In a seemingly unprecedented deal, GameStop will now share in the lifetime digital sales revenue—including for full game downloads, DLC, and subscription plans—for any Xbox console sold through its stores. How much that arrangement will impact the bottom line for the struggling retailer is still an open and heavily debated question, though.
The first sign of this new revenue-sharing arrangement actually came somewhat hidden in a press release GameStop issued last week, trumpeting a "Multi-year Strategic Partnership with Microsoft." That announcement focused heavily on GameStop agreeing to use Microsoft's cloud-based infrastructure for its back-end sales systems and a deal for store associates to start using Microsoft Surface tablets going forward.
Buried in that press release, though, was a vague sentence that could be much more important to GameStop's future: "GameStop and Microsoft will both benefit from the customer acquisition and lifetime revenue value of each gamer brought into the Xbox ecosystem."
While casual readers probably missed the potential import, investors homed in on that sentence. "I received an email from [GameStop Investor Relations representative] Eric Cerny and in the email he said, 'We are allowed to state we will receive a portion of the downstream revenue from any device we will bring into the Xbox ecosystem,'" Domo Capital Management President Justin Dopierala told Ars in an interview. He added that Cerny later clarified in a phone call that the deal applied to all digital sales on all next-gen Xbox consoles sold through GameStop.
Loop Capital analyst Anthony Chukumba confirmed that same basic outline to Ars Technica based on his conversations with GameStop management. "The way it's going to work is for every Microsoft Xbox console that GameStop sells going forward, GameStop will get some percentage of the revenue from every digital full game download, DLC, microtransaction, and any subscriptions as well," he said.
GameStop has yet to respond to a request for comment from Ars Technica. Microsoft declined a request to comment from Ars Technica.
How big of a slice?
A cut of every digital sale for the lifetime of every GameStop-sold Xbox console could be a significant boon for GameStop's bottom line, especially as gamers continue to gravitate away from physical sales of games on discs. But a lot depends on the actual size of that revenue share, a specific figure both analysts said GameStop was holding closely to its chest.Dopierala, who has been rather bullish on GameStop since last year, estimates GameStop's cut could run anywhere from one to 10 percent of all digital revenues for those consoles, a share that he says "materiality could be quite large, especially as time goes on."
But Chukumba told Ars he thinks GameStop's cut of digital sales is much lower, somewhere under one percent. "I don't believe it's large enough to make a significant impact on GameStop's financial results going forward," he said. "Largely, I don't believe that [it's a bigger cut] because what is Microsoft's incentive? I don't see what this does for Microsoft exactly. If they didn't have this, would they sell fewer Xboxes?"
To Dopierala, cutting in GameStop just makes sense if Microsoft wants the massive retailer to market its systems at an important point of sale. "GameStop sells a lot of consoles," he told Ars. "You don't want them to not be pushing one of your devices. Maybe they push Xbox more than PlayStation [thanks to this deal], maybe not."
To that end, Dopierala said he's "pretty confident" that Sony is already in talks with GameStop on a similar revenue-sharing deal to ensure Microsoft doesn't get preferential treatment in the stores. "I think Sony might be next in line," he said.
For Chukumba, though, arguments about GameStop's console-marketing might not "hold a lot of water." He likened the console wars to the US political system; just as the vast majority of voters already know if they're Republicans or Democrats, the vast majority of gamers already know if they want a Sony system or a Microsoft system going into the store.
"If you're a gamer, you're not asking them, 'What console should I buy?'" Chukumba said. "You're asking, 'Where's the PS5? Where's the Xbox?' I don't really believe at this point that GameStop could really influence that. Maybe a grandmother coming in, they could influence that a bit more, but that's kind of like undecided voters, there's not too many of them."
There’s something happening here...
To confuse matters even further, Dopierala said GameStop's Cerny told him the revenue-sharing arrangement would also extend to pre-owned consoles sold by GameStop. "So if someone bought a console from Best Buy and then two years from now they trade it in to GameStop and GameStop resells it, they would then revenue share on [digital content purchases on] that console," Dopierala said.
Chukumba balked at that idea. "It definitely doesn't include pre-owned [console sales]," he said. "No way. I didn't even ask [GameStop] the question because it's kind of ridiculous. I highly, highly, highly doubt that it includes pre-owned [consoles]."
Dopierala also told Ars the revenue-sharing arrangement should apply to "all downstream digital revenue" on the GameStop-sold systems, which would include digital movies, TV, and music purchases made through the system, for instance. "I believe the simplest way to think about it is this: On any next-gen Xbox sold by GameStop, any transaction where Microsoft makes money, GameStop makes money," Dopierala said.
Chukumba expressed a different understanding, though, saying he was told the deal only applied to games and game-related content. "They've been so fucking vague about the whole thing..." he added in exasperation.
...What it is ain’t exactly clear
The fact that neither Microsoft nor GameStop is trumpeting the deal, nor revealing the precise size of the revenue share even to investors, also suggests to Chukumba that there's not a significant amount of revenue involved. "If you read the press release, the sort of vague mention of revenue... if that was a big deal, you'd make that the lead. That [they didn't] makes me think it wasn't the lead..."
In Chukumba's view, Microsoft has simply traded a minuscule chunk of some Xbox digital revenue in exchange for a GameStop commitment to use Microsoft's cloud products and tablets in its stores, as announced last week. "It's going to make Microsoft as a company look much better [to shareholders] with cloud revenue from GameStop," he said.
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The official Microsoft reveal of Xbox Series S.
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Xbox Series S, as placed next to an Xbox Series X.
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To emphasize the size difference, Microsoft puts the smaller Series S into a transparent model of its Series X.
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Bullet points about what "next-gen" performance will mean for Xbox Series S.
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A better look at the venting array on two of the console's sides.
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Confirmation that Xbox Series S will not include an optical disc drive.
While Dopierala agrees that GameStop "should have been more clear" on the import of the revenue-sharing deal, he thinks a larger and more detailed announcement might just be waiting for unconfirmed negotiations with other console makers to conclude. "I'm sure they'll be discussing in more detail on their earnings reports and things... we'll definitely get more color on the earnings call," he said.
Investors at large have been rather bullish on GameStop recently, even before this revenue-sharing news started dribbling out. As of this writing, the company's stock price is up 92 percent in the last 30 days, and up a whopping 379 percent from its 2020 low point in early April.
For now, those investors and other industry watchers are left trying to sift through the vague outlines of Microsoft's new deal. Those specifics could determine if this represents an exciting new business model for GameStop or just a small drop in physical retailers' still-shrinking game sales bucket.
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Microsoft will give GameStop a share of Xbox’s digital revenues - Ars Technica
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