The Premature Demise of Physical Video Games: A Cautionary Tale

A humorous anecdote from my household has become a recurring joke, originating from a 12-year-old UK TV ad. In the commercial, a man returns from shopping, and his partner asks if he's brought back eggs. The man, looking embarrassed, replies that he thought she said Call of Duty: Modern Warfare 3, revealing a video game in his shopping bag. To this day, whenever eggs are mentioned, someone quips, "Why would you want to eat Call of Duty: Modern Warfare 3?" - a lighthearted moment that still brings laughter. The aforementioned ad was created by Tesco, a UK supermarket chain that was once a giant in video game retail. With thousands of 24-hour stores across the UK, Tesco ensured it was the first to sell new releases. During my 2009 visit to their HQ in Welwyn Garden City, the head of entertainment expressed the company's ambition to become the second-largest video game retailer in the country, behind GAME. Tesco's financial prowess, extensive store portfolio, and negotiating power enabled it to secure the best deals from suppliers. As a food-based business, Tesco wasn't reliant on game sales for profit, so it would often drastically reduce prices. On multiple occasions, rival retailers found it cheaper to purchase games from Tesco than from official distributors. Tesco employed a "loss leader" strategy, selling games at a loss to attract customers, leaving independent shops struggling to compete. However, Tesco faced a competitor it couldn't overcome: itself. As physical game sales declined, other departments within Tesco, such as clothing, technology, and toys, began to eye the space allocated to games. Tesco's games aisles eventually suffered the same fate as its CD and DVD sections, with shelf space reduced and smaller stores removing them entirely. Now, Tesco is set to eliminate games from all 2,800 of its stores. Tesco's exit from the video game industry is the latest in a series of troubling headlines. GameStop reported losses, changed management, and closed all 35 stores in Ireland. European data for the first half of the year showed a 9% year-on-year decline in physical game sales, despite major console releases like The Legend of Zelda: Tears of the Kingdom and Hogwarts Legacy. In a recent interview, GAME boss Nick Arran discussed the company's shift towards toys, stating, "Gaming is our core business, and we will be the last ones standing, selling physical video games. But we need to be realistic; we have a business to run, and the expectation is that this will decline." Historically, the argument was that consoles and hardware couldn't be downloaded, and there was still a need for physical retail spaces. However, platform holders are increasingly selling products directly, with Sony releasing some recent offerings, like PSVR 2 and the Edge controller, exclusively through its online store. The days of finding games in local shopping centers or high streets seem to be coming to an end. Nevertheless, across Europe, 29 million PC and console games were sold in the first half of the year, indicating a significant, albeit declining, market. The situation varies by franchise and platform. PC is almost entirely digital, while Xbox is moving in that direction, driven by the popularity of its digital-only Series S console. However, PlayStation and Nintendo have different dynamics. In 2022, GSD data showed that over 80% of new Nintendo Switch game sales in Europe came from physical stores, based on third-party titles. The gap between digital and physical is widening, but the video game industry isn't ready to abandon physical sales entirely. Tesco's departure from the video game market is concerning, given its presence in every major UK town and its significant market share in physical games. For Nintendo, losing a retailer like Tesco is a blow to its business. Moreover, I believe this development is a setback for the industry as a whole. While we often boast about the revenue generated by video games, surpassing that of movies and music, the reality is that TV, movies, and music are more ubiquitous. PC and console games remain a niche interest, and losing a platform like Tesco to reach potential new customers is a disappointment. The 2011 Tesco ad is now a relic of a bygone era, when a mainstream retailer would invest in prime-time TV advertising for an Xbox 360 game, accompanied by hundreds of midnight openings and widespread media coverage. Today, game publishers recognize that TV advertising is less effective than engaging directly with their community. They understand that physical retailers don't provide the same returns as digital ones. By bypassing these channels, publishers can establish a more direct relationship with customers, respond to feedback more quickly, manage product lifecycles more effectively, and sell DLC directly, overcoming the challenges of pre-owned games. In essence, they gain more control and can increase profits. Digital distribution is undoubtedly a positive development for the games business. However, in our haste to adopt this model, we risk leaving behind potential customers who might not have been reached otherwise. Coincidentally, a new Call of Duty: Modern Warfare 3 is expected to launch this year, and I have little doubt it will be more financially successful than its 2011 counterpart. Nevertheless, I wonder if as many people will be aware of its release.