---
title: "Why GameStop failed"
url: https://modern-mba.com/case/gamestop
sector: "Retail & brands"
sector_url: https://modern-mba.com/sector/retail-and-brands
published: 2023-05-03
updated: 2026-09-03
reading_time_minutes: 14
charts: 13
video: https://www.youtube.com/watch?v=qRIyaQLiJl4
publisher: Modern MBA
license: All rights reserved. Quote with attribution and a link.
---

# Why GameStop failed

Beyond the short squeeze, the memes and the day trading, nobody has answered the question of whether there is a business here. This case study reads the three eras of GameStop — total control of gaming through the mid-2000s, a decade of acquisitions that bought AT&T stores and a Flash game portal, and a present-day attempt to become a tech startup — and explains why the company's collapse was not disruption happening to it, but its vendors taking back a margin they had been paying a middleman for twenty years.

## Key figures

- **47% vs 6%** — Gross margin on pre-owned games against new consoles
- **$610M** — Spent on non-gaming retailers that peaked at 9% of revenue
- **$1.45M → $1.34M** — Annual sales of the average store, 2012 against 2022

## The argument

GameStop's dominance is usually credited to buy-sell-trade, and that gets the causation backwards. The model worked because of the domain it ran in. When gaming was niche, GameStop was the only retailer that specialized in it — Best Buy, Walmart, Toys R Us and Blockbuster each gave games an aisle — and it turned that into 3,500 US stores, four times Abercrombie's count and five times Best Buy's, in boxes averaging 1,500 square feet.

The engine was the pre-owned disc, which was a perpetuity. Buy a game back for $5, resell it at $18, and do it again for every owner the disc has, at 47% gross margins against 6% on new consoles and 21% on new software. Then the publishers worked out how to end it: broadband made digital delivery viable, the App Store showed them what a storefront of their own was worth, and multiplayer-first titles with DLC and DRM made a copy non-transferable. Vendors will cut out a middleman the moment they can, however much that middleman built their growth.

GameStop saw it coming and drew the wrong conclusion. Believing the model was the asset rather than the domain, it spent over $610 million buying businesses that were all equally fragile middlemen — AT&T resellers, an Apple reseller, and a Flash game portal acquired two months after Steve Jobs announced Flash would never run on iOS. At its peak that wireless empire was 9% of revenue. All of it was sold by 2019. The present bet is an NFT marketplace competing with hundreds of others on fees, which is the same commoditization again, in software.

## Charts

### More stores than Toys R Us, Best Buy and Abercrombie combined

US store count in 2006 against the leading brick-and-mortar brands of the period. Only Starbucks had more locations than the shop that sold one thing.

|  | Counts |
| --- | --- |
| Starbucks | 7,102 |
| GameStop | 3,624 |
| Abercrombie & Fitch | 930 |
| Best Buy | 750 |
| Toys R Us | 671 |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-1 · Sources: https://modern-mba.com/case/gamestop#sources

### And it was still opening them

Store count during the golden era. The US estate grew a quarter and the international one more than doubled, from 866 stores to 2,177.

|  | United States | International |
| --- | --- | --- |
| 2006 | 3,624 | 866 |
| 2007 | 3,799 | 979 |
| 2008 | 4,061 | 1,203 |
| 2009 | 4,331 | 1,876 |
| 2010 | 4,429 | 2,021 |
| 2011 | 4,536 | 2,134 |
| 2012 | 4,425 | 2,177 |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-2 · Sources: https://modern-mba.com/case/gamestop#sources

### Revenue tripled in six years

Annual revenue through the golden era of gaming. $3.09B in 2006 to $9.55B by 2012, as the category went from niche hobby to mainstream entertainment.

|  | US dollars |
| --- | --- |
| 2006 | $3.09B |
| 2007 | $5.32B |
| 2008 | $7.09B |
| 2009 | $8.81B |
| 2010 | $9.08B |
| 2011 | $9.47B |
| 2012 | $9.55B |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-3 · Sources: https://modern-mba.com/case/gamestop#sources

### A used disc sold for less than half a new one

Average retail price of new against pre-owned titles. The pre-owned line barely moved in seven years, because the customer buying it is the one who waited.

|  | New titles | Pre-owned titles |
| --- | --- | --- |
| 2006 | $34 | $13 |
| 2007 | $36 | $14 |
| 2008 | $42 | $16 |
| 2009 | $41 | $18 |
| 2010 | $43 | $18 |
| 2011 | $42 | $16 |
| 2012 | $39 | $18 |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-4 · Sources: https://modern-mba.com/case/gamestop#sources

### Pre-owned grew six times over

Sales of new titles against pre-owned. Used went from $403M in 2004 to $2.62B by 2012, at double the margin of anything else in the store.

|  | New titles | Pre-owned |
| --- | --- | --- |
| 2004 | $647M | $403M |
| 2005 | $776M | $512M |
| 2006 | $1,244M | $808M |
| 2007 | $2,012M | $1,316M |
| 2008 | $2,800M | $1,586M |
| 2009 | $3,685M | $2,026M |
| 2010 | $3,730M | $2,394M |
| 2011 | $3,968M | $2,496M |
| 2012 | $4,048M | $2,620M |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-5 · Sources: https://modern-mba.com/case/gamestop#sources

### The whole company rested on one of these three bars

Gross margin by segment. Consoles cleared 7%, new software 21%, and pre-owned held between 45 and 50% for nine straight years.

|  | New consoles | New titles | Pre-owned |
| --- | --- | --- | --- |
| 2004 | 5% | 20% | 45% |
| 2005 | 4% | 20% | 45% |
| 2006 | 6% | 21% | 47% |
| 2007 | 7% | 21% | 50% |
| 2008 | 7% | 21% | 49% |
| 2009 | 6% | 21% | 48% |
| 2010 | 7% | 21% | 47% |
| 2011 | 7% | 21% | 46% |
| 2012 | 7% | 21% | 47% |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-6 · Sources: https://modern-mba.com/case/gamestop#sources

### Which still only bought a 7% operating margin

Gross and operating margin through the golden era. Even at its most dominant, retailing a $60 game left GameStop six or seven cents on the dollar.

|  | Gross margin | Operating margin |
| --- | --- | --- |
| 2006 | 28% | 6% |
| 2007 | 28% | 6% |
| 2008 | 26% | 7% |
| 2009 | 26% | 8% |
| 2010 | 27% | 7% |
| 2011 | 27% | 7% |
| 2012 | 28% | 6% |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-7 · Sources: https://modern-mba.com/case/gamestop#sources

### The gross margin held all the way down

Gross and operating margin through the era of struggle. Gross stayed near 29% while operating collapsed to −8% — the problem was never the mark-up.

|  | Gross margin | Operating margin |
| --- | --- | --- |
| 2013 | 30% | 0% |
| 2014 | 29% | 6% |
| 2015 | 29% | 6% |
| 2016 | 29% | 7% |
| 2017 | 31% | 6% |
| 2018 | 29% | 5% |
| 2019 | 28% | −8% |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-8 · Sources: https://modern-mba.com/case/gamestop#sources

### The escape plan grew fast

Combined revenue of the Apple and AT&T subsidiaries. $303M to $814M in three years — real growth, in businesses with the same middleman problem.

|  | US dollars |
| --- | --- |
| 2014 | $303M |
| 2015 | $534M |
| 2016 | $814M |
| 2017 | $803M |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-9 · Sources: https://modern-mba.com/case/gamestop#sources

### Bought, not built

Combined locations of those subsidiaries. 218 to 1,522 in three years is not organic growth; it is a $400M cash purchase of two AT&T resellers.

|  | Counts |
| --- | --- |
| 2013 | 218 |
| 2014 | 484 |
| 2015 | 1,036 |
| 2016 | 1,522 |
| 2017 | 1,377 |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-10 · Sources: https://modern-mba.com/case/gamestop#sources

### And it never got past a tenth of the business

Share of revenue by line. The goal was half of operating earnings from outside gaming; mobile and consumer electronics peaked at 9.5%.

|  | New & pre-owned games | Collectibles | Mobile & consumer electronics |
| --- | --- | --- | --- |
| 2014 | 86% | 5% | 3.3% |
| 2015 | 79% | 3% | 5.7% |
| 2016 | 74% | 6% | 9.5% |
| 2017 | 73% | 7% | 8.7% |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-11 · Sources: https://modern-mba.com/case/gamestop#sources

### Back to gaming alone, at two thirds the size

Revenue after every non-gaming division was sold. $8.55B in 2018 against $5.93B in 2022, on a business the publishers have spent a decade routing around.

|  | US dollars |
| --- | --- |
| 2017 | $7.97B |
| 2018 | $8.55B |
| 2019 | $8.29B |
| 2020 | $5.09B |
| 2021 | $6.01B |
| 2022 | $5.93B |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-12 · Sources: https://modern-mba.com/case/gamestop#sources

### The average store takes less than it did in 2008

Annual sales per location. $1,446,607 at the 2012 peak against $1,343,123 in 2022 — and that is before adjusting for fourteen years of inflation.

|  | US dollars |
| --- | --- |
| 2006 | $688,593 |
| 2007 | $1,113,206 |
| 2008 | $1,347,637 |
| 2009 | $1,418,704 |
| 2010 | $1,407,441 |
| 2011 | $1,420,345 |
| 2012 | $1,446,607 |
| 2020 | $1,089,893 |
| 2021 | $1,314,389 |
| 2022 | $1,343,123 |

Source: Modern MBA, “Why GameStop failed”, published May 2023. Chart: https://modern-mba.com/case/gamestop#chart-13 · Sources: https://modern-mba.com/case/gamestop#sources


## Takeaways

1. **Specialization was the whole advantage.** Before e-commerce, buying a game meant Best Buy, Circuit City, Walmart, Toys R Us, Blockbuster or a local shop — and at every one of them games were **one aisle**. GameStop carried the newest titles, the consoles, the largest used collection, a trade-in counter and a direct line into the industry.
2. **The scale that produced was absurd.** Over **3,500** US locations by the mid-2000s and **4,400** by the early 2010s — **four times** Abercrombie and **five times** Toys R Us and Best Buy, and about **half** as many stores as Starbucks had in America. Overseas it went from **866** stores in 2006 to **2,177** by 2012.
3. **It scaled because the box was tiny.** The average store was roughly **1,500 square feet** — smaller than a tennis court, smaller than a Starbucks, about the size of a Subway — needing four walls, a roof, air conditioning and electricity, so it fitted cheaply into strip malls and shopping centers anywhere in the world.
4. **The trade-in program was a known ripoff and used anyway.** GameStop offered **$3 to $5** in credit or cash for a game and put the same disc back on the shelf at **$15 to $30** the next day. Driving across town for a better offer was not worth the trouble, eBay and Craigslist meant handling shipping and payment on every title, and no big-box retailer thought pre-owned was worth the hassle.
5. **The pre-owned disc was a perpetuity.** No matter how many owners a title passed through, as long as the disc worked there was another margin to take on every exchange. New titles averaged **$41** and pre-owned **$18** — on games bought back for **$5**.
6. **The business monetized both ends of the adoption curve.** Sell the newest hardware to early adopters, repossess the previous generation through trade-in at rock-bottom prices, then resell that same hardware and software at a markup to the budget-conscious majority arriving late.
7. **It was a promoter as well as a retailer.** GameStop owned **Game Informer**, a subscription magazine that was one of the few places to find gaming coverage in the print era, and sold ad space in it and in its stores to publishers, studios and manufacturers. Its reach made it a partner every publisher wanted to stay on the right side of — worth **higher allocations** of new consoles and titles, plus **price protections and return privileges** other retailers did not get.
8. **The golden era did the rest.** Revenue rose **200%** from **$3 billion to $9.5 billion** in six years as gaming went mainstream, and the average store went from **$688,000** a year in 2006 to **$1.44 million** by 2012 — a **110%** increase per location.
9. **But retailing is a thin business at every layer.** New consoles were a **$1 billion** line by 2010 at **6%** gross margin, because everyone from Nintendo to GameStop wants the hardware barrier as low as possible. New software averaged **41%** of revenue at **21%** gross margin — of a **$60** game, about **$15** reached the retailer. Only pre-owned cleared **47%**, and it was what pulled company gross margin to **27-28%** and operating margin to **6-8%**.
10. **Three shifts ended it, and none of them were about GameStop.** Broadband replaced physical distribution with digital delivery. The iPhone and the App Store absorbed casual handheld gaming and handed publishers the blueprint for a storefront of their own. And single-player titles gave way to multiplayer-first games with longer lifespans, post-launch DLC monetization, and **DRM that made each copy non-transferable** — which is what actually killed resale.
11. **GameStop's response inside gaming was as good as it could be.** It sold physical prepaid Xbox Live and PSN cards and DLC codes for customers paying in cash or store credit, and claimed to be *"the only significant brick and mortar retail seller of DLC."* Filling cracks in someone else's storefront is not a strategy.
12. **The diversification is where the real damage was done.** Every business it bought to reduce reliance on gaming was **an equally fragile middleman** facing the same consolidation: **Kongregate** in 2010, **Spawn Labs** in 2011, **Simply Mac** for **$10M** in 2012, **Spring Mobile** for **$60M** in 2013, **ThinkGeek** for **$140M** in 2015, and **Cellular World and Red Sky Wireless** for **$400M** in cash in 2016.
13. **The Kongregate purchase was indefensible at the time, not just in hindsight.** **Two months before** the deal, Steve Jobs published an open letter saying Flash would never be supported on iOS. GameStop bought a desktop Flash game portal anyway; **one year later** Adobe put Flash on maintenance and killed it on Android, taking browser games with it.
14. **Spawn Labs is the other one that stings.** GameStop bought a game-streaming startup in **2011**, the same year Twitch was founded, abandoned it in **2014** with a **$20 million** write-off citing *"lack of consumer demand for video game streaming services"* — the same year **Amazon bought Twitch for nearly a billion dollars in cash.**
15. **It worked, and it did not matter.** Simply Mac and Spring Mobile grew from **$300M to $800M** combined and from **200 to over 1,300** locations in four years, and the stated goal was that **50% or more of operating earnings** would come from outside gaming. Wireless peaked at **9% of revenue**. By 2019 Simply Mac, Kongregate, Cricket Wireless and the entire AT&T division were sold, roughly at **one times annual revenue**, and the company was on its **fifth CEO in two years**.
16. **The present bet is the same mistake in a new medium.** Revenue is back to gaming alone at **$5-6 billion**, the average store takes about **$1.3 million** — less than a decade earlier before adjusting for inflation — and reporting has been collapsed into software, hardware and collectibles so the NFT marketplace cannot be evaluated separately. That marketplace competes with **hundreds** of exchanges where **Blur overtook OpenSea by cutting fees to zero.** Software commoditizes exactly like retail does.

## Common questions

### Why did GameStop fail?

Because its suppliers took back the margin it had been earning as a middleman. GameStop's profits came from pre-owned discs at 47% gross margins, which only works if a game can be resold. Broadband made digital delivery practical, the App Store showed publishers what owning a storefront was worth, and multiplayer-first titles brought DLC and DRM that made each copy non-transferable. None of that was aimed at GameStop specifically — it is simply what vendors do once they can reach the customer directly and keep the whole price.

### How did GameStop make money on used games?

By buying low and reselling the same disc repeatedly. It paid $3 to $5 in cash or store credit for a trade-in and put the disc back on the shelf the next day at $15 to $30 — pre-owned titles averaged $18 against $41 for new. Because a working disc can be resold to every subsequent owner, each one produced another margin, which made pre-owned a 47% gross margin business against 6% on new consoles and 21% on new software. It was also what lifted company-wide gross margin to 27-28%.

### How many stores did GameStop have?

Over 3,500 in the United States by the mid-2000s, rising to about 4,400 by the early 2010s, plus international growth from 8 stores across Australia, Canada and Europe in 2006 to more than 2,000 by 2012. For scale, that was roughly four times as many locations as Abercrombie, five times Toys R Us and Best Buy, and about half as many as Starbucks had in America. The expansion was possible because the average store was only about 1,500 square feet — smaller than a Starbucks.

### What companies did GameStop buy?

Kongregate, a Flash browser-game portal, in 2010; Spawn Labs, a game-streaming startup, in 2011; Simply Mac, an Apple reseller, for $10 million in 2012; Spring Mobile, an AT&T reseller, for $60 million in 2013; ThinkGeek for $140 million in 2015; and Cellular World and Red Sky Wireless for $400 million in cash in 2016. The stated goal was for half or more of operating earnings to come from outside gaming. All of it was divested by 2019, roughly at one times annual revenue.

### Why did GameStop buy a Flash game company?

It wanted a route into free-to-play and casual gaming, and Kongregate came with 15 million monthly active users and a virtual currency. The problem is that the technology was already dead: two months before the acquisition closed, Steve Jobs published an open letter stating Flash would never be supported on iOS, and Adobe put Flash on maintenance and ended Android support the following year. Mobile was visibly outgrowing desktop at the time, so the acquisition was questionable on the day it was signed rather than only in hindsight.

### Is GameStop still profitable?

It is hard to answer from the outside, which is itself part of the answer. Revenue is back to gaming alone at $5 to $6 billion, down from $8 to $9 billion, and the average store takes roughly $1.3 million a year — less than it did a decade earlier, before adjusting for inflation. The company has also stopped breaking out new against pre-owned sales and no longer reports margins by business line, blending everything into software, hardware and collectibles, which makes it impossible to size the NFT marketplace separately.

### What is GameStop's NFT marketplace strategy?

It is the company's last large bet, and it runs into the same problem as its retail business. GameStop's exchange is one of hundreds, competing with OpenSea, Blur, Magic Eden and Rarible as well as marketplaces backed by organisations with more reach, including Reddit, NBA Top Shot and NFL All Day. Exchanges first differentiated on the prestige of the collections they attracted, but as collections became available everywhere the competition moved to cost — Blur overtook OpenSea by cutting trading fees to zero and reducing royalties. Software saturates and commoditizes exactly as retail does.

## Discussion

- GameStop's pre-owned margin depended on a disc being transferable. Was there any version of the company that survives DRM, or was the whole business always on loan from the publishers?
- The company spent over $610 million to escape gaming and every target was another middleman. What made that pattern invisible from the inside?
- Kongregate was bought two months after Steve Jobs publicly killed Flash on iOS. What has to be true about a deal process for that to still close?
- GameStop abandoned game streaming in 2014 as Amazon paid a billion for Twitch. When is 'no consumer demand' a real finding rather than a failure to wait?
- Ryan Cohen's plan is an asset-light company with software margins. If NFT exchanges are already competing on fees down to zero, what exactly is the moat this time?

## Sources

Store counts by region, revenue and gross profit by segment, average sales per location, and acquisition and divestiture terms from GameStop Corp. annual reports and 10-K filings, 2004 through 2022; average new and pre-owned software pricing as reported by the company; the Flash deprecation timeline from Apple's and Adobe's own announcements; NFT marketplace trading volumes and fee structures as reported by the exchanges

---

From [Modern MBA](https://modern-mba.com/). Read this case in full at [https://modern-mba.com/case/gamestop](https://modern-mba.com/case/gamestop), or watch the episode at https://www.youtube.com/watch?v=qRIyaQLiJl4.