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The CHIPS are down: UK independent games retailer Chipsworld enters liquidation

By on July 29, 2010
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MCV today reports that CHIPS has gone bust, with the loss of 29 jobs at head office and at its wholly owned stores. The company is at pains to point out that its franchise stores are not affected. I

My heart goes out to management and employees. I have seen businesses die and I have been made redundant (although in the end that was one of the best things that ever happened to me), and it is not easy.

I take huge issue with CHIPs stated reason for the liquidation though. In their official statement, they say:

“Since the summer of 2008, Chipsworld Ltd has battled against the credit crunch, mounting unpaid debts and the recession in order to keep afloat. On December 31, 2009, it entered a Company Voluntary Arrangement in an effort to continue trading.

Unfortunately, the recession has lasted far longer and bitten far harder than anticipated and Chipsworld Ltd has been unable to continue trading. Many of its customers, particularly in the North-east of England have been badly affected by the recession and to continue trading would only increase the company’s debts further.”

I just don’t buy it.

The recession has been bad, certainly. And i am sure that if CHIPS is saying that its customers are spending less money in store, that is true. I just don’t believe that the primary cause is the recession.

What caused CHIPs’ problems?

Just to be clear, I have no specific insight into CHIPs. MCV commenters have talked about the difficulties of getting credit insurance, poor merchandising decisions or not having the right stock. That may or may not be true, but it is CHIPS specific. I want talk about the malaise that is affecting retail.

Fewer, bigger products

Publishers are being squeezed and their response is to chase bigger, more impressive titles. Everyone wants to be a Modern Warfare 2, grossing half a billion dollars in retail in the first week. What does that mean for other titles? It means that if you are not a big title, you are not getting the retail sales. In short, we’re seeing fewer titles take a larger share of the revenue. And this will continue.The impact for retail is stark. Publisher strategies focus on people buying fewer titles and playing them for longer. That is not good for footfall or average basket size.

The role of online in boxed products

Increasingly, boxed products are not even that important in themselves. They are becoming the first stage in the publishers’ strategy of feeding the funnel. Boxed games may even become loss leaders for DLC: the publishers get free marketing in the retail store (paid for by the consumer) but aims to make most of its profits from upselling other elements of DLC.

Just to be clear, this is not viable yet – DLC is not yet a big enough segment of the market. But it is a sign of things to come.

The growth of other forms of gaming

For everyone complaining about a recession, there are other games business that are growing like crazy during the worst consumer slump for 20 years. Zynga with $400m+ of revenues. Playfish and Playdom with an estimated revenues of more than $100 million. Companies like GameForge, Jagex and Bigpoint with revenues of around $50 million. Lazard estimates that the global online market was worth $15 billion in 2009, growing to $20 billion in 2010.

That’s a lot of growth. $5 billion of growth in fact. Where is it all coming from? Some of it is coming from new users (see PopCap’s research on gamers on Facebook) but a lot of it is cannibalization of existing sales.

To illustrate the point, here is Nick Parker’s charts for boxed sales versus online games and streaming games. (Nick produces much of the games forecast for Screen Digest, among other things.) We hit the peak of boxed products in 2008 and we ain’t never coming back. It may have been kick-started by the recession, but, in Nick’s estimation, the only way for boxed products from here is down.

Sales forecasts for boxed games versus online games and streaming games

The erosion of the hardcore

This one is more of a belief than empirical evidence. I’m still researching it. But my belief is that the hardcore gamer market is stagnating. I wonder if we may have reached a plateau where the hardcore market has reached its maximum size.

As people get older, with families and other commitments, they are less able to dedicate time to gaming. they are still keen gamers, but will seek alternative, less-intensive ways of getting their gaming fix.

This is precisely what happens in the film / television industries. Single, dating, childless people go to the cinema more often. Older, married couples with kids watch television. They are still consumers of filmed entertainment: just through a different medium.

Of course, cinema went through its rough patch in the 80s and early 90s and has since recovered mainly by improving what it offered its consumers. The same may be possible for physical games retailers. But the easy assumption that people who liked games had to go to shops has long gone. And I’m not sure that retail is yet experimenting with how to replace it.

Conclusion

My point here is not to pick on Chips. It’s to challenge the assumption that games retailing is being hit by the triple whammy of a consumer recession, pressures on credit and competition from grocers. Physical retailing of games is definitely facing these things, but it is facing much more. When the economy recovers and credit comes back, there is nothing but a tough future ahead for physical retailers.

Added to the Job Loss Tracker.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com
  • Liquidation

    Hi, i read your post and i love it. Thanks for sharing this.

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  • deftangel

    Interesting stuff from Nicholas and Chris. All of it making a lot of sense. The Long tail, as originally penned by Chris Anderson has certainly turned out a little differently. The tail is certainly longer, but hasn't gotten that much fatter. Instead, the head (i.e. the hits) have only got bigger. Combined, this puts a lot of pressure on the middle. I've seen a couple of analysis' that illustrate this effect, one was a good take on XBLA. The conclusion is the same. Either be massive AAA or small, targeted and niche.

    I've a somewhat complimentary hypothesis from watching NPD data over the last few years which I wish I had the proper access to test. My conjecture is that that the “hardcore” market hasn't just stopped growing, it has been more or less static this console generation and possibly longer.

    If you factor out the growth driven by the Wii (i.e. assert that the Wii turned out to be a reprise of the Gamecube sales wise) then the record revenue increases that were crowed about, peaking in 2008 don't look so clever. Consider also, who makes the majority of the money on the Wii (Nintendo!) and you start to build up a picture. Sony and Microsoft's revenues aren't a long way from flat over this time.

    US revenues were around $10bn in 2005 and have been around $20bn the last two years. The same last two years Nintendo's market share has been around 50%. What was Nintendo's marketshare in 2005? I don't have access to that data but it sure as hell wasn't 50%.

    Over-simplistic perhaps but analysts continue to talk about the decline in the US market being down to Nintendo without considering how revenue's hit these highs in the first place.

  • ChrisBateman

    Hi Nick,

    A few thoughts here… You say “In short, we’re seeing fewer titles take a larger share of the revenue.” I'm not sure this is entirely the correct analysis here, although you're certainly gesturing in the right direction.

    The revenue distribution in videogames hasn't obviously narrowed in the last 10 years as far as I can tell – we're still seeing about 5% of the games take 50% of the revenue. What we have seen is fewer titles competing in the same space, probably because the cost of development has risen so the number of titles (for the power consoles at least) has declined. Now weirdly this suggests that *more* titles are pulling in the big numbers, since the rough percentages haven't shifted much. But it's still the same small slice of the wedge getting those good numbers, we're maybe talking about 3-4 strong hits per year rather than 1-2. Also, the rate of incidence of mega-hits has increased – Modern Warfare 2 being the example of this kind of title. More on this in a moment.

    What does appear to have happened is the middle market has died up. It used to be that there was a lively A market below the AAA's – now it's difficult to find any evidence of this space. The drying up of the once plentiful license tie-in titles speaks of this problem. The reason for the loss of this market probably matches your analysis here – but it's been a big hit for both developers and retailers, both of which rely on a solid throughput of titles.

    In the 90's, 8 million was the ceiling for core market games, now this seems to have risen to about 12 million (give or take) and my unprovable suspicion is that this reflects a rise in the numbers of people in the core market. If so, the hardcore market isn't declining or static, it is continuing to grow, as can be seen from the relative sales of titles targeting a purely core market (at least, the big ones that get the marketing spend) which can now sell 3 million whereas in the 80s they topped out at a million. But the rate of growth of this market is considerably slower than the rate of growth of the mass market, and anyway, because of the rising cost of development of AAA console titles it's become harder and harder to make good returns targeting this market at the top end. It seems that a lot of indie developers are able to fill the huge gaps in the diversity of the market by providing niche hardcore titles at the bottom end, but the economics of this is harder to track of course.

    So on the whole I suspect nothing much has changed at the top, and it's rather the middle of the core market which has been stripped away… with disastrous effects for both developers and small retailers.

    As for boxed product, the AAA games continue to require boxed product – the development budgets demand the higher RRPs which can only be acquired in a box product because of consumer psychology; people are willing to pay more to get a physical item (no matter how illogical this may be!). The fall off in boxed products in the actual data in Nick Parker's chart probably reflects the fewer titles being fielded *and* the narrowing of the target market of those titles. His extrapolations look excessive to me although I don't doubt that you are correct to think that a greater and greater proportion of revenue will be obtained via downloads going forward.

    Unlike you, I don't see an end to boxed product any time soon, but without the diversity of titles that there was, say, during the PlayStation era, the indie retailers can't make up the numbers, and the ability for supermarkets to undercut only makes their position even more tenuous. CHIPs, alas, have fallen prey to these changes in the shape of the market for videogames.

    All the best!