GameStop Fires Warning Shot at EA

Posted: November 24, 2015 in Game Articles

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Games retailer scolds Star Wars: Battlefront sales, then abruptly changes tone.

by Chris Morris via Fortune

Earnings conference calls don’t typically have a lot of drama. There might be a surprise or two in sales forecasts or maybe news of an unannounced product will slip out of an executive’s mouth, but real drama? It’s rare.

But GameStop GME 0.80% turned heads Monday, as it seemingly took issue with its partner Electronic Arts EA -2.78% , then quickly reversed course before the call ended. And analysts are still trying to figure out what it all means.

Third-quarter results for the video game retailer were lower than expected, as both software and hardware sales slowed down and new store openings were delayed. But GameStop officials specifically pointed to EA’s Star Wars Battlefront as one of the chief sources of weakness.

“We’re not going to quantify it in actual number, [but] we had high expectations that diminished somewhat as it got closer, and then it failed to hit those lowered expectations,” said Tony Bartel, chief operating officer of GameStop. The company went on to say it did not think digital downloads of the game were the reason for the lower than expected sales.

By the end of the call, though, Robert Lloyd, GameStop’s CFO, was singing the game’s praises, saying “We expectStar Wars to be one of the strongest titles for the holiday season.”

Analysts say it’s unusual to see a company make such a drastic shift in tone during a call—and aren’t sure what prompted it.

“It was really quite strange to hear GameStop management change tone over the course of less than one hour during its conference call,” says Ben Schachter of Macquarie Capital. “Management seemed to tone down the negative talk onStar Wars as the call progressed. Perhaps EA management reached out during the call with some comments of their own to GameStop, or perhaps GameStop wanted to remind EA that GameStop commentary to the market does matter and that EA and others should remember that as they talk about digital in their own commentary.”

(EA shares fell more than 7.5% after the GameStop conference call, rebounding slightly before trading ended Monday.)

GameStop officials, however, did note that Battlefront‘s underwhelming sales could be tied to the leak of its ownBlack Friday ad. (The company will offer $30 off select EA games with the purchase of Battlefront.)

And analysts Fortune spoke with say they have not adjusted their quarterly sales expectations for the game.

“It’s hard to gauge the potential of a mass market game like this in the first week or two,” says John Taylor, managing director of Arcadia Investment. Corp. “This is the number one candidate for gift purchases in December.”

Benchmark analyst Mike Hickey agreed, saying he remains “confident in EA’s ability to appropriately forecast sales performance, and believe[s] the upcoming movie and related digital content should drive sales of the game.”

GameStop has always had a curious relationship with its publishing partners, though. The company’s sale of used games has always rubbed game makers the wrong way, since they see no financial benefits from the practice. EA led the fight to monetize used game sales in 2010 with “Project Ten Dollar,” which required second-hand players to pay a $10 premium to the publisher to re-activate a game. Other publishers emulated this model, but all (including EA) have since abandoned it.

Today, many of those same publishers are promoting their own digital download services, luring people to bypass physical software—and the stores that sell it. And Monday’s call might have been GameStop’s way to begin fighting back.

“There is no question there is some friction between GameStop and publishers—particularly over publisher’s efforts to build direct to consumer businesses,” says Taylor. “Everybody is trying to do it. EA’s EA Access program probably is as visible as anybody. It wouldn’t surprise me if there weren’t some discussions going on behind the scenes and some of that spilled over [during the call].”

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