevant experiences with you. Mum and dad built that interim behaviour where they’re used to bringing little Johnny for practice, so they’re more likely to go to you, more top-of-line from an awareness standpoint when, once again, it comes to the digital purchases. If that happens, I’d love to see that but, ultimately, when you keep going back to, long term, where the purchasing behaviour is and the competitors in the space being so digital, it’s really hard to go beyond probably the seven-year mark or so, with GameStop continuing to be relevant past that. 17.What is your time frame for turning GameStop around? How likely is it that in 3-5 years the company will be better off competitively, strategically and financially? SP: I think it is unlikely that they’re in a better place five years from now than they are today. I think that you’ll see, we’re seeing some confidence right now, obviously, with Ryan and what his team are doing. I think, like I said, they’re shifting the perspective that needed to be done probably seven years ago. I think a lot of what I see as less positive is just the timing of all this. Consumer behaviour, people are so used to clicking the button on their consoles to say, “Download now. Purchase now.” People are used to going to Amazon because it’s the one-stop shop for everything. I think that’s only going to increase. I don’t think digital video game purchases are going to get less convenient. I think when you look at Twitch, how easy it is to purchase a game through there, I don’t want to repeat myself too much on the consoles and the PCs, but I think GameStop, short term, because of the best practices, the shoring up of inefficiencies that Ryan and his team can do, and I’m sure they’ll do it very well. I think short term, that keeps the boat floating, but I think over time you’re going to see more of these games go to a free game model, micro transactions in the game. You’re going to see, ultimately, I think the next round of consoles, which won’t be for about seven years, thank goodness, but those more than likely won’t have any disc drives in them, and you’re dealing with a younger generation coming up that is so digitally native and used to hitting “download” on every single thing they do outside of video games. They’re used to a button on the screen, purchasing their thing for them, rather than having to go to a separate location to do that, even if that separate location is a website. Like I say, I think if this had been done earlier, the long-term proposition would have be more positive, but, yes, I think around five years it’s going to be looking at, “We’ve got about two more years of viability here with this brand.” The last thing I’ll say too about this real quick is, brands rarely die. Even Toys R Us is coming back up after they went out of business. The reason for that is love for the brand, and what I keep going back to here is that the love for the brand for GameStop, sadly, is lacking, just because of the way that the community has been treated by the brand in the past. Is there an opportunity for a second chance? I don’t know. It appears to be too little, too late, in my estimation, although I would hope that it wasn’t. 18.Could anyone acquire GameStop and attempt to turn the company around? Does that seem unlikely to you? SP: That’s what Ryan and his leadership are kind of doing. Are you talking about taking it private? Is that what you’re asking about, or private equity? Third Bridge (TB): Either private equity, or another corporation such as a bigger-box retailer buying the company and trying to turn it around. SP: I don’t know. I honestly think that what Ryan and his team are doing is the best shot at it. I greatly respect Ryan, what he did with Chewy. I think he’s bringing some very impressive people on the team. The negative, less positive view that I have about the company’s future have nothing to do with, necessarily, Ryan and the team, as much as a better understanding of how the whole gaming ecosystem works and the sentiment of the community. I think Ryan and his team are really the best shot. I think if this doesn’t succeed, it’s going to be a far less appetising asset for anybody, really. I really see Ryan and the team doing it or not. It comes back to the brand, the value of the brand itself. For somebody else to take it under their wing, I don’t see the value there, why somebody would do it if Ryan and his team can’t. 19.Do you have anything else to add on the viability of CEO George Sherman, Ryan Cohen and the management team’s strategies? SP: Yes, something that I don’t know about the strategy but I would like to see is a focus on the community, and people on the board who understand the gaming community. That, I think, has been a challenge in the past. I think the board and the leadership at GameStop have been very good operators. They’ve been great, coming from real estate background. Home Depot is the background that a lot of the previous leadership had, but what Home Depot lacks, or the difference, I should say, between the customer of Home Depot and someone like GameStop is a niche sub-culture who is so extremely passionate about the activity that they take part in, which is gaming. What I found in the past is that the leadership is very detached from any understanding of the community that they’re serving. I think, in addition to the digital pivot, of course, if there are people in the leadership who truly understand the view of the gamer, what matters to them, really just consistently pounds, “What does the gamer want? What does the gamer want? What do they want from us?” That’s so important. I saw that Reggie from Nintendo was one of the board members who is stepping down, and that didn’t look particularly positive to me, because Reggie is greatly beloved in the gaming world. I don’t know the reason for him stepping down, but I know many board members did. I would be more positive about it if they had some people who come from the gaming space, who have worked with publishers, who have worked with even e-sports leagues, things like that. That would be a much more positive sign. If they get great operators who have great e-commerce experience but have never had any experience with the gaming community, I think it’s a failed attempt, because that piece, the sentiment of the community, understanding them, how to serve them, is so crucial in this community, in this industry. 20.What is your best- and worst-case scenario for GameStop over the next couple of years? SP: High level, I think the best case is that we see, over the next year, year-and-a-half, two years, we’re seeing online sales continue to increase. We see that they’re able to capture the customer, retarget them, engage them, all the way from being off the site all the way to receiving the product, whether that’s a download or shipping it to them. Then, after that, I think you’re going to get to a point of where the physical retail sales will continue to decrease and the online sales hit their peak as the consoles are continually selling the game, Amazon is continually a top competitor. Then, I think in around seven years from now, like I keep saying, is around when the brand eventually officially declines all the way. I think the worst-case scenario could be if the new leadership is not in touch with the gaming community and there are some bets that are made, that, “Just because we’re focusing on the website and we have a digital perspective, that’s going to fix all of our problems.” I think this community can blacklist a brand with the blink of an eye, and we see it with video games all the time. A publisher will make a decision that the community doesn’t like, and the forecasted sales ended up being way higher than what actually happened, because nobody bought the game because the community has turned against them. I think this is kind of seen as a last great hope, if you will. If there’s a miss-step or assumptions about the community that aren’t correct because the people in the leadership don’t understand the gaming community, I think you could have that decline being much more rapid. Does that make sense or answer to your question? 21.Do you have any closing comments? Is there anything you wanted to touch on or highlight that we haven’t discussed? SP: I think we were able to touch on most of it there. I think to summarise, I’m concerned about not just the declining sales, but the declining margin as you look at the trade in pre-owned and how that’s affected with digital. I think my less positive outlook is not the result, or is not a response to Ryan or the team that he’s assembling, but it’s a response to the industry itself and the timing, the convenience of competitors, when you look at supporting physical with experiential opportunities. Great competitors in the space who are coming in with Belong Gaming Arenas and Nerd Street as well. While I tip my hat to the effort to turn this brand around, I really think it’s a too little, too late scenario, where the consumer behaviour is already based with a very digitally native customer, and the convenience with other options for purchasing, like I said, the PC or the console or somebody like Amazon, and then the sentiment. The fact that the gaming community itself does not have a warm feeling about GameStop is, ultimately, the nail in the coffin there. That’s the summary of my outlook on it. I’ll continue to cheer for them, but based on my experience and understanding of the industry, I don’t know that it looks, ultimately, positive.