Playing Nice: EB vs. Aussie game publishers

We look at reports of a growing rift between Australian game publishers and the country's largest specialist game retailer EB Games.

Video game retail in Australia is under threat. The gradual shift away from established business models toward alternative platforms and delivery channels has changed the way that video games are sold, paving the way for a new generation of consumers fighting for a faster, cheaper, and more efficient way of doing things.

As the local market struggles to adapt to a global decline in physical game sales, the rise of digital distribution, increased online and mobile revenue, and more independent, confident consumers, reports of a growing rift between Australian game publishers and the country's largest specialist game retailer, EB Games, threatens to impact the long-term viability of video game retail in Australia, and with it the future of the local gaming industry.

In this feature, GameSpot will investigate the reasons behind the reported breakdown in communication between some local game publishers and EB, and how this asserted schism is affecting retailers, publishers, and consumers in Australia.

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EB Games is Australia's largest specialist video game retailer, a position that has given the company the power to affect the way that Australian game publishers price, distribute, and market video games in the local market.

From an economic point of view, EB's business is stable. The retailer is currently operating just over 400 stores in Australia and New Zealand, and continues to grow its store presence across the two regions.

According to a US Securities and Exchange Commission (SEC) annual report, lodged by EB Games' parent company GameStop in March this year, EB achieved total sales of US$604.7 million in Australia and New Zealand in the fiscal year ending January 28, 2012, an increase of 7 percent year on year from 2011. The business also experienced a sales increase in the preceding 2010-11 period, with a revenue increase of 6.6 percent.

Several sources in the Australian video game industry who wish to remain anonymous have said that EB's position in the local market reflects this outlook. According to these sources, the retailer reportedly controls roughly 35-40 percent market share.

However, EB's dominance in the Australian retail market comes at a time of industry-wide uncertainty regarding the future of physical games. Figures showing a 19.5 percent year-on-year decline of physical game sales in the Australian market mirror similar reports from the US, European, and Japanese markets, which collectively show that the global video game retail market has suffered three consecutive years of software sale declines, a trend that many market analysts blame on an uncommonly long console cycle that has produced far too few new intellectual properties to bolster consumer interest.

The effect on the Australian game retail market--small by comparison to that of the US, Europe, or Japan--has been disastrous. In March this year, UK video game retailer Game Group--which runs both GAME and Gamestation stores in the UK and mainland Europe--went into administration. The Australian branch of the business quickly followed, shutting down all of its Australian stores and letting go more than 280 employees.

GAME's fate in Australia secured EB Games as the largest specialist video game retailer in the country, a position that has landed the retailer in trouble with Australian video game publishers, who claim that EB has taken unfair advantage of its position, particularly in regards to grey importing.

Speaking under the condition of anonymity, several sources working for different game publishers in Australia accused EB of "bully tactics". One source close to a local publisher claimed that the publisher was forced to downsize its Australian business due to reduced local sales as a direct result of EB and other game retailers grey importing in the Australian market. In another instance, several sources currently working for different Australian-based publishers described different exchanges in which EB allegedly told some publishers to lower the selling price of their games or risk EB walking away from the deal, or instances in which EB allegedly demanded an exclusive offer under the threat that if publishers did not comply, EB would grey import the games in question.

As a business measure, grey importing involves the acquisition and sale of goods through unofficial--although not illegal--channels. In the game retail market, this means the sale of game stock obtained from other countries instead of local video game publishers and distributors, often at a cheaper price. Money saved through grey importing certain stock also allows some game retailers to attract more customers through lower prices, a measure that has become particularly widespread in Australia, where consumer business is dominated by one or two specialist game retailers, and not all international publishers are represented (so while publishers like Sony, Microsoft, Nintendo, EA, and Activision have a local Australian presence, other publishers like Capcom and Valve do not.)

Grey importing has reportedly been a point of dispute between Australian game publishers and EB Games since the retailer confirmed earlier this year that it is importing overseas video game stock to sell in its Australian stores.

"There are rare times when stocking product from a local vendor is not a feasible option, and stock needs to be obtained elsewhere," EB Games told GameSpot in May. "This is something that our vendor partners are aware of."

While grey importing has advantages like lower prices and earlier release dates, the practice of importing video game stock from overseas can have a severely negative impact on video game publishers and distributors operating in Australia. For example, if a publisher cannot sell a game to a local retailer, it can mean that the game will receive no international support from the publisher; no localised special editions, no visiting developers, no local community events or support.

The Interactive Games and Entertainment Association (iGEA), which represents Australia's video game publishers and distributors, looks upon grey importing with a sceptical eye, saying that the practice takes away from locally generated revenue.

"Wholesale parallel importing does have a direct impact on local publishers, distributors, and the companies who support them," iGEA CEO Ron Curry told GameSpot in May.

"The revenues generated locally support not only local employment, but fund marketing, in-store displays, advertising, classification obligations, etc. Without this local level of support, retailers in Australia will see a direct impact on their business, as will consumers and other local businesses who survive by supporting the Australian video game industry."

A source who works for an international game publisher in Australia refuted EB's earlier claims that the retailer told publishers about its grey-importing measures. According to the source's own experience with EB, the retailer does not inform publishers about its intentions to grey import video game stock from other territories. Speaking under the condition of anonymity, the source said that grey-importing measures employed by EB and other game retailers in Australia leave publishers with an increasing amount of unsold stock and less profit to operate on.

Australian retailer JB Hi-Fi also confirmed its grey-importing measures in May, telling GameSpot that it orders some of its popular video game stock from overseas in order to provide consumers with a more competitive price on games. However, the retailer did not provide a comment when asked by GameSpot about whether its grey-importing measures are communicated to video game publishers and distribution partners in Australia.

While JB Hi-Fi declined to comment further on its relationship with game publishers and distributors in Australia--telling GameSpot that the information is regarded as "commercially sensitive"--the majority of sources who spoke to GameSpot for this story claimed that JB Hi-Fi maintains a good working relationship with game publishers in Australia. The same sources also reported that JB's grey-importing practices have less of an economic impact on game publishers than those of EB.

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Grey importing is not the only sore point for the Australian game publishers that GameSpot spoke to where EB is concerned.

The same sources also described numerous instances in which EB allegedly demanded exclusive content from publishers when ordering a particular game, a demand that, according to the sources, must be financed out of the publisher's own pocket, which can often prove to be expensive.

The practice of demanding or requesting exclusive content from game publishers is one that, according to US industry-specific market research firm Electronic Entertainment Design and Research's (EEDAR) Jesse Divnich, is an industry standard.

"I wouldn't say EB Games or GameStop are threatening anyone," Divnich told GameSpot. "It is definitely in the best interest of both the developer and publisher to create awareness and buzz via exclusive in-game content. When a retailer controls more than 30 percent of the physical distribution market, it should be expected that they request certain advantages, especially for GameStop, who has the most hardcore and loyal consumers."

Speaking to GameSpot for this article, EB merchandising director Shane Stockwell said the retailer's current relationship with video game publishers in Australia is "excellent".

"We pride ourselves on working hard to find win-win outcomes for EB Games and the local publishers," Stockwell told GameSpot."We work with very long lead times with publishers on almost every product. It helps being a specialist, as we love what we do and we understand what is important in regards to content and packaging."

Referring to its current position in the market (but refusing to disclose the exact market share percentage that EB currently holds), Stockwell said that EB's pre-orders for the upcoming period are at record levels. According to Stockwell, this is a result of the retailer's focus on growing its digital channels and continued focus on its pre-owned business, which he said is important to the overall health of the video game industry.

While a lot of sources that GameSpot spoke to for this article wished to remain anonymous, Mike Westrup, the managing director of New Zealand-based consumer electronics distributor Monaco, agreed to speak on the record about his company's relationship with EB Games. Monaco was once one of the largest video game distributors in New Zealand, looking after publishers like Sega, Nintendo, THQ, Ubisoft, and Disney.

In March 2011, Monaco made the sudden announcement that it would be exiting the video game distribution market altogether. While the company did not provide a reason for its sudden departure at the time, Westrup now says that the company's relationship with EB Games was one of the reasons why Monaco exited the gaming market.

"We never had a favourable working relationship with EB," Westrup told GameSpot. "They are difficult to work with. They use their position in the gaming market to get their own way. They're successful, too, because they employ bully tactics."

According to Westrup, EB refused to pay Monaco for gaming products that the retailer had already received and sold, until Monaco could provide EB with a further discount.

"We had already given them [EB] help in clearing slow-selling product," Westrup said. "So we demanded payment, which we eventually received. We had great relationships with major retailers in both New Zealand and Australia, so why give a bully like EB such a huge advantage over their competitors?"

Westrup said EB approached Monaco's gaming suppliers, who then withdrew their support from Westrup's company. With Monaco's distribution margins unable to support further discounts, the distributor decided to bow out of the gaming market.

"The gaming division was a low return on investment division within the group," Westrup said. "EB simply brought forward the decision to exit."

GameSpot approached EB for comment following Monaco's claims about EB's conduct. The retailer had this to say:

"Monaco is a distributor for many products and companies, most of which are not video game-related, and many of whom have changed over the years," EB regional director for Australia and New Zealand Michael Stocker told GameSpot.

"Monaco blaming their failure to make a successful business of distributing one product type on a single customer--as you have claimed--is disingenuous in the extreme. I think Monaco's failures in this area of business have more to do with them than their customers. For the record, EB Games denies any wrongdoing in their relationship with Monaco."

The accusations levelled at EB Games lead to questions surrounding the nature of relationships between game retailers and game publishers. Why are they so important? Does a game retailer like EB have a responsibility to look out for and protect the interests of local game publishers and distributors as well as its own? Or is it within every business' right to safeguard its own interests above all else?

iGEA's Ron Curry said the whole industry model disintegrates when publishers and retailers stop working together.

"Though not without its tensions, which is expected in a competitive environment, the whole distribution chain exists for a common goal: to get games into the hands of consumers as efficiently and effectively as possible," Curry told GameSpot. "This is only possible with a shared respect for each other's part in the chain."

***

It's not just EB that's being blamed for contributing to this growing rift between Australian game retailers and publishers.

A former EB Games member of staff who wished to remain anonymous observed the breakdown in relationships between EB and local game publishers and distributors while still working for the retailer. However, the source said it was game publishers, not EB, that first put strains on the partnership.

"As EB's position in the market grew (both in revenue and in the number of stores it opened across Australia), so too did their business with local game publishers," the source told GameSpot. "But the publishers soon became uncomfortable with EB handling such a large percentage of their stock."

The source said that game publishers in Australia began to offer other Australian retailers special deals without telling EB, gradually trying to increase their profits by pushing up the cost price of games to a recommended retail price (RRP) of A$109 or greater, a move that had the potential to cut into EB's own profit margins at a time when the acceptable street price for games was below A$99.95. (The source said EB was used to paying publishers A$68 to A$78 for games with an RRP of around A$99.)

"This wasn't very fair to EB. In all the time I was there, EB didn't demand anything outside of what anyone else was getting due to their size, and suddenly, they were being blindsided. It created a real feeling of frustration between EB and the publishers."

The source also said that EB had strict policies regarding grey importing, considering it as an option only when a particular game was unavailable in Australia. The source said that this policy was driven by EB's desire to protect its relationship with local publishers, something that may have disintegrated.

But while the source defended EB's core values as a company, they believe that the retailer could be doing more to patch up this relationship.

"There's still a chance to mend this relationship. Publishers should communicate equally and fairly to each retailer, and EB should be open to working with them."

The former EB employee said that the future of game publishers in the Australian market is "entirely dependent" on their ability to maintain a healthy and amicable working relationship with a specialist retailer like EB, whose position in the market is strengthening. For its part, EB must recognise that it has a key role to play if any reconciliation is to be attempted.

"Publishers have to stop acting like they're dealing with the devil, and recognise that what is happening is in fact a commercial reality: EB will survive in the market no matter what happens. It has a business model that can adapt to anything. Whether they'll be selling games, or whether games will only make up 30 percent of EB's business in 10 years' time depends on the market.

"Both parties have to sit down, shake hands, and work out a solution. It can be done."

Most of the industry sources who spoke to GameSpot for this story agreed on the fact that EB Games needs to work alongside--not against--video game publishers to find a viable solution for moving forward: things like sharing marketing costs, finding a way to reach out to consumers together, and helping each other overcome the falling video game retail market.

The future of the Australian gaming industry depends on it.

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