Mon. Sep 26th, 2022
Microsoft gives GameStop a share of Xbox's digital revenue

Aurich Lawson/Microsoft/Getty Images

In a seemingly unprecedented deal, GameStop will now share in the lifetime digital sales revenue — including for full game downloads, DLC, and subscriptions — for every Xbox console sold through its retail stores. However, how much that settlement will affect the bottom line for the struggling retailer is still an open and heavily debated question.

The first sign of this new revenue-sharing arrangement was actually somewhat hidden in a press release that GameStop issued last week, announcing a “multi-year strategic partnership with Microsoft.” That announcement focused heavily on GameStop agreeing to use Microsoft’s cloud-based infrastructure for its back-end sales systems and a deal for store associates to start using Microsoft Surface tablets in the future.

However, buried in that press release was a vague phrase that could be far more important to GameStop’s future: “GameStop and Microsoft will both benefit from customer acquisition and the lifetime revenue value of every gamer brought into the Xbox ecosystem.”

While casual readers may have overlooked the potential import, investors have adopted that phrase. “I received an email from [GameStop Investor Relations representative] Eric Cerny and in the email he said, “We can state that we will receive a portion of the downstream revenue from every device that we will bring into the Xbox ecosystem,” Domo Capital Management president Justin Dopierala told In an interview, Ars added that Cerny later clarified in a phone call that the deal applied to all digital sales on all next-gen Xbox consoles sold through GameStop.

Loop Capital analyst Anthony Chukumba confirmed that same basic schedule to Ars Technica based on his conversations with GameStop management. “The way it’s going to work is that for every Microsoft Xbox console that GameStop sells in the future, GameStop will get a certain percentage of the revenue from every digital full game download, DLC, microtransaction, and all subscriptions,” he said.

GameStop has not yet responded to a request for comment from Ars Technica. Microsoft has declined a request for comment from Ars Technica.

How big a slice?

A cut in any digital sales for the lifetime of every Xbox console sold by GameStop could be a significant boon to GameStop’s bottom line, especially as gamers increasingly move away from physical sales of games on discs. But a lot depends on the actual size of that revenue share, a specific figure that both analysts say held GameStop down.

Dopierala, who has been quite bullish on GameStop since last year, estimates that GameStop’s cut could be anywhere from one to 10 percent of all digital revenue for those consoles, a share he says “the materiality could be quite significant, especially as time passes. “

But Chukumba told Ars he thinks GameStop’s cut in digital sales is much lower, somewhere below one percent. “I don’t believe it’s big enough to have a significant impact on GameStop’s financial results going forward,” he said. “In general, I don’t believe that [it’s a bigger cut] because what is the motivation of Microsoft? I don’t see what exactly this does for Microsoft. If they didn’t have this, would they sell less Xboxes?”

Buy, sell, trade... and earn GameStop a share of digital sales?
enlarge Buy, sell, trade… and earn GameStop a share of digital sales?

For Dopierala, cutting GameStop only makes sense if Microsoft wants the massive retailer to market its systems at a major point of sale. “GameStop sells a lot of consoles,” he told Ars. “You don’t want them not pushing one of your devices. Maybe they are pushing Xbox more than PlayStation [thanks to this deal]maybe not.”

To that end, Dopierala said he’s “pretty sure” Sony is already in talks with GameStop about a similar revenue-sharing deal to ensure Microsoft doesn’t get preferential treatment in stores. “I think Sony is next in line,” he said.

However, for Chukumba, arguments about GameStop’s console marketing won’t “hold a lot of water.” He compared the console wars to the American political system; just as the vast majority of voters already know whether they are Republicans or Democrats, the vast majority of gamers already know whether they want a Sony system or a Microsoft system in store.

“If you’re a gamer, don’t ask them, ‘Which console should I buy?'” Chukumba said. “You ask, ‘Where’s the PS5? Where’s the Xbox?’ I don’t really believe at this point that GameStop could really influence that. Maybe a grandmother comes in, they can influence that a little bit more, but that’s like undecided voters, there aren’t too many of them.”

Something is happening here…

To confuse things further, Dopierala said GameStop’s Cerny told him the revenue-sharing arrangement would also apply to second-hand consoles sold by GameStop. “So if someone buys a console from Best Buy and trades it in for GameStop in two years and GameStop resells it, they would split the revenue on [digital content purchases on] that console,” said Dopierala.

Chukumba opposed that idea. “There are certainly no second-hand in it [console sales]’ he said. ‘No way. I didn’t even ask [GameStop] the question because it’s a bit ridiculous. I doubt very, very, very much that it is also second hand [consoles]†

Ah, for the carefree days when you could wander around a GameStop and not have to worry about keeping a meter and a half away from other shoppers...
enlarge Ah, for the carefree days when you could wander around a GameStop and not have to worry about keeping a meter and a half away from other shoppers…

Dopierala also told Ars that the revenue-sharing scheme should apply to “all downstream digital revenue” on the systems sold by GameStop, including digital movies, TV and music purchases made through the system. “I think the easiest way to think about it is, on every next-gen Xbox that GameStop sells, every transaction where Microsoft makes money, GameStop makes money,” Dopierala said.

However, Chukumba expressed a different understanding, saying he was told the deal only applied to games and game-related content. “They’ve been so damn vague about the whole thing…” he added, annoyed.

…What is not quite clear

The fact that neither Microsoft nor GameStop are trumpeting the deal, nor disclosing the exact size of the revenue share, even to investors, also suggests to Chukumba that there is no significant amount of revenue involved. “If you read the press release, the kind of vague mention of revenue…if that was a big deal, you’d make that in charge. That [they didn’t] makes me think it wasn’t the lead…”

According to Chukumba, Microsoft simply traded a tiny fraction of some Xbox digital revenue in exchange for a commitment from GameStop to use Microsoft’s cloud products and tablets in its stores, as announced last week. “It’s going to make Microsoft look much better as a company [to shareholders] with cloud revenues from GameStop,” he said.

While Dopierala agrees that GameStop “should have been clearer” about the importation of the revenue-sharing deal, he thinks a larger and more detailed announcement may be pending finalization of unconfirmed negotiations with other console makers. “I’m sure they’ll talk in more detail about their earnings reports and stuff… we’re definitely going to get more color in the earnings call,” he said.

Investors in general have been quite bullish about GameStop lately, even before this revenue sharing news started to trickle in. At the time of writing, the company’s stock price is up 92 percent in the past 30 days and a whopping 379 percent from its 2020 low in early April.

For now, those investors and other industry watchers are left to sift through the nebulous contours of Microsoft’s new deal. Those details could determine whether this is an exciting new business model for GameStop or just a small drop in brick-and-mortar retailers’ still-shrinking game sales bucket.

By akfire1

Leave a Reply

Your email address will not be published.