REPORT Chris Jenks, [email protected]

New Consoles’ Enhanced Download Feature Not Yet a Threat to GameStop

Companies: AMZN, BBY, EBAY, GME, MSFT, TGT, TYO:6758/SNE, TYO:7974/NTDOY, WMT December 19, 2013

Research Question:

What does the enhanced digital downloading capability of new game consoles mean for game disc sales and the software tie ratio of consoles sold at GameStop?

Summary of Findings Silo Summaries  Physical discs continue to be the preferred method of video game 1) GameStop Store Employees ownership this holiday season, according to 29 of 31 sources All nine sources noted healthy November sales, largely driven by the PlayStation 4 and Xbox One despite post- composed of GameStop Corp. (GME) employees and customers, launch console supply issues. Sources expect game owners of new generation consoles, and industry specialists. disc sales to grow further as more consumers seek out  GameStop’s sales of video game discs have yet to be affected by titles for their new consoles. The tie ratio of game discs to consoles is expected to be similar to that of prior the enhanced game downloading feature offered through the new game systems, though three said the ratio may lower PlayStation 4 (Sony Corp./TYO:6758/SNE) and Xbox One (Microsoft over time as downloads become more popular. Corp./MSFT) consoles. 2) GameStop Customers  Most sources said the tie ratio of game discs to consoles is in line These six sources, including an Xbox One owner and with past systems. However, they added that the sales potential of some who soon hope to own a new generation console, game hardware and software may be affected by supply shortages shop at GameStop based on its pricing, rewards and limited title selection this early in the product cycle. program, used game/trade-in option and superior  selection of games (when in stock). Five of the six also Game downloading eventually will overtake physical discs, but this cited a preference for game discs over downloadable may not occur until the next system generation arrives, which titles, and none of the five expects that to change. The sources said is at least five years away. other source hopes to move to downloading most of his  content, assuming that technical and DRM issues do A lingering question is whether the initial buyers of the new PS4 not impede game performance. and Xbox One are early adopters, who are likely to embrace downloadable games, or are gamers dedicated to the large 3) Owners of New Generation Consoles blockbuster titles most popular in disc form. These six sources said downloading games is more attractive on the new consoles, and yet all indicated a preference for physical copies because of possible glitches in downloaded games as well as the benefits of owning a disc. Four of the six have downloaded some Holiday Sales of Long-Term Sales of content to their new consoles, though only one has paid Video Game Discs Video Game Discs specifically for downloaded titles. GameStop is a preferred gaming retailer because of its superior title Gamestop Employees selection, pricing and the trade-in/used program.

4) Video Game Industry Specialists Gamestop Customers Nine of 10 sources said video game discs will have

healthy holiday sales, driven by dedicated gamers’ Owners of New Consoles preference for physical copies. Once the PS4 and Xbox One are widely available, downloaded games will increase in popularity and will comprise one-third of the Industry Specialists market soon. However, sources’ opinions varied widely regarding when revenue from downloading will be on par with game discs. Also, sources questioned whether the buyers of the PS4 and Xbox One were early adopters of new technology or gamers dedicated to the longer-narrative blockbuster games, which mostly are bought in disc form and may drive up the tie ratio temporarily.

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GameStop Corp.

Background GameStop reported strong third-quarter earnings on the back of disc sales of Take-Two Interactive Software Inc.’s (TTWO) Grand Theft Auto V. Its sales grew 10.1% for new hardware, 52.3% for new video game software and 23.1% for used video games year to year. The retailer’s digital receipts increased 8.6% to $137.9 million, while its mobile sales were 14.4% higher than the previous year.

Sony’s PlayStation 4, or PS4, and Microsoft’s Xbox One are highly anticipated next-generation consoles that offer improved digital downloading capabilities. These include the ability to download new games at the same time they are released in stores; the ability to start playing the game during the download process; and the flexibility to access accounts from other consoles. These improvements may result in a lower tie ratio of game discs related to new hardware purchases.

Gamers still enjoy going into stores like GameStop for the release of new games and consoles, as well as promotional material and the chance to own the game before anyone else. Also, digital downloads lack qualities that gamers enjoy, such as owning a game outright and being able to sell, trade or lend it to others.

Current Research In this study, Blueshift assessed whether the new PlayStation 4 and Xbox One systems are leading to a greater proportion of games being sold via digital downloading than as a physical disc. We employed our pattern mining approach to establish five independent silos, comprising 31 primary sources and six relevant secondary sources focused on digital versus disc sales, PlayStation 4 versus Xbox One, and GameStop’s trade-in and used game sales: 1) GameStop store employees (9) 2) GameStop customers (6) 3) Owners of new generation consoles (6) 4) Video game industry specialists (10) 5) Secondary sources (6)

Next Steps Blueshift Research will examine GameStop sales in early 2014 and assess developments related to the new PS4 and Xbox One consoles, specifically the number of related games sold via digital download rather than as discs.

Silos

1) GameStop Store Employees All nine sources noted healthy November sales, largely driven by the PlayStation 4 and Xbox One despite post-launch console supply issues. Sources expect game disc sales to grow further as more consumers seek out titles for their new consoles. The tie ratio of game discs to consoles is expected to be similar to that of prior game systems, though three said the ratio may lower over time as downloads become more popular. Employees are taking advantage of in-store supply issues to push online sales of consoles and bundled games, which provide a healthier margin. Trade-ins, upgrades and used copies of games are all expected to be popular during the holiday season.

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GameStop Corp.

KEY SILO FINDINGS Sales of Game Discs - 8 of 9 GameStop employees said November sales of video game discs increased year to year and were in line with or higher than expectations. - 1 cited a 3% drop in sales because of consumers’ hesitancy to buy the new systems when only a few games were available following the console launch. Games Tied to New Consoles - All 9 said game disc purchases related to the new consoles were in line with or greater than prior systems. Expectations and Projections - 3 expect sales of game discs for the new systems eventually to drop; 1 cited a lack of game titles for the new consoles, while 2 expect game downloading to rise. GameStop - All 9 expect strong sales from GameStop’s resale program, including the first flow of used games from the new systems.

1. GameStop manager in the Kansas City area Game disc sales took off in November thanks to Black Friday promotions, new game titles and the new consoles, especially the PlayStation 4. The new consoles are not expected to boost game downloading at the expense of game discs, which most people still prefer. Customers bought an average six game discs with the PS4 and two or three discs with the Xbox. The store immediately sold out of its PS4 consoles in mid-November and again on Black Friday; it expects to receive more PS4s by end of the year. The tie ratio of games sold with the new consoles is in line with titles for older gaming systems. Sales of Game Discs . “Sales of physical games were up a lot November compared a year ago with the new games offered for the holidays. I am not sure how much it increased over last November. It’s about what we projected. The holidays are big, and we had a big Black Friday promotion. The new consoles we got in mid-November had a little do with the physical game sales increase.” Games Tied to New Consoles . “Those who purchased PlayStation 4 bought an average of about six physical games, and those who got the Xbox One bought two or three. We The PS4 has a better tie ratio did not have any promotions or discounts on games bought with the new to games than the Xbox or consoles. We also sold an average of five attachments with each console.” other systems because people . “No games were included with the new consoles.” like the PS4 more. . “I can’t compare the tie ratio of physical games to the new console releases in the past because I have only worked here three years, and it’s been that GameStop Manager, Kansas City Area long since we got new console systems. It’s been seven or eight years since any new systems came out.” . “The number of games we sell with the new consoles is about the same as with the older systems. It varies a lot by the customer, but selling three to six games with the new consoles is not out of the ordinary. It did not surprise me.” Expectations and Projections . “The PS4 has a better tie ratio to games than the Xbox or other systems because people like the PS4 more. People have been concerned about the DRM [digital rights management] restrictions and the ban on used game resales that Microsoft first put in with Xbox. That hurt sales of the Xbox. Price is also a factor. The PS4 is $400, the Xbox is $500.” . “I don’t think the downloading capabilities of the new consoles will impact the sales of physical games very much. It’s hard to know because people buy the online games at home, not here. People still like holding the game in their hands and having it to resell. More technical issues can come up with accessing the online games. The people who buy these games online usually do so for convenience; they don’t have to come to the store.” . “The membership programs give customers 10% off the price of used games, and that is very popular. For instance, a $60 game we buy back from someone is priced at $54.99, so 10% off of that saves the member $10 [compared with buying a new game]. That’s where it is used a lot.”

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GameStop Corp.

GameStop . “We don’t have any special plans to boost physical game sales over the holidays. We did for Black Friday—running a 12-page ad and opening at midnight.” . “As far as consoles, there is nothing we have to do to increase PS4 sales because we don’t have any in stock. We had a long, long line of people wanting to buy them on Black Friday, and they sold out immediately. Same thing happened when we got the first group of PS4s in mid-November. I get 200 calls a day from people wanting the PS4. We hope to get more in by the end of the year.” . “One impact we could have on sales of physical games would be to get in more PS4s. But even without those, we expect a growing sale of used physical games through reselling of games sold to us by the PS4 owners and Xbox owners. But we have only gotten in two or three of the new games back for us to resell. It hasn’t done anything for that market yet.” . “I think there will be a jaw-dropping increase in game sales over the next two or three years. The technology of the consoles and the games is improving that much. Download game sales will also go up a lot because you are going to see games being offered free to people who buy certain Internet services.”

2. GameStop store manager in a New York City suburb Enhanced downloading capabilities will cut the game disc tie ratio for PS4 and Xbox One by as much as half compared with PS3 and Xbox 360. Still, GameStop is betting it can sustain itself on what it predicts will be a still-robust resale market for game discs. One way the retailer is trying to spur physical games sales this holiday season is allowing rewards- club members to trade their used Xbox 360 games for Xbox One versions for $10. This store is selling two to three games per new-generation console, in line with expectations and comparable to the early attach rates of previous consoles. Comparable sales are up at least 30%, thanks to the new consoles. Sales of Game Discs . “We’re selling more games and getting more foot traffic compared to a year ago because of the new consoles. It’s up at least 30%.” . “Sales are higher than expected for PS4 but lower than expected for Xbox One. For example, [on their respective launch days] we sold 350 PS4s compared to 70 Xbox Ones. I can’t give exact figures, but there’s probably a similar gap in terms of games sold for each system.” . “PS4 is doing a lot better.” Games Tied to New Consoles . “The [PS4 and Xbox One systems] we sell in the store don’t come with games. Generally, if you buy the console, you’re also buying two to three There is demand for a physical games, depending on whether [the console] comes with a second controller. copy of the game because If so, it’s usually three games; if not, it’s two games plus a controller.” people still want to play it, beat . “We offer a bunch of bundles, but you have to order them. We advertise the it in a month, then turn it in and bundles in the store. If you come in here and we’re out of stock but you really, really need the console by Christmas, we’ll sell you the bundle and get some money back to put guarantee shipping by Dec. 24. It’s more expensive that way, but it’s OK toward a new game. … There’s because all the different games you get in that bundle you’re probably going also the element of giving to buy anyway.” physical games as gifts: You . “I don’t recall whether PS3 and Xbox 360 were ever packaged as a bundle want something you can wrap when they first came out. ... The number of [physical] games people bought with those old consoles is probably the same as the number [two to three] up and hand to someone at they’re buying with the new ones.” Christmas, not something . “I think [the game disc tie ratio upon purchase] for the new consoles is what where you have to say, ‘Here’s we expected it would be.” a code to download it.’ That’s Expectations and Projections . “It’s safe to say that downloading will cut [the physical software attach rates no fun. for] the new consoles in half compared to last-gen consoles. People are GameStop Store Manager going to say, ‘Why do I need a physical game when I can just download it New York City Suburb and not leave the house?’”

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GameStop Corp.

. “At the same time, there is demand for a physical copy of the game because people still want to play it, beat it in a month, then turn it in and get some money back to put toward a new game.” . “The membership programs will probably get more people playing online because you get exclusive demos and promotions. For example, you might get to download a game a few weeks before it hits stores.” GameStop . “One thing we’re doing [to spur game disc sales with the new consoles] is a coupon that lets you trade in your old Xbox 360 games for the new, Xbox Our margin on buying and One versions for just $10.” (This promotion is available to GameStop’s PowerUp Rewards members and applies only to games bought at reselling a used game is 30%. GameStop within the first 30 days of the current-generation game’s For a new one, it’s less than release.) 5%. . “[Ramped-up] digital downloading will eat away at our sales of new games, without a doubt. We’re not immune to that. But you have to understand, we GameStop Store Manager New York City Suburb aren’t making any real money off new game sales in the first place. Where we make most of our money is used games. And there will always be a demand for that. Our margin on buying and reselling a used game is 30%. For a new one, it’s less than 5%.” . “We realize the pure gamers are going to start downloading, especially if they’re doing things like offerings online- only exclusives. But even with that, you’re still paying full price, or close to full price, and you’re stuck with that [downloaded] game forever, and it’s harder for you to share it or lend it to a friend.” . “Another drawback to downloading is there’s a bigger security concern. You have to put your credit card information online and leave it there, so you’re very vulnerable to getting hacked.” . “There’s also the element of giving physical games as gifts: You want something you can wrap up and hand to someone at Christmas, not something where you have to say, ‘Here’s a code to download it.’ That’s no fun.”

3. Gaming advisor for a Kansas City GameStop store The number of games sold with each new console is about the same as the number sold with other systems. Most customers buy two games with the Xbox and PS4, and advance sales have been good. The downloadable virtues of the new consoles should help online game sales, especially initially. Still, people are buying a lot of game discs for other systems. Sales of Game Discs . “November sales were great although I can’t compare it to last November as I wasn’t here. We had a big crowd waiting for the store to open on midnight Black Friday. A lot of games were discounted, but none of the new ones for PS4 and Xbox One.” . “Sales were better than expected; I was actually shocked. We sold quite a few games for the new consoles even before they came out, and that surprised me. There was a lot being said about limits people would have with the Xbox, but its games still sold in advance.” Games Tied to New Consoles . “On average, customers have bought about two new games with each of the Xbox and PS4 consoles. So that has raised game sales in the store somewhat.” . “The number of games sold with the new consoles is about the same as the number that people buy with other consoles, maybe slightly more. I don’t know how the initial sales of games with these systems compare to other new launches since I have only been with GameStop since February.” Expectations and Projections . “We sold about as many physical games with the new consoles as I figured, but the advance sales exceeded my expectations.” . “The better downloading capability of the new consoles should improve sales of games online, especially at first. I remember when I bought the PS3, I got more games online because I had the hard drive space and it was cool to download so easily. But then I started going back to the physical games.” . “Only a few people complained about downloading glitches with the new consoles, more so with the Xbox, but they were ironed out by the companies.”

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GameStop Corp.

. “The membership program and 10% discount should help sales of preowned games once those games start coming back to us for resale. So far, that hasn’t happened much because they are so new.” GameStop . “We have not been told what special promotions are planned for the holidays. Usually we only hear a day or two in advance.” . “What we are pushing now is the 2,500 games for under $20. We’ve discounted a lot of games to fall into that category. Many are $9.99 and $14.99.” . “We don’t plan any discounts for the new console games, as far as I know. We only have one Xbox console in stock, and we are out of the PS4. We are supposed to get two shipments next week.” . “Used game sales won’t be affected much by the new consoles for a while, I don’t think. People will play the new games and let others play them. … Eventually those games will be coming back to us and should sell well.” . “Download games will be more popular with the new consoles, but there are lot of people who like to have the game in hand. The online prices of older games are attractive sometimes. There was one recent game I bought that that was $30 at the store but on sale for $19.99 online.”

4. Associate a New York City GameStop store Enhanced downloading capabilities will cut the long-term game disc tie ratio of PS4 and Xbox One by as much as half when compared with PS3 and Xbox 360. Still, GameStop, which relies on resales, believes enough customers still prefer game discs because these can be easily shared, resold and purchased for less. This store sells one to two games along with each new console, keeping with expectations and comparable to the early attach rates of the prior-generation consoles. This store quickly sells out of the nonbundled consoles, which is the only type it carries in stock. It has been able to steer many customers to costlier special-order bundles with guaranteed pre-Christmas delivery. Sales of Game Discs . “I couldn’t say exactly how many more games we sold last month compared to November 2012, but I’m sure it’s higher. The release of Xbox One definitely boosted those numbers and brought more people in the store, whether to buy that or something else.” . “We knew we would get a boost in game sales because of the new consoles. I would say the increase [in physical games sales] was in line with You need the customer our expectations.” Games Tied to New Consoles memberships to play online. . “Since both of the new systems came out, our game sales have been up … I’m sure that will also get more [both] for the new consoles and the older consoles, because more people people downloading games are coming to the store.” online, especially for people . “The consoles that we actually sell on the floor—when we have them in who like multiplayer games. I stock—don’t come bundled with games. We have lots of themed bundles for the new consoles, like sports or shooter games, but you can only get those think it’s all just part of things online or by special-ordering them at the store.” moving online—just like CDs . “We sell out very quickly every time we get the new consoles in stock. Right and DVDs did. now [on a Saturday afternoon], we don’t have either of the new consoles in stock.” GameStop Store Associate . “They sell out so quickly. I’d say most of our sales are coming from special- New York City order bundles. . “The customers that do get lucky and buy one of the [nonbundled] systems when they’re in stock are usually walking out with two games for the new console.” . “The most popular games for both consoles are Call of Duty: Ghosts and [Ubisoft Entertainment S.A..’s/EPA:UBI/UBSFY] Assassin’s Creed.” . “The only bundle that we advertise here in the store is an $859 Xbox One holiday bundle, which comes with four games, an extra controller and a one-year membership [for Xbox Live]. If people are special-ordering a new Xbox One here in the store, that’s the one they’re usually getting. I think it’s the most expensive bundle you can get from GameStop. There are cheaper ones on our website. … Of course, if somebody asks, we’ll tell them about those.”

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GameStop Corp.

. “Demand is so high that people are actually willing to pay for the $859 bundle, even though it’s nearly twice as much as the regular [nonbundled] Xbox One [$499].” . “I wasn’t here when the old consoles [PS3 and Xbox360] came out, but I would guess people were buying the same number of games—one or two—with those systems.” . “Most of the PS3s and Xbox 360s that you can buy here now are used and don’t have any games bundled with them. People getting those usually buy a few more games—maybe three or four—because they can get some cheaper used games.” Expectations and Projections . “[Ramped-up] digital downloading [on the new systems] will probably reduce the number of physical games people buy. I would guess it’ll cut the number [of physical games purchased for the new consoles] in half from what it was for PS3 and Xbox 360.” . “Once people get used to the idea of downloading games, I bet it’ll really take off.” . “You need the customer memberships to play online. I’m sure that will also get more people downloading games online, especially for people who like multiplayer games. I think it’s all just part of things moving online—just like CDs and DVDs did.” GameStop . “GameStop will probably be hurt a little if more people begin downloading their games—but not too much. Most of our business comes from buying and selling used games, and I think there will still be plenty of people who are looking to do that. Sometimes you don’t want to commit to buying the game at full price, or you buy it new and get tired of it.” . “People might want to play one of the older games but not pay full price for it [by buying a physical copy off the shelf or downloading it online], so they’ll come here and get it used.”

5. GameStop assistant manager in Wisconsin Although downloading is easier through the newest gaming systems, the technology will not challenge game disc sales for some time to come. This GameStop sells 100 games daily on average and double that on a busy day. The store is exceeding sales goals and selling more games year to year. Games are selling briskly for the new consoles, which have been sold out since Black Friday. The store sold 15 PS4s to its first 15 customers, and its 30 Xbox One consoles were sold out by day’s end. Bundles are available to ship directly to customers but not for in-store purchasing. Sales of Game Discs . “We are selling more games than ever. We are most definitely selling more than we were this time last year.” . “Downloading games has become more popular with the new systems, but not so much that it has affected our sales in any way.” . “Game sales this November have exceeded our expectations.” . “On an average day, we sell at least 100 games. On good days, it is double The downloading capabilities that or more. It is not even 2 p.m., and we have already sold over 100 games today.” will not have much effect on . “With [PlayStation Plus] you get free downloads every month of new games, physical game purchases over so if you play a lot, the $50 fee is totally worth it.” the life of the console. Gamers Games Tied to New Consoles like to share games, bring them . “Game sales are great since the launch. The most popular so far for the new consoles are [Take-Two’s] NBA games, [Microsoft’s] Ryse: Son of Rome to friends’ houses and trade and [Electronic Arts Inc.’s/EA] Battlefield.” them in. You cannot do any of . “Customers who were lucky and got the new consoles on Black Friday that with a download. All you bought several games as well.” have is the file. . “The Xbox One and PS4 consoles we got in were just that: There were no games included, and we did not get bundles in the store. We can order GameStop Assistant Manager them for you and have them shipped directly to you.” Wisconsin . “The 15 PS4 consoles we got in for Black Friday sold out in the first hour. The first 15 customers in our store bought them. But with the Xbox Ones, we still had them at 4 p.m. Then all of sudden, people bought them up. We got in 30 total and were sold out by the end of the day.”

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GameStop Corp.

. “We have been sold out of PS4 and Xbox One consoles since Black Friday. We don’t know when and if we will get more or how many we will get.” . “We can preorder an Xbox bundle sent directly to customers for $739.95. It ships on Dec. 16. For that you get Xbox One Regular Edition Console, three games [Ryse: Son of Rome, Capcom Co. Ltd.’s/TYO:9697 Dead Rising 3 and Microsoft’s Forza 5] and one extra wireless controller. But we don’t have the bundles available in the store.” Expectations and Projections . “The PS4 system and the new Xbox are practically the same console. One does not outrank the other in terms of what they have to offer.” . “The downloading capabilities will not have much effect on physical game purchases over the life of the console. Gamers like to share games, bring them to friends’ houses and trade them in. You cannot do any of that with a download. All you have is the file.” GameStop . “We offer new bundles every week. We are always changing them, so customers pay close attention until one comes up with the features they want.” . “We have a promotion that you get 30% extra in-store credit when you trade in any games, accessories, systems, smartphones or tablets towards any preowned products or a choice of new games including several of the top sellers.”

6. Gaming advisor for a GameStop store in southern Florida Game disc sales have increased year to year. Multiple popular games were released around the same time and have driven sales to exceed expectations. No slowdown in game disc sales is expected, given the many benefits of owning versus the digital version. PS4 and Xbox One consoles have been selling evenly, and game disc sales have been one to two titles per console for both PS4 and Xbox One. Sales of Game Discs . “A lot more sales of physical games this year over last year. Last year not as many games were released at this time.” . “All of the most popular games have come out within weeks of each other, and it is driving sales.” . “We definitely exceeded expectations of games sales. November was a great sales month because of all the new games, Black Friday, Christmas coming up and the new consoles being released.” Games Tied to New Consoles . “The new consoles has pushed game sales hugely for us.” . “The PS4 and Xbox One don’t come with any physical games. Customers are Downloading of games will be purchasing one to two games with the initial purchase. That is about the convenient for some, but I same as with previous console releases.” Expectations and Projections don’t think it will impact us . “Sales have been about even—1:1 between the Xbox and PS4. No other until the downloaded games console is even competing with them. We marked the Nintendo [Co. have the same benefits as the Ltd./TYO:7974/NTDOY] Wii down the week after Thanksgiving because it physical games. was not selling. It still isn’t.” . “Gamers like to own the games. It has many more benefits to own the GameStop Store Gaming Advisor physical copy right now. You can trade it and sell it when you’re done Southern Florida playing. You can also bring it with you to friends. The downloading of games will be convenient for some, but I don’t think it will impact us until the downloaded games have the same benefits as the physical games.” GameStop . “I am not aware of any promotions or discounts until they are published from corporate. The flier tells you everything we have going on in our store as far as discounts and promos.” . “Gamers are still going to come and buy from GameStop, even when they can download games. The trade-in and cash value of the physical game are not decreasing, and that is worth it to our customers.”

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GameStop Corp.

7. GameStop store manager in an Atlanta suburb Game disc sales were up 20% compared with November last year, thanks to the new consoles. Physical games will remain popular because people are afraid to put financial information online. The physical tie ratio is double for the PS4 and Xbox One over other systems. Plans to market the new consoles will consist of initiatives and better merchandising. Sales of Game Discs . “Physical game sales last month compared to November 2012 were up about 20%.” . “The sales fell in line with our expectations.” Games Tied to New Consoles . “[The consoles] definitely increased sales in the store, even with a big push to digital.” . “There is a fear in consumers for digital things—putting all your card information on there. Last year PlayStation was hacked, and consumers’ information was taken.” . “Customers are buying fewer games with consoles than we expected.” . “No games are included with consoles. All consoles when they first launch, except for the Wii, don’t come with games or bundles. After the launch, GameStop corporate will offer bundles because we have different ones than, say, Target [Corp./TGT] or Wal-Mart [Stores Inc./WMT].” . “Physical tie ratio is up a little. We usually shoot for 4-1 and we aimed for 5-1 ratio, and we definitely hit that.” Expectations and Projections . “The expected difference in the physical tie ratio of PS4 and Xbox One is doubled over other systems.” . “A lot of it has to do with these are big purchases for people, and if they are spending $600 anyway it’s easier to add another game or two.” GameStop . “Our Black Friday sale was pretty big and we had good deals, but past that, I’m not sure. We have marketing initiatives to try, better merchandising things in-store but nothing too drastic.” . “We always do a trade-in bonus. Say you bring a game in to trade for $10, we give you $13 if it’s for a PS4 or Xbox One game.” . “The reason people will shop here? For the security of not having to put credit card info online. And the trade-in program.”

8. GameStop assistant manager in Wisconsin Initial fears of declining game disc sales related to enhanced downloading capabilities have proven to be unfounded; in fact, this store’s November sales exceeded expectations and beat last year’s numbers. Downloading has not caught on as quickly as predicted and will take a few years to do so. Gamers prefer physical copies because they want it in case of technical difficulties, and some like to collect the cases. Everything related to the new consoles is selling well—even if a customer has yet to buy the gaming systems. Customers purchase a few games with the new consoles, and bundles with three to five games are available but only through direct shipping. Although game titles for the new systems are limited, disc sales are expected to remain strong. Sales of preowned games also will be stable as customers keep playing their old systems while waiting for the next generation to become available. Sales of Game Discs . “Our game sales are awesome. We are beating our goals and expectations. We are totally up from this time last year.” . “People will always want the physical game. Some gamers collect the cases, and they are really into it. And if your system crashes, you still have the physical disc rather than having to get it back when there are inevitable technical difficulties.” Games Tied to New Consoles . “The new launch has been great for all game sales, especially for the new consoles. They all sell now since there are not that many releases yet, but they are coming out every week.” . “Even if they don’t have the new console yet, people are buying up anything and everything to do with the new systems. Controllers, headsets and games are all flying off the shelves.”

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GameStop Corp.

. “We have not had any games come with the new consoles, so customers have to purchase them separately—and they are. They average $60 each.” . “The newly released games have contributed to our increase in game sales. Most people get at least two to three games when they get a PS4 or Xbox One.” . “Assassin’s Creed, Call of Duty and Dead Rising 3 are among the top sellers for the new systems.” . “Most of the ship-direct bundles of the new systems have at least three games as part of it. It varies bundle to bundle, and there are new ones weekly since the release [of the new consoles].” . “We have a presale on a PS4 Kids Epic Bundle, which is being shipped on Dec. 17. You get the console and five games: [Take-Two/2K Sports’] NBA 2K14, [Sony’s] Knack, [EA’s] Madden NFL 25, [Time Warner Inc.’s/TWX] Lego Marvel Super Heroes and [EA’s] FIFA 14. An extra dual controller and one year of PlayStation Plus are also included. The cost is $809.92.” Expectations and Projections . “Over the life of the systems, say five years from now, there will be more Over the life of the systems, say downloading than there is now. How much more is hard to say, but it has five years from now, there will not caught on as fast as we thought it might.” be more downloading than . “Games are going to sell for the older systems for some time because there there is now. How much more are so many of them out there. It is expensive to upgrade.” is hard to say, but it has not . “With limited games, people won’t be trading in those for the new systems until more are released. So we expect new game sales to continue to grow.” caught on as fast as we GameStop thought it might. . “We have a promotion now that you can get a new game for $9.99 with the GameStop Store Assistant Manager trade-in of two eligible games. That is a credit of up to $50.” Wisconsin . “We are giving $30 in store credit when you trade in certain games and 30% more store credit on accessories and preowned games until Dec. 29.” . “Used game sales will be stable for a while since the new systems are hard to come by. People will hold onto their older systems until they are more available. Meanwhile, they will want more games to play. They won’t want to buy new ones since they will be upgrading, so they will buy preowned.” . “For the extra $100, the Xbox One has more features that are useful in everyday life.” . “If you are a Time Warner [Cable Inc./TWC] customer, you can use the Xbox One to change channels. If you cannot locate your TV remote, the Xbox will respond to voice command and do it for you. You can also use it as your DVR.” . “The Xbox One also come with a built-in Blu-ray player and great graphic capabilities.” . “With the customers who collect covers, they come in to look at the artwork. That won’t change, no matter how popular downloads become. The collectors are serious.”

9. GameStop store manager in an Atlanta suburb Games sales fell 3% in November year to year. Customers are hesitant to buy the new systems, as the related game releases are slow; they purchase two to three games along with the console. Consoles with bundled games are offered only online. This source does not foresee any dramatic drop in the sale of game discs. GameStop heavily promotes its game trade-in program. Sales of Game Discs . “Physical game sales this November compared to last November was a little less, only about 3%.” . “Game sales in November fell a little short of expectations.” Games Tied to New Consoles . “Customers are a little hesitant about purchasing the new systems because there aren’t that many games available yet.” . “All the bundled games we sold were bundled only online. We don’t bundle games with consoles in the store. You buy a console, that’s all you get.” . “I’d say the physical tie ratio with the new systems is the same as in prior releases.” Expectations and Projections . “The expected physical tie ratio of PS4 and Xbox One compared to other systems is a lot lower [at this point]. There are not as many titles available.”

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GameStop Corp.

. “Physical games purchases won’t be affected because customers have been able to download games for years for the 360 and PS3, and it hasn’t Physical games purchases affected their physical game purchases.” . “With the whole trade-in going on, it’s going to keep physical sales up there.” won’t be affected because GameStop customers have been able to . “We will continue to do what we always do to spur physical games sales: download games for years for push trade-in.” the 360 and PS3, and it hasn’t . “As far as spurring physical purchases to PS4 and Xbox One owners, there affected their physical game hasn’t been any sales for the physical games, but there may be closer to the holidays. When the consoles came out, there were discounts on purchases. subscriptions but no real deals. I think people will hold onto these new GameStop Store Manager consoles longer because the game releases are slower.” Atlanta Suburb . “With a physical game, the customer can come [to GameStop] and trade in a game and put it toward a new game. It saves them money.”

2) GameStop Customers These six sources, including an Xbox One owner and some who soon hope to own a new generation console, shop at GameStop based on its pricing, rewards program, used game/trade-in option and superior selection of games (when in stock). Five of the six also cited a preference for game discs over downloadable titles, and none of the five expects that to change. The other source hopes to move to downloading most of his content, assuming that technical and DRM issues do not impede game performance.

KEY SILO FINDINGS Sales of Game Discs - 5 of 6 GameStop customers prefer video game discs over digital downloading at this point. Expectations and Projections - Sources cited an interest in downloading games, but only 1 of the 6 was firm that this will be his primary method of acquiring games. - Pricing would need to be substantially lower for downloadable games for the technology to overcome the perceived benefits of having a physical copy. Games and Retail Sales - 4 of 6 preferred GameStop for its pricing, rewards program and selection of titles.

1. Mother of 12-year-old son, Florida This new Xbox One owner is buying more game discs from GameStop than in the past because of the retailer’s rewards program. She also likes being able to trade in and carry around the physical discs. She expects 60% of I will buy the physical games at her game purchases to be in disc form and 40% in downloads. GameStop over the download Sales of Game Discs because of the resale option and the . “I bought four new games for the Xbox, two were before I bought the rewards points I can get toward console. I couldn’t pass up the deals on Black Friday at GameStop.” purchases. Also, I know my son and . “I like GameStop because of the discounts and rewards they offer. I bought more games this season because of the new console, and I his friends like to play at each other’s became a rewards member to get points towards the purchase of houses so the physical copy can games.” travel; that is an added bonus. Games Tied to New Consoles . “No games came with the system. I purchased four games from GameStop Customer Florida

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GameStop Corp.

GameStop, all new in the last two months.” Expectations and Projections . “With the downloading capabilities of the new console and the fact that some games are only available online with Xbox, it will be a 60/40 split of physical games purchased to downloaded.” . “Downloaded games are a final sale; you can’t get any money back on them.” Games and Retail Sales . “If a game has a special level on the physical or downloaded version, I will go for that one.” . “GameStop’s rewards program is great. That will keep me coming back and buying used games to save money.” . “I will buy the physical games at GameStop over the download because of the resale option and the rewards points I can get toward purchases. Also, I know my son and his friends like to play at each other’s houses so the physical copy can travel; that is an added bonus.”

2. 15-year-old male, Kansas City, MO This GameStop customer hopes to get a PS4 for Christmas. He will buy more games with this console than if he just had kept his PS3 because of the variety and newness, and he will be tempted to buy more downloaded games than in the past because of convenience. Still, he prefers game discs because he is wary of technical glitches. Sales of Game Discs . “I have not bought a game at GameStop in a couple months, but I will if I get the new PS4 for Christmas. I usually go to Target for games because they are more likely have the ones I want in stock. GameStop runs out of popular games sometimes.” . “I would be more likely to buy at GameStop this season if I get the PS4 because they have a greater variety of games than Target does—when they are in stock.” Membership programs will Games Tied to New Consoles make a difference. For $50 or . “Initially, I would probably buy two physical games with my new PS4.” . “Games don’t come with the new consoles, but there were some bundling $100 with the new consoles promotions with the PS4 on Black Friday. Something like that would interest you can get online accounts, me.” like the PlayStation network Expectations and Projections [PlayStation Plus], and play . “I am likely to buy more games with the PS4 than with my PS3 because I think a greater variety of games is being offered.” games at the same time as . “Greater downloading capability is attractive. It is more convenient to buy your friends. online games, and you can try them out somewhat before you buy them.” GameStop Customer . “Membership programs will make a difference. For $50 or $100 with the Kansas City, MO new consoles you can get online accounts, like the PlayStation network [PlayStation Plus], and play games at the same time as your friends.” Games and Retail Sales . “In a physical game, I prefer to have Grand Theft Auto and Call of Duty. I play them a lot.” . “GameStop runs a lot of ads on TV about the consoles and games and the advantages over rival brands. That does get my attention.” . “While the downloadable games have their advantages, I still prefer the physical games. You can’t always trust technology to store a game that you’re paying $60 for. It could be faulty, and you end up not having the game.”

3. Woman in her late 40s, Atlanta suburb This shopper’s 15-year-old son has an Xbox. She does not plan to upgrade his console. She likes downloadable games for the lack of clutter, but she favors game discs because they can be transported. Her son does not like the length of time needed to download games. Both believe a market for physical games will always exist. GameStop is their store of choice for all their video gaming needs.

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GameStop Corp.

Sales of Game Discs . “I recently bought three preowned games that were in a special bin.” . “I will probably be less like to buy physical games because right now we have given our son’s list of games he wants for other people to buy him for Christmas.” Games Tied to New Consoles . “I did not purchase one of the new systems.” Expectations and Projections . “I do not plan to purchase a new console.” . “We have an Xbox and will not upgrade to Xbox One.” . “We have downloaded games to my son’s existing console, and I like it. Less clutter.” . “Downloadable games will drastically reduce my purchase of physical games. However, my son is hesitant to have only downloadable games because he is afraid his hard drive will crash.” . “When my son earns money from odd jobs, he will purchase a physical game. He says it takes forever for the game to download, and that until he can download a game in under 10 minutes he’d rather go to the store.” . “I don’t think it is the end of physical games. There will always be a reason to buy a hard copy—mainly for transportable reasons.” Games and Retail Sales . “We prefer to have a physical copy of the Call of Duty games. My son likes to take them to friends’ houses.” . “I think GameStop is really ramping up the idea of trading in physical games.” . “We prefer GameStop as there is easy access to a store. I like the size of the store; it’s not too overwhelming.” . “I will be purchasing the Xbox Live club card this Christmas season.” . “I think my GameStop purchases will be slowing down a little as my son is getting older and outgrowing it.” . “My main purpose in buying physical games is so my son can take it to a friend’s house if they don’t have the game.”

4. 25-year-old Wisconsin man This source is open to downloading games but prefers owning the game disc in nearly all cases. Downloaded versions often cost more. He has only downloaded two games, and one was a PlayStation membership exclusive. He likes to swap games with friends and to trade in for credit toward a new game. He buys three to five games yearly and plans to purchase a new PS4 later next year once more games are made available for the console. Sales of Game Discs . “I am considering purchasing a game today. I generally like the action, war games and zombie games.” . “I am buying the same amount of games this season as I was last season. Next season I may buy more when I get the PS4.” Games Tied to New Consoles . “I have not purchased the new PS4 yet, but I plan to next year. I want to wait until they release more games for it.” . “I would purchase other games outside the bundle if I got a bundle. I tire of games somewhat quickly. I like to have many choices to move around to so I don’t wear myself out on one game.” Expectations and Projections . “I buy three to five games every year and have for years. In total over the years, I have downloaded only two games.” I don’t expect to download . “I don’t expect to download more games than I have previously when I get more games than I have the PS4, unless they start to drop the prices so that they are significantly previously when I get the PS4, lower than the physical product.” . “I have the PlayStation membership, so I will play their downloaded games unless they start to drop the more often once I buy my PS4.” prices so that they are Games and Retail Sales significantly lower than the . “I prefer to have nearly all my games as purchased actual games. I don’t physical product. consider myself a downloader of games since I do it so infrequently.” . “I trade games with my friends, so I like to have the physical copy. I GameStop Customer sometimes also trade them in for credit towards a new game. That does not Wisconsin work with a download.”

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GameStop Corp.

. “I did download a game once that was only available as a download. I would have preferred the hard copy, but I wanted it enough to settle for the download.” . “GameStop is offering some extra credit now when you trade in games.” . “They don’t really need to do much to sell the games for the new systems. There are not that many to choose from yet.” . “I prefer to shop in the store because I like to see what is out there.”

5. Mother of two young sons, Pennsylvania This source shops at GameStop fairly often and purchased a hunting game for her youngest son one month ago. She has not purchased a PlayStation 4 or Xbox One. This holiday season, her kids want iPhones, so she is less likely to buy game discs than in previous years. She would prefer downloadable games in the future because discs can be easily damaged. However, buying used games is cheaper, and often her sons like to take their games to friends’ houses. GameStop has been advertising in her area this holiday season. Sales of Game Discs . “A month ago I purchased a hunting game at GameStop for my youngest son.” It is cheaper to buy used . “I am less likely to buy physical games at GameStop this season versus prior games, so this could influence seasons because my children wanted iPhones instead of games.” me to buy them at the store . “It is cheaper to buy used games, so this could influence me to buy them at the store instead of online.” instead of online. . “For games my kids like to take to friends’ houses, I would likely purchase GameStop Customer the physical copy.” Pennsylvania Games Tied to New Consoles . “I did not buy either of these systems [PS4 or Xbox One].” Expectations and Projections . “I will buy fewer physical games—because they are easily damaged—once there are greater downloading capabilities of the consoles.” Games and Retail Sales . “I have seen several ads for GameStop, but nothing much other than that.”

6. 31-year-old New York City man This source expects to download most if not all of the games for the PS4 he is planning to buy this month. He has purchased game discs at GameStop but believes the format is becoming obsolete. He also has qualms with GameStop’s resale business, believing it to be financially harmful to game makers. He said GameStop’s outlook is poor because digital downloading eventually will quiet gamers’ appetite for physical discs. Amazon.com Inc. (AMZN) also poses a threat, with its fast shipping and sometimes lower prices. GameStop’s best bet is to undercut online prices, but that means slicing margins. Sales of Game Discs . “I recently bought [Take-Two’s] BioShock Infinite for Xbox 360 from GameStop. I bought it new.” . “I don’t like to buy games used from GameStop. Consumers need to support the games they love, or else new ones won’t get made. … I have a problem with the fact that GameStop will sell a used game at $5 to $10 less [than the price of the new version] and won’t have to pay anything back to the game publishers or creators.” . “I am less likely to buy physical games at GameStop this holiday season. First off, GameStop is a largely pointless middleman with a used-game policy that’s harmful to creators and publishers. Second, Amazon is often $5 to $10 cheaper than GameStop, even for new titles, and its shipping times frequently beat GameStop’s availability. Another reason is the increasing availability of new titles that are available for download. And for a good game, I’m usually willing to pay an extra $5 to $10 for the convenience of downloading it.” Games Tied to New Consoles

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GameStop Corp.

. “I am planning to buy a PS4 for myself in the next week or two. I’ll probably just order the console online. And at this point, I may not buy any physical games for it at all.” . “Sony has yet to totally crystallize their online strategy, but eventually you’ll be able to download titles and play as you download, which essentially is gaming on-demand. That’s something I’ll probably be willing to pay full price for.” . “There are always bundles available, but I’m not sure I’d purchase one. I almost exclusively buy games outside of bundles.” Expectations and Projections . “For earlier consoles, I mainly bought physical games. I did download some I am planning to buy a PS4 for games, but they were mostly indie titles that didn’t have a physical release. myself in the next week or two. Xbox Live Arcade had some incredible titles, including Limbo, Braid, Fez, Castle Crashers, Super Meat Boy. These were some of my favorite games of I’ll probably just order the the last six years. They were lower-priced and often shorter in length, but console online. And at this ended up being more interesting and more creative.” point, I may not buy any . “Most if not all of my gaming purchases for the PS4 will be downloads.” physical games for it at all. . “The PS4 membership program won’t influence my purchases. I’m sick of paying monthly fees. I’ll download the titles I want, unless they really are GameStop Customer generous with the giveaways.” New York City Games and Retail Sales . “I haven’t ruled out buying a physical game. I just think it’s less and less likely. It is still nice to hold a game in your hand, but I’m not sure how long that’s going to keep me buying boxes I have to store in my closet.” . “The biggest thing that would drive me to continue buying physical games is if these companies prove to be unreliable at serving you the content you’ve already paid for. Then I would start buying physical releases exclusively to avoid dealing with customer service. The DRM imposed may end up pushing me back if they are too draconian, which would be a shame as I think downloading is real progress.” . “GameStop’s outlook is poor, assuming that Americans have the appropriate bandwidth to purchase and play games quickly online. Sony is rolling out the ability to play while downloading, and if that ends up working well, it’s hard to imagine wanting a physical copy. Regardless, Amazon is becoming a reliable way to obtain physical games quickly as well. Frankly, I view that as another credible threat to GameStop’s business model. Secondly, more casual mobile gaming on [Apple Inc.’s/AAPL] iOS is stealing quite a bit of attention and sales from consoles, period. That’s a market in which GameStop cannot possibly participate. At this point, I fear GameStop’s best bet is to undercut online prices, but that means slicing margins and reduced profitability. I sure as heck would not be investing in any physical game retailer at this point.”

3) Owners of New Generation Consoles These six sources said downloading games is more attractive on the new consoles, and yet all indicated a preference for physical copies because of possible glitches in downloaded games as well as the benefits of owning a disc. Four of the six have downloaded some content to their new consoles, though only one has paid specifically for downloaded titles. GameStop is a preferred gaming retailer because of its superior title selection, pricing and the trade-in/used program.

KEY SILO FINDINGS Purchases of Game Discs - All 6 indicated a clear preference for game discs over downloadable titles. Digital purchases might become more popular if hard drive space and download speed issues are improved on new consoles. Games Tied to New Consoles - Customers were open to using downloads for add-ons and enhancements, but prefer to own a physical copy of games. - 4 have downloaded games on their new console, but only 1 paid specifically for the game. Others are members of PlayStation Plus, which provides a free game download each month. Projections

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GameStop Corp.

- Downloading is becoming more attractive, but sources plan to favor physical copies, especially of the blockbuster and longer-narrative games. Games and Retail Sales - 5 of the 6 favor GameStop for its selection, pricing and resale program.

1. Working college student, PS4 owner, Texas This source plays games on several consoles, including both the PS3 and PS4, as well as on his computer. He prefers to have a physical copy of console games. However, he does download computer games from Valve Corp.’s Steam because of its exceptional promotional pricing on recent releases. His game discs purchases for the PS4 will be similar to those for previous consoles, but he is adding free game downloads from his PlayStation Plus membership. He expects the general gaming population, but not himself, to transition half of their game purchases to downloads in the next few years. Purchases of Game Discs . “I have recently purchased several games for my computer online from Steam. They have ridiculous sales on new games with 75% off for a short I am protective of my hard drive event. I watch for their daily promotions to get some really good deals on space. I am not likely to games.” . “I still have my PS3 because it plays all the back games from PS1 through download a full-size 20 GB PS3, and PS4 will not do that. I have older games I like to play on it, but I game because my library of probably will not be buying many more games for it now.” games would be way too big. Games Tied to New Consoles But I will download the smaller . “I got my console at the midnight release event in November at GameStop. I $10 to $15 indie games. They had preordered it. It did not come with anything, just the console.” . “I am a member of [PlayStation] Plus, so I get free full game downloads download pretty quickly even every month or so. I got Resogun, DC Universe and Warframe downloads though my Internet is not the free.” best, and they do not take up . “I have only purchased one physical game for my PS4 so far, and it is Call of much memory. Duty: Ghosts Special Edition.” . “I am protective of my hard drive space. I am not likely to download a full- PS4 Console Owner size 20 GB game because my library of games would be way too big. But I Texas will download the smaller $10 to $15 indie games. They download pretty quickly even though my Internet is not the best, and they do not take up much memory.” . “This new console has a dual processor. A new downloaded game will play after it is maybe 5% downloaded, which only takes a few minutes, but only on specific games designed for that kind of download. Otherwise, you can play another game while it downloads. … A full $60 game download would still probably take three to four hours, slower if I am playing another game using bandwidth at the same time.” I will never completely Projections transition to downloads. For . “I never did any downloads on my PS3, but I am doing the free downloads from the Plus membership. They are full games, not just free trials, but one thing, I like to own usually they are the smaller, cheaper games so they are quick to something when I pay for it. … A download.” download is really just a license . “I expect the number of physical games I purchase for this console will be to play a game, and they pretty consistent with my previous game purchases. I usually buy 15 to 17 control my access to play it. games a year, and sometimes I will trade a game back in for credit with GameStop. Occasionally, I will find a nice deal on a used game, but usually I That bothers me. I had a shop new.” situation once where my . “So far I have not purchased any downloads with my Plus membership, only system got hacked, and they the free games downloaded. But I expect other people may be downloading revoked my license to play. more than me.” . “There will always be a need for physical games. For one thing, not PS4 Console Owner everyone has Internet available everywhere and all the time. Consider how Texas

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GameStop Corp.

many kids who do not even have Internet at home. And a game system should be playable if all you have is a power outlet.” . “I am a little different than typical gamers. I do not buy as many games as other gamers I know. I am really picky before I buy a game. I expect other people will transition to maybe half downloads over the next few years, but I likely will never go that far.” . “I will never completely transition to downloads. For one thing, I like to own something when I pay for it.” Games and Retail Sales . “I like GameStop for my console games and Steam always for computer games.” . “I will likely spend less this year on games because of the limited availability of PS4 games. Last year, I was buying for my PS3; there were a ton of games available to choose from.” . “I have seen some promotional events at GameStop where they are offering like 50% of new value on returned games, but it only applies on credit toward a new PS4 or Xbox One. That is a really good deal if you have games to sell back because usually they only give maybe 10% to 20% of new value on a trade. Everything this year is geared toward pushing console purchases, not games.” . “A download is really just a license to play a game, and they control my access to play it. That bothers me. I had a situation once where my system got hacked, and they revoked my license to play. It was a mess. I just like to have control over my game.”

2. Military contractor, PS4 owner, Michigan This source shops for deals on games and uses several systems, including Xbox 360, PS3 and Wii U. He is not motivated to purchase downloads because they are a set price, while retailers will discount game discs. Newer systems’ increased capacity is no different than an upgrade to a PS3 or a Wii U. He expects his game buying to be very similar for the PS4 as it has been for his previous consoles. He expects game discs to continue to be in demand. Purchases of Game Discs . “I have purchased some games for my other systems over the last few months. I downloaded one game from Nintendo for my Xbox 360, and I purchased a couple of games at Best Buy [Co. Inc./BBY], one for my 360 and another for my PS3. Then I bought a game for my PS3 at Toys ‘R’ Us [Inc.], and another for my 360 at GameStop. I’m just taking advantage of the best deals as I see them.” . “I do not typically shop at GameStop unless the game I want is just not available anywhere else. Sometimes I will shop a sale there.” . “I tend to not get newly released games for a while because I shop sales.” We just like to buy something . “No used games for me. I think they give too low a trade credit, so I just do we can hold in our hands, give not trade or buy used.” away as a gift, loan it out, own . “Best Buy does have a used program, but they are just getting started and do not have much selection yet. They give bonuses toward new game it, instead of just a license to purchases, and it seems like it will be a more fair system for the user than use it. the program at GameStop. We will see.” PS4 Console Owner Games Tied to New Consoles Michigan . “I got my PS4 on release day at Wal-Mart, and it came in a bundle with one game controller and one game, Knack, for $517.96.” . “I have also purchased [EA’s] Madden 25, [Sony’s] Killzone: Shadow Fall and Call of Duty: Ghosts for it, at Wal-Mart. Then I have some free downloads from Plus [PlayStation Plus].” . “Price is really the driving factor in all my game purchases. I shop sales and deals. I have seen some discounted games this holiday season, but not on any games for the PS4.” Projections . “I have always shopped sales for games, and this console will be no different. I mean, price and availability are what drives my purchasing, and they will remain the compelling factors for me.” . “It is easy enough to update the hard drive on the PS3 to increase capacity, and the Wii U will also easily update to increase the memory. I like that it has more memory, but if it did not come with enough, I would just expand it anyway.”

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GameStop Corp.

. “Sometimes there is a special game I will want as a download instead of as a physical copy. Also, there are add-ons and extras that I will download, but I think there will always be a reason for physical games. We just like to buy something we can hold in our hands, give away as a gift, loan it out, own it, instead of just a license to use it.” . “I do anticipate the transition toward more downloads. It will take a long time though. By the time the next consoles come out, we may be about 25% downloads. But 75% will still want physical games. I really believe there are some people who will always want a physical game. That demand will never go completely away.” Games and Retail Sales . “I shop by price and probably buy more at Best Buy than anywhere else.” . “Typically the physical games will go on sale as a retailer tries to rotate stock before a download’s [release]. I will just wait for the sale and take the better price. Now if downloads were priced less … then I might be motivated to do more downloads. But I do not really foresee that happening either.”

3. Working family man, PS4 owner, New Mexico This source prefers physical discs to downloads because the Internet previously was too slow in his area and downloads were taking up too much memory on his hard drive. He has a membership in PlayStation Plus so he is able to play live online, and he thinks the value is good for the regular backups of all his online game play. He has purchased one physical game and two downloads for the PS4, and also has downloaded free games from the Plus membership. He does not expect to spend much more at GameStop this season because the new console was his big investment and the variety of games for the PS4 is limited so far. Purchases of Game Discs . “I purchased Call of Duty: Ghost before I got my PS4. Then I also got Battlefield 4 for my PS3; it was a joke, and I returned it three days later for store credit. I got both games new from GameStop.” . “I usually have to be interested in a particular game before I go to into the [GameStop] store.” . “Some of the games, like Call of Duty: Ghost, that are already out for PS3 are available to upgrade to PS4 for $10. So if you already have the game, it is totally worth it to buy the upgraded version of it.” Games Tied to New Consoles . “I bought my new PS4 online at eBay [Inc./EBAY] on Nov. 16 because everyone else had already sold through their first shipment. It did not come I prefer to have a hard copy of with any games or downloads; it was just the console.” . “I had already purchased Call of Duty: Ghost at GameStop, and have since a game, just to save the disk joined the Plus program. That came with a free download of Season Pass. I space. They are saying the hard also purchased downloads of Madden 25 and NCAA [Football] 14.” drives are huge, but you always . “I prefer to have a hard copy of a game, just to save the disk space. They want to have free disk space are saying the hard drives are huge, but you always want to have free disk space for backups and game play.” for backups and game play. . “Downloads for my PS3 were incredibly slow, sometimes six or seven hours, PS4 Console Owner so it was just not worth it. That is just the quality of Internet I can get where I New Mexico live. I have upgraded recently, and these new downloads were faster, but still, it took three hours or so. I could play my other game on disc, but I could not play the game that was downloading until it was completed.” . “I prefer to have the disc primarily to save memory on my console’s hard drive. On PS3, downloads just took up too much memory.” Projections . “The difference in the graphics between the two [PS3 and PS4] is just magnificent. So I will prefer games or upgrades for the PS4, rather than playing older games on my newer system. I think there are really only about 10 games out for the PS4 so far, but more will come out.” . “I expect I will only download add-ons or upgrades to hard copies of games I purchase. If I want to own a new game, I will still buy the physical copy.” . “PlayStation Plus membership is $47 a year. You get some free game downloads and trials, so you can see if you like a game before you commit to buying it. Also, every time you get online, it backs up your system. It is like a cloud backup. If something did get corrupted, you could recover all your online play from the backup.”

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GameStop Corp.

. “There will always be a reason for physical copies of games. Some downloads are just problematic. You buy it and spend six to seven hours downloading it, and then you find out it only partially downloaded.” . “I play another guy online, and he just wants a disc for everything. He prefers the hard copy. His Internet is slow too.” Games and Retail Sales . “I prefer GameStop or Wal-Mart. I like to buy used games at GameStop, and they have a warranty. Wal-Mart can only get new games, but sometimes they have it in stock when GameStop is sold out of a new game.” . “I may buy a few [Nintendo] DS games for the kids yet this season, but the new console was my big investment this year. I will not be making any more big purchases from GameStop this season. I guess that is similar to what I spent there last year as well.” . “I get rewards emails two or three a week from GameStop with specials and promotions, but I get them all year around. The promotions were most aggressive during the Black Friday/Cyber Monday week, but I would say they were still pretty similar to the deals last year.” . “I want a physical copy of a game because downloads are too slow and use up too much memory on my hard drive.”

4. College student, PS4 owner, Oregon This source is not motivated to download games when physical copies are easily accessible at his nearby Target. However, he might not purchase any more game discs once he figures out the download process. He is not yet a member of the PlayStation Plus program. The transition to digital game downloads is like anything else: Once people accept and adapt to it, physical game discs will go away. That transition will be completed after the next consoles come out. Purchases of Game Discs . “I bought three new games at Target when I bought my console. It was a buy two, get one free deal they ran. I got NBA 2K14, Madden 25 and Call of Duty: Ghosts.” . “I am more likely to go to GameStop this year than last year, because I bought the new console. I’ll probably shop for some new games pretty soon.” Games Tied to New Consoles . “I purchased the console at Target, and it did not come with any games or free downloads.” My game purchases will be . “I have not used downloads yet; I just haven’t taken the time to figure it out. similar, I expect. Only, once I But I do not expect there will be any difference in the game play. So far, I like figure out how the downloads physical copies just because that is what I am used to.” work, I will probably purchase Projections all my games that way. I will . “My game purchases will be similar, I expect. Only, once I figure out how the downloads work, I will probably purchase all my games that way. I will likely likely do that with this console. do that with this console. So far there is no difference than last time. I have I just have no motivation to do only purchased physical games. I may figure it out. I just have no motivation downloads so far. to do downloads so far.” . “I see no difference between systems, really—just better graphics and more PS4 Console Owner memory, new technology.” Oregon . “I am not a member of [PlayStation Plus] yet, but I may join later. I do not think it will have any impact on my game purchases, but it may. I just do not know that yet.” . “I can see that manufacturers are trying to move everyone in that [digital downloading] direction, and eventually that may be all we can buy. I guess then I will have to do downloads.” . “I think most people are like me: They like the physical games and may not be motivated to do downloads yet. But eventually, everyone will move that direction. Just like any other new technology, eventually everyone adapts to it. Probably by the next generation of consoles the transition will be complete.” Games and Retail Sales . “I like to shop for games at Target. They are close by and usually have a good inventory. I have no need to go anywhere else usually.” . “I do not really have any plans for further game purchases this year, and that is really about the same as last year. I am set with the new system and the games I have.” . “I do not expect I would go to a GameStop for a game once I go to downloads. I am not attached to physical copies.”

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GameStop Corp.

5. Active duty military, Xbox One owner, Kansas This source does not prefer a physical game over a download, but has not been motivated to try downloads for his new console. He has used downloads for previous systems and was satisfied with them. He appreciates being able to trade in a game, and dislikes the limited selection of downloadable games. He prefers long-play games with good stories and rarely plays fast-action short games. Purchases of Game Discs . “I have not done a game download on my new console yet, so I cannot really comment on them.” . “I recently purchased Ryse: Son of Rome at Best Buy and Assassin’s Creed IV: Black Flag at GameStop.” . “I pretty much only play one kind of game, and I have all physical copies, no downloads. My Internet is slow, and I just have not bothered to figure [downloads] out yet. I can see why a download would sometimes be more convenient, but I like long role-playing games with a good story and they would take a lot of memory and a long time to download.” . “Maybe when I take the time to figure it out, I might prefer downloads. I guess I do not have a particular preference really, just a matter of not being motivated to move that direction yet.” I have all physical copies, no . “I sometimes trade a game in at GameStop, so I guess I like being able to downloads. My Internet is slow, do that with a physical copy.” and I just have not bothered to Games Tied to New Consoles figure [downloads] out yet. I . “I have not made any game purchases recently other than my console and a couple of games for it. I got it on release day back in November at Best Buy. can see why a download would It did not come with any games or accessories.” sometimes be more . “Since I invested in my new console, I am mostly done with game purchases convenient. for now. I will wait until some new games are released.” Projections Xbox One Console Owner Kansas . “My game purchases for this console will be the same as any other. I have never been dissatisfied with the hard drive capacity on previous systems, so I am not going to be influenced by the larger capacity on this system.” . “I would be more interested or motivated to do downloads if the variety of games were more extensive.” . “I probably had half of my games as downloads on the last system, and it did what I wanted and needed it to do. The capacity of the hard drive was not an issue.” . “I am a member of Xbox Live, but I have not done any of their downloads yet, free or otherwise. It makes no impact on how I purchase games; at least it has not yet.” . “I cannot see the end of a need for physical games until the technology is significantly improved and Internet access is better, faster and more widely available—maybe in the far future.” . “I like role-play games with good stories, and I am really not at all interested in short, fast-action games. I do not buy a lot of games. When I do, it is a big game requiring a lot of memory, and I pay for a new copy.” Games and Retail Sales . “I guess I like GameStop best. They just have the best selection, a full line of every game available out there pretty much. I like that I can trade a game back if I am through playing it, and their employee feedback is really helpful if I’m trying to decide between options. I like to hear what they have to say, and I read a lot of game guides too.” . “I may still buy some games for Xbox 360 or some DS games for my kids at Christmas. I likely will shop GameStop for them, probably pretty much the same as last year.” . “I guess I like a physical copy because I can trade it in if I want to, and I do not like the limited selection of download games. That is really the only difference I see; well, and that a download just gives you access to someone else’s game. But I am not sure that really makes any difference in the game play experience. It is more philosophical.”

6. Senior citizen, PS4 owner, New Mexico This source prefers to own physical copies of games and likes his local GameStop store because the employees are very knowledgeable. Nothing online will ever replace that kind of personal service for him. He is a member of PlayStation Plus

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GameStop Corp.

and likes the free trials of new games, but when he decides he wants it, he will go to GameStop and buy it. He believes gamers may begin to transition to purchases half of their games through downloads in the next five or six years, but is hopeful physical games will never be phased out completely. Purchases of Game Discs . “I recently purchased a new copy of Black Ops 4 for my PS3 at GameStop.” . “Probably I have already spent what I will for this holiday season. I may check out some of the trial downloads from Plus. If I see something I really like, I may buy it.” . “I kept my PS3 also. I have some games I still like to play on it like [ZeniMax Media Inc.’s/Bethesda Softworks] Elder Scrolls, [Activision Blizzard’s] Diablo and [Bethesda’s] Fallout 3.” Games Tied to New Consoles . “I purchased Call of Duty: Ghosts at GameStop before I had my console. I It is better to have a physical have not purchased any other games or downloads yet.” . “I got my new PS4 console at GameStop, but it did not come with any games copy of any game, especially a or downloads.” long-play game. For instance, I . “It is better to have a physical copy of any game, especially a long-play have over 300 hours of play on game. For instance, I have over 300 hours of play on Fallout 3. If I had a Fallout 3. If I had a corrupted corrupted file and lost my game, it would be devastating. But with the disc, I file and lost my game, it would could reinstall if I needed to.” Projections be devastating. But with the . “I expect my game buying will be the same for this console as previously. I disc, I could reinstall if I needed prefer physical games. The only downloads I use are the free offers and the to. free trial games from Plus.” . “I do not think the difference in the PS4 memory will impact my game buying PS4 Console Owner preferences. I want my memory free to play. My Internet is slow, and I want New Mexico to have a disc for a backup in case I need to reinstall it.” . “I do use the free downloads and free trials of games that come with my membership. I like to try out the game to see if it is something I will like before I buy it. It helps me choose which games to buy, but it does not make me want to buy downloads instead of physical games.” . “I can tell things are going that way, that downloads will be the way of the future. I am hoping I will always be able to buy a physical copy of games, but I guess only time will tell.” . “Manufacturers are obviously pushing downloads instead of physical copies. That means they can do away with manufacturing [game discs], packaging, shipping, the third-party retailers. It will save them tons in costs.” . “Still, I think some people will be slow to accept the transition. It will maybe be 50/50 by the time the next consoles come out, but it will not be totally downloads yet.” Games and Retail Sales . “GameStop is my No. 1 choice, no question. I like my little store nearby. The guys there know me; they know what I like. They give good service, have expertise on the games and systems. Their advice is invaluable.” . “I have about the same budget for gaming this holiday as I did last year. But I spent it already on the new console, so I likely will not be making any more game purchases before next year anyway.” . “You get bonus points for purchases. I like to go in to the store and get the T-shirts or whatever with my points.” . “I sometimes buy used games, but I prefer to buy new. I sometimes will sell a very well-kept game back to GameStop, and I think they are a little chintzy on their trade-in value. That is pure profit for them, and they can afford to pay more than $5 for a nice, well-kept game. But they are pretty much the only game in town for trade-ins and buying or selling used games.”

4) Video Game Industry Specialists Nine of 10 sources said video game discs will have healthy holiday sales, driven by dedicated gamers’ preference for physical copies. Once the PS4 and Xbox One are widely available, downloaded games will increase in popularity and will comprise one- third of the market soon. However, sources’ opinions varied widely regarding when revenue from downloading will be on par with game discs. Also, sources questioned whether the buyers of the PS4 and Xbox One were early adopters of new technology or gamers dedicated to the longer-narrative blockbuster games, which mostly are bought in disc form and may

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GameStop Corp.

drive up the tie ratio temporarily.

KEY SILO FINDINGS Sales of Game Discs - 9 of 10 said consumer preference for game discs will continue this holiday season. - Most sources foresee a slow conversion to digital, which may not overtake discs until the next-generation systems arrive 5 or more years from now. Games Tied to New Consoles - Because of console supply issues and a lack of software titles at this point, many sources said predicting downloading’s growth in this product cycle would be premature. - In question is whether initial buyers of the new consoles are early adopter gamers or “blockbuster” game buyers, who have a strong preference for owning discs. Projections - The ratio of game discs to digital will slide to 2:1 over the next few months, but the predicted timeline to reach 50-50 varied widely, from 1 to 5 years out. - 2 sources said free-to-play games have risen in prominence, though how these games and their near-constant updates would function on a console-based system is unclear. Games and Retail Sales - Indie games will be the most popular downloads because of their smaller size and download-only nature. - Blockbuster games have a dedicated user base that prefers discs; however, this behavior may change if the big games are download-only early in their cycle.

1. Founder of a video game technology company and advisor to game startups Thanks in large part to the PlayStation 4 and Xbox One, this holiday season could be a turnaround period for the video game industry. Customers who buy the consoles also will buy games. Long term, though, the trend is toward digital, and GameStop will need to adapt. The company already has started to move in that direction with its Kongregate online portal, used mostly by kids. Physical games still hold some advantages: They are portable, can be shared and carry no lengthy download times. Still, free-to-play and indie games are becoming popular on the digital front. Electronic Arts’ Battlefield 4 likely will be the best-selling game of the season. Sales of Game Discs . “In general, the business peaked in 2008 and has been in decline since then. There is hope in the industry that it is the year that will turn things I would not be surprised if around, with the release of the new consoles. Grand Theft Auto came out physical game purchases and did incredibly well in September. There are not a lot of games for the actually go up this year. It is a new consoles yet, and we need better games to go with these shiny, new big year for games with the new consoles.” consoles coming out. Even . “There are some advantages to having a physical game in your hand. You could carry it around to your friend’s house and play. Some of these games though the long-term trend will are getting really big, and with the new generation of games, games can be be negative for GameStop, it is over 50 GB. It is going to be a long download to download 50 gigs. … The positive this year. flip side of that, though, is that all of these games are being patched now. I just got a new Xbox One and brought it home, and it immediately said I had Founder to do a big download to get the patch. It does not make for a great Video Game Technology Company consumer experience.” . “There are two different things happening. One is that you can buy games digital or physical on day one, so people now have the option to buy the digital version. It is more convenient. That is going to affect behavior. And the second thing that is happening is there is a new kind of game: free-to-play. They are free to download and you pay money over time, a microtransaction. That style of game became popular on mobile devices and now is spreading to consoles, and that is a purely digital form of entertainment. And that is a big area of the game business: video games as a service.”

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GameStop Corp.

. “Free-to-play games by definition have to be downloadable. You even have consoles that take no physical games at all—just a little cube that you set next to your TV.” . “The other thing that is happening is the movement from big, blockbuster hits to smaller, independent games. These games are being created by small groups. The game consoles are doing a lot more of them in the past, and they will be digitally distributed. Retail is only going to be for the big blockbusters.” Games Tied to New Consoles . “Zero physical games are included with the new PS4 or Xbox One.” . “When you are in the store and buying a console, you want to pick up some games with it. I do not think that dynamic changes very much with the new consoles. People will buy a couple games with the console, and then the average lifetime may be 10 or more games.” . “Both of the PS4 and Xbox One consoles are in huge demand. Retailers are having trouble keeping them in stock.” Projections . “Customers who are used to buying discs will go in and buy a console and some games on disc. I think we will see an uptick this year compared to last year in physical game sales. But the long-term trend is more toward digital and less physical.” . “I would not be surprised if physical game purchases actually go up this year, which may seem counterintuitive. It is a big year for games with the new consoles coming out. Even though the long-term trend will be negative for GameStop, it is positive this year.” . “The transition from physical to digital will be slower than most people expect and there will still be a good amount of games sold as physical. I’d say five years from now it will be a 50% digital. I do not think people change as fast as you think.” Games and Retail Sales . “Electronic Arts’ Battlefield 4 is well positioned to be most in demand this season, so I think that is probably going to be the best. The retailers are not doing bundles that I know of.” . “GameStop knows that things are going to move to digital, and they have plays in the digital world too. They own something called Kongregate, an online gaming portal mostly used by kids.”

2. President and CEO of a software company, and head of a video game design school Although digital downloading of video games is clearly a threat and will be more so in the future, game disc sales this holiday season will be the same year to year. Retailers, manufacturers and publishers are spending plenty on marketing and advertising to coincide with the launch of the Xbox One and PlayStation 4. Wal-Mart is the top retailer for game discs. Best Buy could take a hit this year. GameStop should have a successful holiday season; it is in full swing with consoles on display, game discounting and posters to entice consumers. Plus, the store still buys used video games. Sales of Game Discs . “What are important to watch are the curves of the prior two generations or prior three generations of console games. Traditionally, it would double pretty much every generation. I am not positive the industry will see the What are important to watch same curve this season.” are the curves of the prior two . “People are still buying stuff for prior-generation consoles, and it all generations or prior three depends what hot games are out there. One is Call of Duty. I would not be generations of console games. surprised if game sales numbers were similar to last year. The retailers and manufacturers and publishers are spending a ton of money on marketing Traditionally, it would double and advertising right now.” pretty much every generation. I . “In the future, instead of these new consoles coming out, you will see a am not positive the industry will game system, a chipset inside a set-top box, etc., and then different games see the same curve this going up on channels.” . “The downloading capability of the consoles would obviously bring down the season. purchase of physical games all things constant. At the end of the day, we President & CEO, Software Company & are in a competition for people’s time, and they have other things they are Head of a Video Game Design School doing.” . “Over the next three years, the industry will be searching for talent to make

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GameStop Corp.

games. There will still be physical games predominantly, with online components.” . “Minecraft is a monster. My kids play it now. That is a downloadable game, and it can go on a tablet and PC and can go anywhere.” Games Tied to New Consoles . “You do not get any physical games with the purchase of a new PS4 or Xbox One console. You have to buy them separately.” . “Typically there is a 2:1 to 4:1 tie ratio in an initial console year. If you have a 3:1 tie ratio, you feel pretty good.” . “Anybody who buys one of those consoles has to have something to run on it. Typically, people pick up their Madden game, Call of Duty or some other game. The industry should hope to see closer to a 4:1 tie ratio.” . “In terms of games being bundled or purchased later on, it all depends on the software. People will always buy a game or two at Christmas if they buy a box. It all depends on how much is out there.” Projections . “Wal-Mart will have no problem this year, but Best Buy may take a hit. GameStop will still be the niche if they keep their costs low.” . “Not any one game will be more popular than any other this season. Popular games will be purchased as standalones for a premium price.” Games and Retail Sales . “Physical game purchases at GameStop probably will not differ from prior years. When I go in, it is the same activity. The store looks the same to me. They will be busy at Christmas.” . “GameStop has the boxes up everywhere and the games running on their demo units. They are offering discounts— $10 off the game if you buy the console. I was just in there the other day, and it looked like it should look coming into Christmas. GameStop is doing tons of money on the trade-ins.” . “Digital downloading is not so far in the future that GameStop does not have to worry about it. But I would be more worried if I was Best Buy.”

3. Professor of interactive games and media at a major technology university Assessing this season’s physical video game sales and the influence of the new consoles would be premature. Still, GameStop will attract those wanting the new consoles and the latest in high-tech games, and will entice consumers with add-ons. GameStop also stays strong by selling used hardware and games. People will download games if the titles are much anticipated and if they want immediate gratification. As gamers age and evolve, the move toward digital is inevitable, but this year the industry can expect gamers to buy titles bundled with consoles, as standalone purchases and as digital downloads. Sales of Game Discs . “Sources have not released the sales numbers yet, and we will not know for sure until January about physical video game sales. But in general, the trend for the past couple of years is that more people are buying [downloaded games]. I do not think it is quite yet to the point where GameStop is going the way of Blockbuster, but it is definitely making a dent. What kind of hedges GameStop is their market in used hardware and used physical games, of which they sell more than anybody else.” . “It is also too early to tell how the new consoles have affected physical game sales this season. The box is barely shipping. You will need to look at this by the end of January. You have people who receive cash or gift cards, so they will be buying off their Christmas money for a couple of weeks after Christmas. There is still a segment of the population that wants the physical device or the physical box for any number of reasons. They do not trust the companies, and want to know they can reinstall it and want to know they can install it on different machines. They want the action figures printed book that comes with the higher-priced limited edition.” . “A customer would buy a physical game from a store pretty much for the same reason that people wander into a store and buy a physical movie or music—just being able to drop in and browse.” . “The games people have been waiting for—the top sellers, the next Halo—you will have more people getting that as a digital download in the same way that you will have more people going to a midnight showing of a movie. That is offset by people who prefer the premium version of the physical goodies that come with it. What you can bet on is that if there is a title that sold extremely well before and there is a lot of consumer anticipation of the next chapter,

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GameStop Corp.

the next sequel, then there will be a higher percentage of folks going for the digital download for the immediate gratification. In that case, we will not see the same percentage of people buying it as well.” . “I do not think there will be a significant difference in physical game purchases at GameStop this season. We have not gotten past the unwrapping the box under the Christmas tree, if you will. So probably right around Christmas the physical games bundled or unbundled will do well as they have done in previous years.” Games Tied to New Consoles . “There are a couple of different bundles with the PS4 and Xbox One, and some of those bundles will be exclusive to places like GameStop.” . “Games will be purchased later as a standalone purchase because, What you can bet on is that if historically, when new consoles arrive there are not a lot of new titles that there is a title that sold come out with them, just a handful. There are plenty of people who actually extremely well before and there recommend not buying a console in the first year because of the limited is a lot of consumer number of games.” . “A lot of people will wait for that new console, and it is always years between anticipation of the next consoles. People are waiting so long for a new toy, and they want it now. chapter, the next sequel, then This is why the Xbox 360 eventually became the best-selling game machine. there will be a higher There is no other industry in the entertainment or consumer electronics percentage of folks going for world where you wait four, five, six, seven years for the next thing.” . “For the new consoles, GameStop will be offering bundles. GameStop has the digital download for the the leverage with the game companies to get pretty sale exclusive. So if I immediate gratification. prepurchase my copy of Call of Duty: Ghosts with GameStop, I might get Professor of Interactive Games & exclusive weapons or carriers if I do not buy it from someone else. It is not a Media, Major Technology University different version, but you can buy extra add-ons.” Projections . “Will there be more people buying digital games online? Absolutely. What that percentage is going to be for a short- term answer, we will know at the end of January or early February. It will take six months of data. Games are a much bigger download than a song.” . “Down the road physical game purchases are going to drop, and that is what the industries want because they will save money. It is safe to say that if it can be sold digitally and online, as you get away from the generation that is more tied to physical purchases, brick-and-mortar retail will be impacted.” Games and Retail Sales . “Probably GameStop is the top retailer for physical video games this season. In terms of a specialized brick-and- mortar store and an online presence, they have more stores on the ground and more of a brand name than anyone else. People go there for their significant ‘used’ market. Wal-Mart and Best Buy are two general stores, but for a specific game store, GameStop is the 800-pound gorilla.”

4. Expert with extensive education in the video game and media industry and former GameStop employee Hardware sales will somewhat outpace last year, driven by the new consoles, but the shift of sales to hardware likely will come from games. Top-selling games will be for older systems because the new consoles are not readily available. Most console units are sold before or immediately after they arrive in stores. The trend toward digital downloads and away from physical copies of games is not new, and will not see a drastic shift with this generation of consoles. Physical copies are a clear majority of the market, by 2:1. That may equal out by the end of this game system cycle, which is projected by manufacturers to last four to five years. Sales of Game Discs . “Hardware sales are up to last year and software sales are down to last year, but that is a typical trend when new consoles are introduced to the market. Customers redirect money for game purchases into the new consoles.” . “The trend toward digital game sales and away from physical game sales has been increasing for the last two or three years. I expect that to continue this holiday season. Still, physical copies of games hold a clear majority of the market, probably two to one over digital downloads.”

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GameStop Corp.

. “During the lifecycle of these new systems, I do not expect the conversion to digital games will be complete. The last round of console systems was about eight years ago, but manufacturers indicate, this cycle will be shorter with the next console upgrades coming out in maybe five years.” . “The choice between physical games and digital downloads is purely a personal preference. Historically, digital downloads have been problematic in that the downloads took several hours; slower Internet connections exacerbated this issue; the consoles have had less memory to store numerous games; and gamers fear losing access to a game or saved game progress if a hard drive crashes. A lot of these concerns are addressed or at least improved with the new-gen hardware consoles [PS4 and Xbox One]. It stands to reason that more digital games will be sold for these consoles than any previous systems.” . “The advantages of a digital download are the immediate access to play as soon as it is released, and I understand these systems are able to play the game while it continues to download. The new consoles have bigger hard drives so more data can be stored. The advantages of a physical copy of a game are primarily the fact that it can be sold and or purchased as a used game; it can be shared; and I think there is even a collectible aspect.” . “There will always be a demand for physical copies of games. We may get to a point where manufacturers package a physical copy with access to a digital download.” Games Tied to New Consoles . “I believe the impact on physical game sales is minimal so far this year. For Hardware sales are up to last one thing, the systems are so new, not very many people have them yet. And availability is limited, so even if people are planning to buy, there are year and software sales are waiting lists for delivery.” down to last year, but that is a . “We may see a slight drop in sales of physical games this holiday compared typical trend when new to last year and a slight increase of digital game sales, but it will not be a consoles are introduced to the cliff. It will be a continual gradual shift, just like it has been for the past two market. Customers redirect to three years.” . “This generation of consoles will drive digital game sales more than for money for game purchases into previous systems. That is the manufacturers’ goal of course. But physical the new consoles. copies [of games] remain more popular for now. It will be a slow Video Game & Media Industry Expert conversion.” . “Big, multiplayer, long games that people play for endless hours, like Halo, Call of Duty and Grand Theft Auto, are all games that gamers prefer to own as a physical copy. For one thing, there are generations of these games, like a series, and a collector may have copies of every generation.” . “Multiplayer online games like Braid and Castle Crashers [available for both PS4 and Xbox One] are more popular as digital downloads because of the speed of delivery and convenience of access to other live players [online].” Projections . “The average tie ratio for the last four- to five-year cycle of console systems was 10 to 15 physical games, with a minimal one to two digital. I expect this cycle that ratio may drop to five to 10 physical games with an additional three to five digital games. The trend will maybe equal out to half and half by the end of this cycle or maybe shortly after the introduction of the next new consoles in four or five years.” . “Manufacturers are pushing digital downloads and increased capabilities of these systems, but consumers will not accept a drastic shift. There is still pushback because they want access to physical copies and used copies.” . “The membership programs are popular for live, online multiplayer options, and physical copies of games are sold with access codes to utilize this option. But used copies are not typically sold with those access codes, so the live online gaming features are lost or no longer accessible.” Games and Retail Sales . “GameStop is definitely the top retailer for physical games. They have been for a while, and it is driven by used game sales. Used games are pure profit for GameStop, and that is their bread and butter.” . “Digital games come direct from the manufacturer and cut out the middle man—in this case, GameStop or other retailers. So, sure, manufacturers are doing everything they can to drive the consumer to digital.” . “Best Buy also has a trade-in/used game program, but it is not as well established or as well received by consumers.” . “Consumers will likely prefer the PlayStation4 over the Xbox One. It is a little cheaper, more powerful, better technology upgrades, and online service is better, more accessible. Microsoft [maker of Xbox One] has pretty stringent digital policies, and that is off-putting to a lot of people.”

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. “The Xbox 360 had a notorious hardware issue, and all of the systems in the initial release had to be replaced. It is not unusual to find glitches in new systems in the first year. I will wait a year or so to purchase, and I will probably get the PS4.” . “The historic cycle shows system sales generally hit their stride around one to two years after introduction on the market. By next year console systems will be readily available, hopefully with the glitches identified and fixed. And a lot of new games will be out as well.” . “Cloud services are available now but are really new. They will play a role over time for consumers to back up either physical games or digital downloads as well as saved game levels.”

5. Attorney and consultant to independent game studios This source is a big proponent of digital games and believes game discs are “obsolete.” Still, consumers buy the physical copies because they can hold them in their hands and trade them in. The video game world is slowly moving over to digital, based on greater downloading capabilities. Free-to-play games are very big in Asia and are breaking into new consoles in the United States. Customers also prefer to download smaller indie games. Amazon.com is the top retailer for games. He personally buys only digital games now and will continue to do so in the future. GameStop, which owns Kongregate, understands what is going on in the industry. The company has market weight and can offer exclusive content to consumers. Sales of Game Discs . “Physical games are obsolete. It is a matter of adjusting the perception of Physical games are obsolete. It consumers, who can accept not having a box on their shelf.” is a matter of adjusting the . “I now only buy digital. But in light of the fact that I have three PlayStation 4 games and a stack of Xbox 360 games, I do not think the physical game perception of consumers, who industry is dead. But it is moving.” can accept not having a box on . “Some customers buy physical games because they like to sell them back. their shelf. … There is also value to holding something physical in your hand, but that is diminishing in terms of real value in the marketplace.” Attorney & Consultant to Independent . “It used to be that when you downloaded a game on a PlayStation or Xbox Game Studios console, the machine would sit there downloading and you could not play a game on it. With both the Xbox One and PS4, your download is in the background and you can still play the game. There are small companies that have highly sophisticated technologies that can compress all of the content.” . “People wanting to have games with the initial onslaught of physical deliveries is pretty much normal. Going forward, I know I will be buying digital versions of the games because then I do not have to wait for them. I wish I had done that with all of the games.” . “The small games, the indie games, customers prefer to download. Traditionally that is where the download market has been. The major games—Call of Duty, the big titles—the tendency there is still pretty entrenched in retail. Five years ago nobody had broadband. We are lagging behind other parts of the world.” Games Tied to New Consoles . “You have to pay more for the bundle with the PS4 or Xbox One. With the Xbox One, there are some versions that come with one game, some come with two games.” . “I expect the product cycle of games tied to the new consoles to be different from those games played on previous systems. There are some innovations in terms of the marketplace. Extending the lifecycle of the games has been being worked on for a long time.” . “The tie ratio of physical games to the new consoles will be no less than four and no more than 10 annually, as far as retail goes in the following 12 months. I am talking about retail games, AAA titles—not small independent titles or independent games that were downloadable on the consoles. Then it is closer to 20. People are used to buying those bite-sized games in digital format.” . “Everyone who buys a console buys a couple games with it.” Projections . “Greater downloading capabilities of the consoles will cut into customers’ physical game purchases. There is no way they will not do so.”

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. “One of the things that will be the biggest impact on this generation of console games is the introduction of free-to- play games. This has been very big and is the primary way that games are monetized in Asia. There are games on the PC platform that are generating tens of millions of dollars a month. You get a game for free and buy stuff in the game to enhance your experience. These ‘fremiums’ are just breaking into the new consoles because they require a back- end monetization model that has to be built in. Console owners have been somewhat resistant to this, but it is the inevitability of this glacier moving down the mountain.” . “With consoles, you deliver manufacturers a completed game and they examine it in detail before they put it on their system. If you want to make a You should not understate the change, it takes months. With fremium games they have to be updated daily, or in real time. And that issue has been the primary barrier to fremium value of the small games, the on consoles.” ones that do not come out the Games and Retail Sales big publishers. In terms of total . “GameStop bought Kongregate, which was one of the online distribution game sales, annualized game systems. The company clearly understands what is going on in the revenues, I really think these industry.” . “Amazon is the top retailer for physical games this season. They bring it to small games will generate as your door and provide ease of shopping. Amazon is now selling digital much revenue as the big games as well.” games. . “You should not understate the value of the small games, the ones that do not come out the big publishers. In terms of total game sales, annualized Attorney & Consultant to Independent revenues, I really think these small games will generate as much revenue as Game Studios the big games, which means they will sell like hotcakes. The quality and experience of these small games gets better and better, and in terms of the quality of the experience, they are just as much fun.” . “GameStop is selling used games. If you ask me, I think they are evil. They sell you games for $60. Then somebody brings it back, and GameStop gives them $10 and then sells it for $50. And the publisher and developer do not get any revenue from the second sale. These used games are eating up their shelf space.”

6. Director of a game development company and president of an industry trade group Sales of game discs should remain strong this holiday season, thanks to the Xbox One and PlayStation 4 consoles. Gift givers want physical games to wrap for Christmas. However, many indie titles now are going digital, and a lot of the hardcore gamers who buy “shooter” titles, such as Call of Duty and Assassin’s Creed, likely will download them down the road. This source predicts a gradual and increasing move to digital, and expects half of game purchases to be digital downloads by 2015. GameStop still is the top retailer, as the store is a destination location for all things games. Sales of Game Discs . “The sales of physical games this holiday season will be good because of the new consoles. I think physical games will outsell digital for the new consoles, and I would assume for the old consoles as well.” . “For the holiday season, it is my experience that most of the people buying are as much gift givers as they are end users, and they would want that physical item for wrapping under the tree. Because of tradition, they are used to that. The players who have gift cards and money after the holidays will start ramping up online.” . “I believe we are going to see a fair amount of indie titles going digital, and a lot of the ‘shooters’ and the like are going to do very well on digital distribution to new consoles. Call of Duty will do well. Assassin’s Creed really reaches out to a gamer audience and is not necessarily a gift, and it will do well.” Games Tied to New Consoles . “I expect the product life cycle of games tied to the new console to be different. What we have seen is that digital prolongs the life of titles a great deal, while in the past games would be on the shelves [for much of their lifespan].” . “Physical games sales have increased a dramatic amount due to the new PS4 and Xbox One. I also teach game development, and my students are still buying primarily physical games, especially this holiday season.” Projections . “I definitely think the tie ratio will be less with the PS4 and Xbox One. Even though the titles and the machines will both have longer lifespans, the move to digital will grow over time.”

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. “Greater downloading capabilities of the consoles will cause physical game sales to go down. I think it will go quickly to two-thirds physical and one-third digital, and by the end of next year it may go to 60/40. The holidays of 2014 will push up that physical number, and in 2015 we will start seeing a 50/50 ratio.” Games and Retail Sales . “Physical game purchases at GameStop will be better than last year because of the new consoles coming out. But I think we will see one-fourth of people making digital purchases.” . “GameStop is doing a good job making the rollout of the consoles an event. There was a great deal of buzz getting the consoles at launch and being part of that purchasing event.”

7. Marketing manager for a UK-based video game publisher and distributor This holiday season has been good so far for game disc sales, which are up year to year. Broadband speeds are still too slow for game downloads, making physical copies a quicker option. Amazon.co.uk is the top retailer for game discs in the United Kingdom. Sales of Game Discs . “Physical game sales are shaping up very well. They are up on last year, but this could have been impacted by our wider range.” . “You can take your copy of Mario Kart on Wii to a friend’s house and enjoy It is still quicker for me to drive multiplayer action. If that game is tied to the console, you would have to to my local GameStop and pick take your whole console.” up a copy of a game than it is Games Tied to New Consoles . “The new PS4 and Xbox One will not have a huge impact on physical game to download it. I think once this sales this season.” tips, and it is quicker to Projections download a game than it is to . “The greater downloading capabilities are not the defining factor for me; pick it up in store, this will broadband speeds are. At the moment it is still quicker for me to drive to my change. local GameStop and pick up a copy of a game than it is to download it. I think once this tips, and it is quicker to download a game than it is to pick it Marketing Manager up in store, this will change.” Video Game Publisher & Distributor Games and Retail Sales UK-based . “Amazon.co.uk is the top retailer for physical games this season [in the United Kingdom] as they are the No. 1 online retailer.”

8. Founder/CEO of small business consultancy and board member for video game industry trade group Game disc sales are rising this holiday season because of the PlayStation 4 and Xbox One. Physical games are here to stay despite the hype for digital downloading. Amazon.com is the top game retailer thanks to the site’s selection, deals, ease of purchase and quick shipping. Sales of Game Discs . “There are three primary reasons most people would buy a physical game when they could download it directly: 1) Many stores acquire exclusive deals with game publishers that often result in extra digital content or physical ‘goodies,’ including controllers, T-shirts, toys; 2) they have built up a relationship with their local retailer often resulting in discounts, suggestions and help finding new games that match their past tastes, game launch events, supporting a local business and better customer service; 3) they are in an area where the ability to handle downloading of content is not easily accessible, they are not able to set up their devices to handle downloading of games regularly, they are parents who prefer to buy physical games and keep their children’s Internet usage and ability to download potentially inappropriate content to a minimum.” Games Tied to New Consoles . “In general, most consoles are sold by themselves, but there are lots of different bundles you can get that will include games or other accessories with the purchase of a new PS4 or Xbox One.”

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. “If you are talking about the lifecycle of a game post-launch, then the main difference is that more and more people are having the ability to take their There is still a size limit on the systems online and gain easier access to downloadable content, thus extending the life of a game for players.” consoles, which means the Projections amount of games and their . “There will always be games that are only available as physical game data that can be downloaded is purchases. Moreover, there is still a size limit on the consoles, which means restricted. By purchasing the amount of games and their data that can be downloaded is restricted. physical games it will require By purchasing physical games it will require less space on the hard drives and, therefore, more games/data that can be stored.” less space on the hard drives Games and Retail Sales and, therefore, more . “Amazon [is the top retailer for physical video games this season]. Their games/data that can be stored. breadth of choices of games, their continuous sales, the ease to purchase online and ship anywhere, and the ability to use Amazon Prime to get many Founder/CEO of Small Business Consultancy & Board Member for Video items shipped in time for the holidays are just some of the reasons that Game Industry Trade Group make this digital store the No. 1 retailer for physical games.”

9. Founder of a UK-based game company and director of an industry trade group Gamers still like to buy game discs, largely for the convenience and immediacy. Despite this, physical game sales likely will drop this season, and the tie ratio will be lower this year since there are just a few games available for play on the new systems. EA’s FIFA may be the best-selling game of the season, worldwide. Over the full cycle, most games will be bought as standalone purchases, but in the first six months of a console launch, many will be bundled. Amazon could be the top retailer for games because of quick delivery, ease of use and price. Sales of Game Discs . “Convenience seems to be a major factor for shopping in stores. I shop for physical when I want a game ‘right now’ and happen to be near a store. A lot of the people I see in those stores tend to be people who are also near the stores. This is especially true for malls. Preowned is also a draw.” Games Tied to New Consoles . “Zero games out of the box [are included with the purchase of the new PS4 or Xbox One console], but I think bundles with up to five games were Most of the hardcore audience available. One or two games seem to be the most common.” is very skeptical about the . “Out of the gate, the tie ratio is going to be lower because the games are upgrade cost in the first six not there. There has been huge adoption of the platforms, but most of the months to one year of the hardcore audience is very skeptical about the upgrade cost in the first six months to one year of the cycle. That suggests that the gamers have not cycle. That suggests that the moved across, so we are looking at the blockbuster audience. The boxed gamers have not moved games are more expensive and fewer and further between than in previous across, so we are looking at the generations, as more developers are transitioning to digital distribution and blockbuster audience. mobile. Long term, I think this means that we are going to a much lower number of boxed games next to the hardware.” Founder of a Game Company & . “Over the full life cycle, most games will be bought as standalone. For the Director of an Industry Trade Group UK-based first six months or so, most will be bundled.” Projections . “Physical game purchases are going to go down, guaranteed. How much is an open question and relates less to the capability and more to the terms of pricing, but more options are going to lead to people choosing to exercise them.” Games and Retail Sales . “It is difficult to predict how physical game purchases at GameStop will differ from prior years. New consoles will generate a bump; competition from digital will probably drop that from previous launches. Economic factors will probably play into it. Things seem, in the UK at least, to be a bit better for folks, so there may be more money around than in previous years. It is a complicated, multidimensional problem. My instinct is that all the factors balance out and ‘about the same’ is where they end up.”

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10. Professor and director of a digital media research center at a major university Sales of game discs are doing well this season, but most sales seem to be for the current hardware generation and not the new consoles. More games will be purchased later on for the PlayStation 4 and Xbox One, particularly since the overall launch title lineup for these new consoles is very weak and challenged. Consumers still like to visit retail stores to purchase physical games. Bandwidth is not always readily available in many areas, particularly in more rural communities. Also benefitting disc sales are the collectors’ items or special codes available only in retail versions. Still, this new generation of consoles should be accompanied by more downloadable titles. Call of Duty: Ghosts and Battlefield 4 are hot sellers, as is Sony’s Flower, which is downloadable. Sales of Game Discs . “Sales of physical games seem to be doing quite well, but note that the The second and third order majority of sales at least at present seems to still be larger on current- ‘casual games,’ indie games generation hardware than next-gen.” and minor titles will drive . “It is too soon to tell if the new systems PlayStation 4 and Xbox One have affected physical game sales this season.” significantly more engagement . “I expect you will see a few more titles sold per box [with the new consoles], this cycle than previously. We but the titles will be of varying types and kinds and price points. The second have already seen the gamer and third order ‘casual games,’ indie games and minor titles will drive community become much more significantly more engagement this cycle than previously. We have already sophisticated, passionate and seen the gamer community become much more sophisticated, passionate and engaged around these types of titles based on the hype-war between engaged around these types of Sony and Microsoft. … Courting of smaller developers and lightweight titles titles based on the hype-war will drive more individual titles per box, but at varying price points.” between Sony and Microsoft. . “With the PS4 and Xbox One, more games will be purchased later on. Aside from one or two titles, the overall launch title lineup for the consoles is very Professor & Director of a Digital Media weak and is particularly challenged by the current title generation’s quality.” Research Center, Major University . “There are several things that lead to a customer visiting a retail store to buy a physical game. One is the bandwidth/playability timeframe. With modern AAA titles often coming in at several GB downloads, this can stress the bandwidth available in many areas, especially non-city areas. Another factor is collectability/packaging: Many fans are driven to get the box or collectors’ items or special codes available only in retail versions. Also, some consumers will prefer retail packaging so that they can trade in or resell their game[s] and/or play them easily on other consoles. While some of that is possible with digital versions, I am not sure that has really been well explained or understood by the mass market.” . “I expect that this generation will ultimately see more consumption of downloadable titles. While there are numerous enforcement mechanisms to try and combat used games, it is not clear if these will ultimately drive additional first- party sales or simply hurt the resale market.” . “The games that are download only, obviously customers [must] have as a download. If it is available in retail, then it just becomes a price war between retail and digital download, balanced against the issues noted above about The more interesting thing to collection, trade and bandwidth.” watch is what happens with . “For the casual consumer, the perception based on the press releases is ‘Steam Box’ from Valve, which that it will be harder on Xbox to purchase and play used games. That has actually been changed, but consumers now know that this is a possible is taking a pure download future restriction, so it may impact behavior.” channel [Steam] and moving it Games Tied to New Consoles to a console format. This could . “The Xbox One and PS4 offer zero games with the console unless it is a significantly disrupt the cycle of bundled package.” either this generation or the Projections . “Over time the greater downloading capabilities of the consoles may next. challenge more consumers on price point, and it may lead to impulse Professor & Director of a Digital Media purchases. That said, it has a long way to go yet.” Research Center, Major University . “The more interesting thing to watch is what happens with ‘Steam Box’ from

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GameStop Corp.

Valve, which is taking a pure download channel [Steam] and moving it to a console format. This could significantly disrupt the cycle of either this generation or the next.” Games and Retail Sales . “It’s hard to say which games will be most in demand this season, as it depends in part on genre. Clearly, Call of Duty: Ghosts and Battlefield 4 are hot sellers. And a lot of folks are holding out for [Activision’s] Destiny, which comes out after the holidays. Flower is selling like crazy on the PS4 and is a downloadable.”

Secondary Sources The following six secondary sources highlighted the battle between PlayStation 4 and the Xbox One, and the effects of digital downloads, game discs and trade-ins on GameStop’s profits.

PS4 VERSUS XBOX ONE The following three secondary sources discussed the advantage of PlayStation 4’s head start as it outsold Microsoft in November, Xbox One now selling at a faster pace than PS4, a survey showing gamers’ greater interest in the Xbox One, and Microsoft’s early debacle of always-on DRM and efforts to eliminate trade-in games.

 Dec. 17 International Business Times article PlayStation 4 sales outpaced Xbox One sales in North America 2.1 million to 2 million. However, Xbox One beat the PlayStation 4 in how fast the console sold, selling 101,000 systems each day during the final nine days in November. Both companies are trying to keep up with demand. . “Sony fans, rejoice! Global market research firm NPD Group confirmed that the PlayStation 4 outsold the Xbox One in North America during November. Both next-gen consoles hit shelves last month, although the PS4 was released on Nov. 15 and the Xbox One became available on Nov. 22.” . “The latest numbers show that the PS4 has sold 2.1 million units, while the Xbox One is at 2 million consoles. Both next-gen systems initially sold out quickly following their releases and were unavailable in stores like GameStop, Wal-mart and Best Buy in some locations for weeks. Websites like Amazon also ran out of the PS4 and the Xbox One.” . “‘Demand continues to overwhelm supply, but we’re working hard to get PS4 units into the hands of customers throughout the holiday season,’ said CEO of Sony Computer Entertainment America Jack Tretton in a statement.” . “PlayStation 4 sales in North America and worldwide have been incredibly strong since launch, culminating in PS4 being recognized as the largest console launch in history. In North America alone, more than one million PS4 units were sold in only 24 hours and we’re pleased NPD has reported that PS4 was the top selling next gen platform for both hardware and software in November.” . “Despite the PS4’s higher sales, Microsoft’s highly anticipated Xbox One beat out the PlayStation 4 as November’s quickest-selling console, with around 101,000 systems purchased each day during its nine day availability from Nov. 22 to Nov. 30. ‘When looking at sales on an average per-week basis, Xbox One led PS4,’ said NPD group. The Xbox One launch was also Microsoft’s most successful console launch of all time. Both Sony and Microsoft replenished their stock in various countries for holiday demand.” . “Meanwhile, Nintendo reported a 340% rise in Wii U sales since October. According to estimates, the company sold around 220,000 consoles during the past month. The brand also sold almost 770,000 handheld units like the 3DS and 2DS in November.”

 Nov. 27 SurveyMonkey Blog post A survey showed an overall lack of interest in either the PS4 or the Xbox One as mobile gaming is gaining in popularity. Still, more gamers are interested in buying the Xbox One than the PS4. . “Both products are offering major new features. Microsoft wants the Xbox One to be the go-to entertainment system in consumers’ living rooms. In other words, it’s not just about Call of Duty: Ghosts.” . “The PS4 has received a complete design makeover but unlike the Xbox, is sticking with what it knows best– video games.”

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. “Using SurveyMonkey Audience—a powerful online product designed to collect data from a target audience—we asked 450 video game players their opinions on these new consoles.” . “More than half (54%) say they’re really not excited about either system.” . “Xbox vs. PS4? Xbox comes out on top with 22% of respondents choosing to go the Microsoft way over PlayStation (15%).” . “No consoles under the tree this year! A whopping 75% of folks say they’re not at all likely to purchase the PS4 as a holiday gift and even more (78%) are taking a holiday pass on purchasing the Xbox One.” . “Perhaps unsurprisingly, the price of each is cited as the #1 reason to say no to both.” . “Although the gaming experience with the console is still a better one, playing via mobile is cheaper and easier for people. Over half of both say the best platform for playing games is on a console.” . “Mobile game playing is definitely a player with nearly 60% saying they regularly play at least 1-3 games on their mobile devices.” . “In a nutshell, those outside of the hardcore gaming community—general consumers—aren’t excited for these shiny new gadgets in the gaming world. While gamers still prefer to use consoles, mobile is growing in popularity.”

 June 19 NBC News article Microsoft’s decision earlier this year to initiate an always-on DRM and to eliminate trade-in games (which it overturned in June) still may be having residual effects on the Xbox One’s adoption. . “Following heated criticism of the new Xbox One console’s need to constantly be online, along with related restrictions to trading and selling used games, Microsoft Wednesday made a 180-degree turn, completely reversing its position: No daily online ‘check-in’ will be required, and games can be rented, gifted and sold just like anything else.” . “Sony’s assurance that its new console would work offline and no restrictions would be put on game sales or trades caused an extended standing ovation — and clearly rattled management at Microsoft.” . “‘Since unveiling our plans for Xbox One, my team and I have heard directly from many of you, read your comments, and [listened] to your feedback,’ wrote Don Mattrick, President of Microsoft’s Interactive Entertainment Business division. ‘So, today I am announcing the following changes to Xbox One and how you can play, share, lend, and resell your games exactly as you do today on Xbox 360.’” . “The changes should allay the concerns of many, although the handling of the always-on policy decisions has already damaged Microsoft’s reputation among gamers and press.”

DIGITAL DOWNLOADS AND TRADE-INS The following three secondary sources centered on the advantages and disadvantages of digital downloads and game discs, digital downloads eating into GameStop’s profits, and an increase in trade-ins to GameStop.

 Nov. 16 Gotta Be Mobile article Both digital and physical games have their advantages. Digital games allow users to purchase at home and, with recent innovations, to start playing the game as it downloads. Game discs offer the ability to resell or trade in. . “Starting today, digital games, that is downloads that travel straight from Microsoft’s and Sony’s own servers to your hard drive. To be fair, both consoles have offered digital titles for years, however the PS4 and Xbox One introduce innovations that finally make buying digital versions of games a valid option for most users.” . “Both console makers have promised to make digital versions of games on their platforms available at the same time as their disc-based counterparts. Furthermore, users don’t actually have to carry the games themselves. Both the Xbox One and PS4 allow users to log-in to their account and download their games to play on a friend’s console. The Xbox One even allows other users to play a visiting user’s games with their own account.” . “The best part is that users no longer have to wait to download an entire game before they can begin playing. Both consoles allow users to begin playing once a certain percentage of the game is on their hard drive.” . “Digital games are subjected to unprecedented forms of digital rights management. For example, the Xbox One doesn’t allow users to trade digital games to other users or sell them. It’s also impossible for users of the Xbox One to allow their friends to play their digital games without their Xbox LIVE Account signed into that Xbox.”

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. “To their credit, Sony allows more than one PS4 to play games if their original console is designated as their ‘primary’ console.” . “Simply put, users should buy a disc-based game for no other reason than they don’t have to adhere to anyone’s rules but their own. Users can sell them, loan and do whatever else they want—all without having to sign-in to their account or jump through hoops.” . “Disc based games are also usually cheaper than their digital alternatives over time for those who don’t mind buying used. Purchasing a used copy of Halo 4 would cost a user $19.99 at GameStop. That’s $10 less than it would if that same user bought it digitally. NBA 2K13 still costs users $39.99 through the PlayStation Store. That’s $20 more than what it costs for a used version of the game at GameStop.” . “Given the positives and negatives of buying digital, a user’s decision simply comes down to how gaming fits in their life. Users who loan games to friends or resell them to buy other games will want to stick with discs. Not only is it a known quantity, it’s also cheaper if they want to get the most they can out of their budget.”

 Nov. 21 Trade the Newsroom article Digital downloads are starting to eat into GameStop’s profits, specifically its preowned software and hardware sales. . “The digital revolution has moved to consoles. Please, let’s not get ahead of ourselves with Angry Birds killing off console or PC gaming. PlayStation moved a million units in the first 24 hours. Xbox One is looking to do comparable numbers. So, it isn’t mobile gaming that is doing in GameStop.” . “The issue stems from once you have the console in your living room, you can digitally download games straight to the console. Both companies are developing digital storefronts that gives gamers direct access to games right from their couches.” . “Pre-owned software and hardware, long the biggest winner in GameStop’s portfolio continued to slip. It now makes up 23% of total sales, slipping from 28% year over year.”

 Nov. 18 Polygon article GameStop saw a tremendous uptick in the amount of trade-ins before the release of the PS4 and Xbox One. This fares well for the company, which sees an average $1.70 for every $1 trade-in. A reader mentioned GameStop’s promotion of 90% trade credit on select dates. . “The Sunday before the PlayStation 4 launch, GameStop took four times more trades in used games and consoles than average. The company told Polygon that it expects the next few weeks to be its busiest time ever in processing gamers trades, as consumers clear out the old and make way for the new.” . “The arrival of PlayStation 4 and Xbox One is an opportunity for customers and for retailers to make some extra money. Gamers seeking to find the $400 or $500 needed for a new console, and more for new games and peripherals, are trading in their old hardware and their game collections. Trading with GameStop may not be the most lucrative exercise, with prices paid out well below the retailer’s final mark-ups, but it is convenient.” . “He said that many gamers are cashing in their collections in order to make full payments on next-gen consoles ordered earlier in the year.” . “Puzon said that 43% of people who have pre-ordered are paid in full, and of those, 20% have used trade-credits to pay some or all of the price.” . “When the kids finish a game they bring it back in and instead of asking for cash or credit they are applying it to their console order. Our number has grown substantially week over week. I think we will see a lot of people coming into stores and being fully paid off.” . “For GameStop, any boost to its trade-in program is good news. The company makes significantly more money from used games than from new. Last year, it generated $1.2 billion in trade currency. Customers who trade goods tend to re-spend the money they make in-store, and then some.” . “‘For every dollar that is traded in, a dollar and seventy is being spent in store on either hardware or software or accessories,’ said Puzon.” . A reader’s Nov. 18 comment: “It should absolutely be mentioned that GS was also offering 90% extra on trade credit on Sunday for consoles. It was a highly promoted deal and, of course, led to a higher number of consoles traded in. … Seems like essential information when evaluating this bump in trades.”

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GameStop Corp.

Additional research by Lisa Bullock, Cheryl Meyer, Colin Gustafson, Tina Strasser, Kevin Murphy, Cindy Elsberry and Erica Franklin

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