Babbage’s: Before GameStop

Video in development…

            By the mid-1980s, computers had become much more appealing to the general public and the advent of personal computing marked a turning point for the tech industry and society, itself. Now that regular consumers were more interested in the budding technology, what came next was an endless cavalcade of software, video games, and hardware over the following decades – starting with companies like Apple, Atari, and Commodore duking it out for market dominance. Before the World Wide Web took hold, shoppers relied on individual stores for specialty items like computer software. Among these software specialty stores was one that started it all: Babbage’s.

McCurry, Kusin, and Perot: A Market Emerges

            James McCurry and Gary Kusin, classmates at Harvard during the mid-70s, had discussed becoming business partners after graduating. However, following graduation, the two ended up going their separate ways, keeping in touch. Kusin moved out to Dallas and worked as the general merchandise manager for Sanger-Harris under Federated Department Stores, and McCurry became a consultant for Bain & Company in San Francisco. It wouldn’t be until 1982 that the men would finally become partners. That year, McCurry shared with Kusin a concept for a new chain of specialty stores that would capitalize on the flourishing computer software and video game markets. The TRS-80, one of the first mass-produced and marketed home computers, was released in 1977, and the success of the Apple II and Commodore lines were a big cause, but that was just a warmup. That year, several consumer home computers were launched, including more systems in Atari’s 8-bit lines (which were very popular.) Most notably, 1982 was the year the Commodore 64 was launched, which would go on to become the best-selling single computer model of all time.

            With computer software and hardware consumers growing consistently, and squeezing their way into more and more retail space in department stores and big-box retailers, having this kind of store could be massively successful if they got in early and would initially entail a growth plan of neck-brake speed, opening 20 stores almost immediately.

           The plan didn’t get much traction until February of ’83 when a certain businessman got involved – an old family friend of Kusin’s – none other than Ross Perot. He offered a $3 million line of credit for one-third ownership in the company and suggested they hold back on the over-ambitious expansion plan and focus on just one unit, during which the two could learn more about the industry and how it worked. They accepted Perot’s offer and opened the first location in Dallas’ NorthPark Center that May. It would be named Babbage’s, after Charles Babbage – a 19th Century British mathematician, inventor, and engineer best known for creating the “Difference Engine,” regarded as the first mechanical computer. Dubbed by many as the “father of the computer” – a reference which, although fitting, certainly wasn’t chosen with their demographic in mind. However, it would soon become a household name. McCurry would handle the finances while Kusin would deal with software distributors, with both taking turns to manage the store directly.

           “During this time, McCurry and Kusin tested their business strategy, which involved four key provisions: a constantly updated mix of products, a competitive pricing system, a flexible store design with sections devoted to various computer and entertainment system platforms and software categories, and an enthusiastic, noncommissioned sales staff that would not intimidate customers with technical jargon.” – Funding Universe

           By Thanksgiving, there were five Babbage’s in the Dallas area. With the turnover heavy model, they were able to tailor the inventory to favor the most popular computers and video game consoles at a given time. The most dominant console at its founding was the Atari 2600, however, the next year would see an end to their stranglehold due to massive oversaturation of consoles and titles, as well as a lack of quality control to where, in some cases, anyone who had basic coding knowledge was able to write and legally sell their games for play on systems like Atari’s – no matter how horrible they were. This resulted in the 1983 North American Video Game Market Crash, causing company revenues to drop a whopping 97%, a catastrophic event that practically killed Atari and its contemporaries. This gave the industry a really bad connotation. The market crash was largely attributed to consumers shifting away from consoles to PCs, giving that market a big foothold, and, thankfully, Babbage’s was prominent in both.

New Rivals and Ambitious Expansion

            By the end of their first year, the company had sales of $3 million, but out of that had lost $560,000. Now, the high-speed expansion drive was brought back and over the next two years, they would more than quadruple in size. They balanced the scales and finally broke even with over $10 million revenue and about 20 stores, and a warehouse, staying mostly mall-based. By ’85, it was apparent they weren’t the only fish in the pond. The bookseller giant B. Dalton had opened Software Etc. as a “store-within-a-store,” with the intent of selling computer software in some of their nearly 800 bookstores. However, the next year B. Dalton was sold by its parent company, Dayton-Hudson, to Barnes & Noble. Software Etc. Stores, Inc. would be spun-off in ’87 and would begin to open standalone stores, being mostly in malls as well. Unlike Babbage’s, their inventory would come to favor higher-end products. There was also Egghead Software on the West Coast and some early sputters from Electronics Boutique (which would later become EB Games.)

           In June ‘87, Waldenbooks, the second-largest retail bookstore chain, owned by Kmart, opened WaldenSoftware, which would open selling 7,500 different PC software titles. [6] The difference between them and the others was the fact they were more expensive and, while they had a large selection, were frequently out of stock, pushing their customers to favor preordering or special ordering items rather than selling them right off the shelf. They also carried a lot of more obscure merchandise. [11] The rise of these specialty stores capitalizing on the market was a big help to video game and software publishers after the crash, helping to make a foundation that would be used to reboot the market, but also made it a lot more competitive. While the crash was mostly focused within North America, other countries had much less intense shockwaves and saw a major transfer of power.

           Japan experienced the crash through what they called the “Atari Shock,” while they had become a sort of video game capital in their own right with brands like Sega and Nintendo mostly unaffected. The latter would sneak their new 8-bit video game console, known as the Famicom, into American households as the ‘Nintendo Entertainment System:’ a big, grey computer-looking console that came with a light-gun and a robot. This wasn’t anything like its U.S. predecessors, taking the words “console” and “cartridge” out of the game completely (no pun intended.) Thanks to Nintendo’s crack marketing, Americans bought the gimmick, and it sold like hotcakes, grabbing up some of the dominance left over by Atari. Boasting 16-color graphics and an actual attempt at corporate quality control, games were getting better and were drawing in older crowds. The second half of Babbage’s business model was slowly being nursed back to health. They added the new system to their product lines soon after as they added another 35 stores to their fleet, with sales of $29 million and a profit of $1.16 million.

           In ’88, Babbage’s made a stock offering and went public, offering equity at $13 a share. After this, Perot bought up shareholder stock for a time at a higher price than the initial value to give more incentive for selling, further bolstering expansion efforts. This is a maneuver known as tendering one’s stake (again, no pun intended. Or it might be…) However, they began to lose business because of their bias on video games, understandable as Americans were still reeling from the crash, to which they responded by lowering the prices of computer software. However, Sega would revolutionize the industry with the Sega Genesis, a 16-bit, 64-color console, avoiding non-industry terminology and marketing it as an outright home gaming console, and their rival Nintendo had also just debuted the new handheld Game Boy. These companies had revitalized the industry, making a big splash in Babbage’s 1989 holiday season. Entertainment software became their main business, with educational software and computer accessories and hardware taking a back seat. By early 1990, products were being sold at lower-profit-margins as the industry got more and more competitive, and Babbage’s stock plummeted to under $5 as they opened over 50 new stores.

Richard Garriot sitting in front of Software Etc. (c. early-90s)

           They slowed expansion as they focused on their financials, implementing a computerized POS system, giving better control over product turnover, and automatically shipping orders from their warehouse to fill demands by the next day. Company revenue responded to the reorganization and the reborn gaming industry by a 39% rise to $132.8 million, with earnings at $4.1 million, growing to 204 stores. The company’s financial Controller, Opal Ferraro, would become Chief Financial Officer in 1991 and would join Kusin and McCurry as one of the company’s only officers. Sales of computer and home console software rose rapidly as a price war broke out in the industry, pushing Babbage’s stock to $24 a share. The next year, Software Etc. went public with 229 stores in 37 states and D.C. [3]

               In ’92, Kmart would acquire Borders and merged them with Waldenbooks to create the Borders-Walden Group. Electronics Boutique would come to manage their WaldenSoftware stores for them soon after this. [10]

A Merger Looms as Gaming Grows Up

            The next two years saw the launch of the Super Nintendo Entertainment System and Sega’s growing number of Genesis expansions (like the 32x and Sega CD.) That year also saw the launch of the 32-bit Panasonic 3DO and SNK’s Neo Geo CD, consoles that utilized the hot new disc medium. They began to carry the groundbreaking consoles but the 3DO was not well received for many reasons – its $700 price tag one of them – but gave a glimpse of a new dawn in gaming on the horizon. In Japan, new, more economically feasible CD consoles were introduced: the Sony PlayStation and Sega Saturn, which were slowly making their way across the Pacific to North America, and both would retail for $100 less than the Neo Geo CD. Gamers knew it was smarter to just wait, and so, the 3DO and Neo Geo CD faded into obscurity.

           The compact disc would soon be a threat to the long prevalence of the cartridge, but, as far as much of the industry was concerned, 16-bit was still king. Babbage’s had a sharp decline in video game sales and their stock went down as well, because, as I mentioned before, the majority of video game consumers were waiting for the next generation of consoles and stopping buying as much from their stores. Even if consumer trends remained static, they’d find an increasingly outdated inventory, with a good portion still favoring the aging 16-bit predecessors. As the company now entered the mid-’90s, this had to be resolved to stay relevant. “[They] slashed prices on hundreds of video game titles early the following year to unload [their] inventory…” [1]

           By this point, the video game industry game had become a $5.1 billion market. This period also saw the rise of Funco to prominence as the nation’s largest seller of preowned video games, a market they helped to popularize, and one that Babbage’s was not in. With 50 FuncoLand stores and fluctuating sales of around $80 million, they also had Game Informer, the company’s bi-monthly video game magazine, which had about 100,000 subscribers, and were #11 on Fortune magazine’s list of fastest-growing companies. [5]

           Funco’s business was unique in that their profitability was very turnover heavy and relied on the frequency of new consoles, as to when people were looking to sell or not. As more consoles began to be produced, it became harder and harder to read market trends, so, they began to shrink following the introduction of CD-based systems.

           After sailing through the intense recession at the start of the decade, Babbage’s was now a 330-store chain with $240 million revenue and no meaningful debt to worry about. Now, their fears would be realized, instead, in a huge rise in competition. Mass-marketers had gotten in on the business, as well. Kmart, itself, was gigantic and Wal-Mart had become a national staple, but they weren’t the only ones getting bigger: Best Buy and Circuit City were growing exponentially, not to mention Toys R Us and Target, in addition to already existing competition from national and regional department stores, as well as other specialty stores. Software Etc. had adjusted their inventory over the years to mirror Babbage’s more so, and operated around 380 stores with similar revenue to their competitor.

           Amid the intense competition, the two came to a mutually beneficial decision: consolidation. They would merge their chains into a single holding company, NeoStar Retail Group, Inc., and would become respective subsidiaries of the company and retained their separate identities. [1] The overlap in market presence wasn’t too great as the two operated in less than fifty of the same malls, so by the time the merger closed “[they had] stores in more than half of the 1,200 malls in the United States – making it the largest consumer software specialty retailer in the country.” [1] It would have a third branch that operated software sales inside Barnes & Noble stores. Leonard Riggio, the founder and chairman of Barnes & Noble, would join the NeoStar executive committee with McCurry as board chairman and CEO. Daniel DeMatteo, president of Software Etc., would retain his post, as would Kusin as president of Babbage’s – however, he would leave the company in ’95 and would go on to start a cosmetics company.

Barnes & Noble, Funco, EB, and The Late ‘90s

            The consolidation efforts, proposed to counteract the rise in competition, ended up prolonging the inevitable: mass-marketers were gaining strong control over the software and video game specialty industries and profits were falling. They began posting dismal deficits as Barnes & Noble took over software sales in their stores. Without means to secure financing to prepare for the holiday season, NeoStar would file for Chapter 11 bankruptcy protection in September of ’96 and would appoint Thomas Plaskett as chairman. He had a history of renowned business turnarounds, bringing companies like Greyhound back from the brink of dissolution and made a similar attempt with Pan Am (albeit unsuccessfully.)

Credit: PeRshGo

           NeoStar would minimize over-presence in their markets to slim down costs as they attempted to reorganize. After no luck in securing financing for said reorganization, they would put their stores up for sale. The future of NeoStar was in the balance until they received an offer from a rival: Electronics Boutique, who had grown to a 600-store chain. Like Funco, EB had become more focused on TV-based consoles and their software. They were ultimately beaten out by Leonard Riggio and a group of investors for $58.5 million for the whole enchilada, but they’d be back soon. [1]

           A new holding company called Babbage’s Etc., LLC was created to run the combined 467 Babbage’s and Software Etc. stores, closing the 200 remaining outlets from the two. The company’s CEO would be R. Richard Fontaine, who led a joined focus on home video games above everything else. The release of the Nintendo 64, a cartridge-based 64-bit system, got them back on track and was healthy enough for meaningful growth by 1999. The main focus was moving the expansion drive from indoor malls with the plan of opening 20 strip mall-based stores that year. They chose a new name for this different kind of store: GameStop. A website for the new chain was launched that year as well, offering 1,000 games and game accessories, as well as game reviews. [1] That October, immediately following the company turnaround and the launch of GameStop, Riggio and his team sold Babbage’s Etc. for $215 million to Barnes & Noble, over three times more than what it was worth just three years earlier. [1] The launch of the Sega Dreamcast and PlayStation 2 and the new millennium would mark a turning point where bits didn’t matter anymore, it was about the way games looked, and they looked impossibly advanced compared to the start of the decade.

Credit: User 73706

           By Spring 2000, Funco had come to operate 401 FuncoLand stores, mostly located in strip malls. Electronics Boutique would enter the ring again, for Funco, with a bid of $110 million in shares for ownership of the company. By this point, EB operated in 46 states, Puerto Rico, Canada, Australia, and South Korea. [7] Having recently acquired WaldenSoftware, merging with Funco would make Electronics Boutique the world’s largest video game specialty retailer. They had been eyeing the chain for the last couple of years, but their latest offer wouldn’t hold long and had initiated a bidding war. Barnes & Noble would outbid them through Babbage’s Etc., prompting EB to counterbid $135 million. [8] Funco stock would soar from $11 to around $24 as Barnes & Noble put up $161.5 million in stock for the company, a price proving to be too high for EB to match. [9]

The Rise of GameStop and Electronics Boutique

Image result for eb games 2004
EB Games catalog (c. 2004)

            Babbage’s Etc. would become a wholly-owned subsidiary of Funco, Inc, which changed their name that December to GameStop, Inc. This began a slow companywide change to the GameStop nameplate, and by 2004, nearly all stores were rebranded. As they surpassed 1,000 stores, they enjoyed a large push from new products like Nintendo’s GameCube and Game Boy Advance as well as Microsoft’s well-marketed debut to the video game industry: the XBOX. “The number of installed video game systems in the United States jumped from 26 million in 2000 to 65.1 million in 2002. The time seemed right for B&N to partially cash in on its foray into gaming, and GameStop Corp. was incorporated in August 2001 in anticipation of an initial public offering.” [1] Their first stock offer on the NASDAQ failed due to a lack of interest, so, they instead went to the New York Stock Exchange and listed 20.8 million shares at $18 each. [1]

           By 2003, installed game systems in the U.S. jumped to 86.9 million units. “The company had its best year ever in 2003, posting record sales [of] $1.58 billion and record profits [of] $63.5 million. Perhaps most impressive, GameStop was profitable every quarter.[4] They realized there was enough room in the market for thousands of more stores and they expanded strategically over the following years. By this point, two-thirds of all their stores were located in strip-malls, which had proven to be much more accessible than those in regular shopping malls (continually dropping out of vogue in North America and much of the world.) Electronics Boutique was more focused on organic expansion and focus on the core of their video game business, eliminating their other chains like EB Kids and BC Sports Collectibles, selling off the latter. They opened 383 stores in 2004 and their President and CEO, Jeffrey Griffiths, announced plans for 400 more in 2005.

           GameStop and EB were neck and neck when it came to expansion. Even without Funco, EB was able to take the title as the world’s largest specialized retailer of electronic-games software, which says a lot about the company. By then, GameStop was completely separate from Barnes & Noble and, as internet sites like Amazon were starting to enter the market, they announced one more major acquisition: a $1.44 billion merger that combined GameStop and Electronics Boutique into a single 3,800 store company with $3.8 billion in overall revenue. Again, consolidation became the answer.

           Gone were the days of individual, small operators, and in came the mega-corporation – it finally happened to the video game/software specialty industry, too – and in the years since, the two have grown to colossal proportions, becoming titans in the new and preowned video game market. Yet, even after all these years, they both stand on their own as two modern relics of home console and computer software history.

Babbage’s Legacy

            Babbage’s is a special case for Post-Mortar, as it is a defunct brand that continues on to this day, for all intents and purposes. Sure, their business practices and philosophies don’t completely line up, but with the additions of Funco, EB, and the several small acquisitions that followed, I’d say it’s about an even mix of the several once-competitors.

            Resale-wise, the American market was never going to be comparable to that in, say, Japan. There, they treat resale with the utmost care and respect. Just like everything we do in this country, we make aggressive warfare on the market: not paying so much attention to the quality of the image we’re selling so much as our dominance in which to do so. When it comes to game developers losing money to GameStop-style resellers, they have plenty of ways around that today than they did when it was first an issue. Digital has completely changed consumerism forever, so, let ‘em fight a war if they want; at the end of the day, it’s really about the creator getting the product to the audience at a fair trade. That is all that truly matters. GameStop’s business practices caused a stir in the community but that would have always been a given, even if they were still just Funco or EB, Software Etc. or Babbage’s.

            The expansion of both the computer and video game industries happened to coincide perfectly and was just powerful enough for so many companies to profit, survive the early ‘90s, combine their efforts, and, at least in spirit, continue into the next century. Like many pioneers, Kusin and McCurry are among the hall-of-famers. If it weren’t for them and their fellow industry members, the computer software and video game markets may very well have, more-or-less, flatlined. We owe a lot of modern tech to companies like theirs, pushing the product on us when we didn’t even know we needed it. They helped in institutionalizing a burgeoning market that some considered to be merely a passing fad, and their invention, much like that of their company’s namesake, would go on to more than exceed their wildest expectations.

Credit: Mike Mozart

Citations

[1] GameStop Corp. History. (n.d.). Retrieved February 3, 2021, from http://www.fundinguniverse.com/company-histories/gamestop-corp-history/

[2] Babbage’s, Inc. – Company Profile, Information, Business Description, History, Background Information on Babbage’s, Inc.(n.d.) Retrieved February 3, 2021, from https://www.referenceforbusiness.com/history2/83/Babbage-s-Inc.html

[3] Gross, S. (1992, April 24) Software Etc. offering brings in $22.5 million. Star Tribune, p. 45.

[4] GameStop History. (2020, August 27). Retrieved February 03, 2021, from https://www.zippia.com/gamestop-careers-4821/history/

[5] Funco, Inc. History. (n.d.). Retrieved February 5, 2021, from http://www.fundinguniverse.com/company-histories/funco-inc-history/

[6] (1987, April 5) Kmart Unit Will Market Computer Software, Toys. Los Angeles Times, p. D8.

[7] Schlisserman, C. (2000, April 27) Barnes & Noble increases its offer. The Philadelphia Inquirer, p. 31.

[8] Fernandez, B. (2000, April 21) Electronics Boutique matches competing bid for games retailer. The Philadelphia Inquirer, p. 33.

[9] Moore, J. (2000, May 3) Funco suitor drops chase. Star Tribune, p. 39.

[10] Reuters (1992, Oct 3) Kmart to Purchase Borders Bookstores Chain. New York Times, p.37.

[11] Servo5678 (2002, Jul 25) Waldensoftware. Retrieved February 7, 2021, from https://everything2.com/title/Waldensoftware

Alex Nuelle, 2020

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