38% (2014: 35%) 4.5m (2014: 4.7m) 33% (2014: 33%) 275 (2014: 236) 319 (2014: 321) 1.7m (2014: 1.4m) 1.5m (2014: 0.8m) 2015 highlights

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1 GAME Digital plc Annual Report and Accounts 2015

2 2015 highlights Overview ifc 2015 highlights 1 Our community Strategic report 22 Chairman s statement 24 Chief Executive Officer s review 28 Our markets and key trends 34 Welcome to our world 36 Our business model 38 Our strategy 52 Financial key performance indicators 54 Non-financial key performance indicators 55 Risks and uncertainties 58 Operating responsibly 62 Operating and financial review Governance 69 Chairman s introduction to Corporate Governance 70 Board of Directors 73 Corporate Governance Statement 76 Nomination Committee Report 77 Audit and Risk Committee Report 82 Directors Remuneration Report 92 Directors Report 95 Directors Responsibilities Statement Results 96 Independent Auditor s Report to the members of GAME Digital plc 100 Consolidated Statement of Comprehensive Income 101 Consolidated Statement of Financial Position 102 Consolidated Statement of Changes in Equity 103 Consolidated Statement of Cash Flows 104 Accounting Policies of the Group 110 Notes to the Consolidated Financial Statements 126 Statement of Financial Position of the Company 127 Statement of Changes in Equity of the Company 128 Statement of Cash Flows of the Company 129 Accounting Policies of the Company 131 Notes to the Company Financial Statements Shareholder information 135 Glossary of terms 136 Shareholder information ibc Find out more online Gross profit 213.7m +1.9% FY FY FY14 FY FY15 Adjusted basic earnings per share p +5.6% FY15 UK retail market share 3 33% (2014: 33%) UK stores 319 (2014: 321) Digital customers 1.7m (2014: 1.4m) 18.8 Adjusted EBITDA m -8.5% FY13 FY FY14 FY FY15 FY Dividend per ordinary share 29.4p 29.4 Spain retail market share 3 38% (2014: 35%) Spain stores 275 (2014: 236) App users 1.5m (2014: 0.8m) Operating profit/(loss) 26.2m +5.6% FY13 FY13 (3.3) (76.6) 24.8 FY14 Net cash/(debt) 63.0m -24.7% FY FY15 FY Active reward customers 4.5m (2014: 4.7m) Notes: 1. Operating profit before depreciation and amortisation, exceptional and adjusting items. Defined in note 2 to the consolidated financial statements on page Adjusted basic earnings per share is calculated by dividing the net profit before exceptional and adjusting items for the period by the weighted average number of ordinary shares outstanding in the period. 3. Source: GfK Chart-Track; market share based on value of retail sales of mint hardware, mint software, console digital content and gaming accessories. We are retail. We are events. We are technology. We are GAME and we are building the most valuable community of gamers. Here s what it looks, feels and sounds like. GAME Digital plc Annual Report and Accounts

3 Our community It s staying up all night. Insomnia 55 Event date: August 2015 Att by over 36,000 Watch the film 2 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

4 Our community continued IT S SCARY AND FUN ALL AT THE SAME TIME. 5 Super Smash Bros. Launched: September 2014 Watch the trailer 4 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts 2015

5 Our community continued Call of Duty Advanced Warfare Launched: November 2014 Watch the trailer It s unstoppable. 6 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

6 Our community continued Star Wars Battlefront Launched: November 2015 Watch the trailer IT S GLOBAL, AND REACHES GALAXIES FAR, STAR WARS & TM 2015 Lucasfilm Ltd. All rights reserved. Game code and certain audio and/or visual material 2015 Electronic Arts Inc. EA, the EA logo, and the DICE logo are trademarks of Electronic Arts Inc. or its subsidiaries FAR AWAY. 8 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

7 Our community continued It s full of people who love games. 10 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

8 Our community continued And p eople who li ke to esc ape a little... GAME 12 GAME Digital plc Annual Report and Accounts 2015 Digital plc Annual Report and Accounts

9 Our community continued Helen AKA goalmachine Big fan of FIFA 16 Launched: September 2015 Watch the trailer 14 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

10 Our community continued Dan AKA Legend_101 Queued overnight for his copy of LEGO Hobbit Launched: April 2014 Watch the trailer 16 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

11 Our community continued Overview ifc-20 Strategic report Governance Results Shareholder information 135-ibc John AKA the_joker Got the game and the T-shirt Batman Arkham Knight Launched: June 2015 Watch the trailer 18 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

12 Our community continued The exciting thing for us is we ve just got started. It s taken time, investment and effort to build the community. Now the challenge is to make sure it delivers consistent value for shareholders. Here s how we do it. 20 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

13 Chairman s statement Where we are at the end of 2015 David Hamid Chairman AKA theboss Favourite game: Project Cars Most likely to hear him say: Make it so Dear Shareholder, GAME Digital plc has just completed its first full year as a public company, a year where we have taken key steps forward in delivering the Group s strategy. This positions GAME well and provides a strong platform for future growth. As our industry continues to rapidly change, I am confident that we have the right people and strategy to help transform the business over the coming years. Market As anticipated, with well over 30 million Xbox One and PlayStation 4s now sold globally, the new generation of games consoles is reaching a critical mass for the development of new blockbuster games titles. As a result, we are selling consoles at lower values, but achieving greater sales of higher margin software. Combined with the impact of growing digital download sales, where we see a shift from sales to commission-based revenue, we are experiencing an improvement in the gross profit of our business which will continue as we grow these categories further. Other key structural changes are happening across the market that present new opportunities for the Group, including the rapid growth of esports and gaming events. We are closely monitoring other market dynamics and see further opportunities to continue to reshape and future-proof our business. Results Although our peak period was impacted by significant promotional activity, most notably on consoles, the Group nevertheless delivered further growth for the year. The Group s Gross Transaction Value increased by 2.3% to million. However, given the competitive environment over the peak Christmas period and higher costs, the Group s Adjusted EBITDA fell to 46.9 million from 51.3 million in After adjusting items and the improved effective tax rate, Adjusted basic earnings per share increased by 5.6% to 18.8p. The Group s profit before tax increased to 25.8 million (2014: 7.3 million), with the prior year impacted by IPO-related exceptional costs totalling 8.4 million. In the current year the Group has benefited from the reduction in interest costs as a result of the balance sheet restructuring undertaken at the time of the IPO, which saw the removal of all debt from the Group. The Group has maintained its strong balance sheet and flexible lease profile whilst retaining a disciplined approach to capital allocation, with a total of 50 million of dividends announced or paid to shareholders during the year (including the proposed final dividend). The Board is recommending a final dividend of 7.35p per share, taking the total for the year to 29.4p per share, including the special dividend of 14.7p per share declared alongside our interim dividend in April. The Board remains committed to maintaining a progressive dividend policy. Strategy We offer our customers a unique and differentiated proposition, we have leading market positions and maintain strong relationships with our suppliers. We have a highly recognisable brand, a broad customer base and one of the largest and most generous loyalty schemes of its kind, and we will continue to build on these strengths and further develop the business as digital and online trading becomes an increasing part of our international retailing offer. To support our strategy and build on our solid foundations, we have been able to make investment decisions from a position of financial strength. The acquisition of Multiplay in March added an entirely new dimension to the line-up of products and services we can provide to gamers and publishers. Multiplay has successfully grown its business over recent years and we plan to leverage our strengths and relationships to significantly accelerate this growth. Our acquisition of Multiplay is indicative of the kind of investment we will look to make as we seek to further modernise our business and develop our digital future. Through Multiplay we now hold live gaming events for tens of thousands of gamers at major public venues. We also now provide online hosting services for both consumers and game developers for popular game titles on a worldwide basis. Board At our Interim results announcement, Benedict Smith announced he would step down from the Board. I would like to thank Benedict for his contribution to GAME and particularly for his involvement in the Group s successful IPO last year. Benedict has been succeeded by Mark Gifford, who joined the Board on 1 October as Chief Financial Officer. Mark brings valuable experience of the retail sector, financial management and strategic thinking. People I would like to pay tribute to our people, who make GAME the business it is. Our colleagues are our greatest asset. With their talent and dedication, they remain central to GAME s success. On behalf of the Board, I would like to thank all of our colleagues, including those who have recently joined us from Multiplay, for their hard work and commitment to the business over the past 12 months. Our values are more important than ever and our priority is to ensure we put the customer at the heart of our business and focus on building and engaging with the gaming communities of the UK, Spain and elsewhere. This makes good business sense and also gives us a real competitive advantage. Sincerely, David Hamid Chairman 22 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

14 Chief Executive Officer s review Dear Shareholder, It is now just over a year since GAME Digital plc became a public company. At that time I spoke of our vision as a business to build the most valuable community of gamers by delivering the best possible gaming offer and experiences for our customers and engaging with them more deeply, in a shared passion for gaming. Following the acquisition of Multiplay, the progress made in the creation of our new divisional structure (Retail; esports & Events; and Digital Solutions) and the strengthening of the senior team with a number of key appointments, I am confident that, when combined with the passion and dedication of our colleagues and the strong relationships we have built with our supplier partners, our Company is well placed to compete successfully and grow in an increasingly digital world, creating long-term value for all stakeholders. Though our headline performance this year was not what we set out to achieve 12 months ago, there is no doubt that the business remains in a strong financial position and is well positioned for growth as we enter the start of the content growth cycle for the latest generation of consoles. Given this cycle, we have clearly defined plans to deliver short-term improvements and other planned activities to transform the business for longer-term success. Competitor activity over our peak trading period was intense, however putting the customer first and ensuring we maintain an exceptional proposition in order to recruit as many new console customers as possible into our community remains key to driving longterm customer lifetime value. Indeed, the year saw a number of new trading records broken across the business including: a record Gross Transaction Value 1 of over 960 million; record revenues for our preowned phones and tablets business (GAMEtronics), up 100%; record console volumes, with over 1 million units sold; record gross digital sales; and, at Multiplay, record revenues and footfall for Insomnia, our flagship gaming festival. None of this would have been achieved without the hard work and dedication of every one of our colleagues serving our customers and communities, together with the collaboration of our supplier partners. I am immensely proud of and indebted to all of our colleagues and grateful to our business partners for their continued support. Our strong leadership team Martyn Gibbs Chief Executive Officer AKA the_force Charlotte Knight MD, UK Retail AKA The_ Shopkeeper Craig Fletcher Founder and CEO, Multiplay AKA Head_of_fun Stuart Rowe MD, Digital Solutions AKA Merlin Pablo Crespo Director General of Spain AKA thespaniard Gross Transaction Value 962.4m (2014: 940.5m) GAMEtronics revenue growth 100% Favourite game: Star Wars: Knights of the Old Republic Most likely to hear him say: Do... or do not. There is no try Favourite game: Lego Star Wars Most likely to hear her say: It s all about the customer Favourite game: Elite: Dangerous Most likely to hear him say: It s got to be the biggest and best yet Favourite game: Call of Duty: Advanced Warfare Most likely to hear him say: It s never been done before? Let s do it Favourite game: StarCraft II Most likely to hear him say: Muy bien, Amigo Note: 1. As defined in note 2 on page GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

15 Chief Executive Officer s review continued Summary of Group results The year saw continued developments within our markets as the latest console cycle entered its second full year post launch. Revenues excluding hardware grew 3.3% over the year, with growth across higher margin categories (Content, Preowned and Accessories, Toys-To-Life & Other) accelerating to 11.2% in the second half. As expected after the initial surge in sales following the launches of Xbox One and PlayStation 4 in the prior year, Hardware revenues were lower as a result of reduced average selling prices, falling by 5.4% over the year. These dynamics resulted in overall Group revenues growing 0.6% in the year to million (2014: million), whilst the Group s Gross Transaction Value 1, a better measure of underlying retail activity as it includes gross digital receipts, grew by 2.3% to reach million (2014: million). Group gross margins increased by 40 basis points to 24.7%, resulting in a 1.9% increase in gross profit to million (2014: million). Gross margins benefited from the shift in sales mix to higher margin content and preowned category sales, with content margins benefiting from the higher contribution from digital sales, rising by 250 basis points to 30.5% (2014: 28.0%). Hardware margins fell over the year from 7.6% to 4.1%. Adjusted EBITDA 2 was 46.9 million (2014: 51.3 million) reflecting a higher cost base, including revenue investments made to support the business s strategic initiatives and increased central overhead costs as a result of the Group s IPO. Statutory operating profit increased from 24.8 million to 26.2 million. Profit before tax increased from 7.3 million to 25.8 million, due to the balance sheet restructuring undertaken at the time of the IPO, which saw the removal of debt and the related interest burden from the Group and the elimination of any exceptional costs. Last year s results included 8.4 million of exceptional costs mainly in relation to costs associated with the IPO. Adjusted basic earnings per share increased 5.6% to 18.8p (2014: 17.8p) largely as a result of a lower effective tax rate. Group inventory and capital expenditure continued to be actively managed, although the planned levels of additional stock to support appropriate availability of new releases around our year end, as well as better preowned and GAMEtronics availability, led to a 16.0% increase in inventories on the prior period. Cash flow performance was robust, with free cash flow 3 of 32.0 million against 30.9 million in the prior year. After the interim and special dividend payments of 12.4 million (7.35p per share) and 24.8 million (14.7p per share) respectively, as well as 12.6 million on acquiring Multiplay, the Group maintained a strong net cash position at the end of the year of 63.0 million (2014: 83.7 million). It is the Group s policy to maintain the disciplined allocation of capital between growth and returns. Refocusing for the future We have identified various growth opportunities across the business and following the acquisition of Multiplay we have initiated the implementation of a new divisional structure to drive performance across the Group. Specialist Retail Building a team for the future We are in the process of realigning management and operating teams under the three key divisions: Retail, esports & Events and Digital Solutions. As part of this process we have made a number of senior internal appointments and added some key new hires to the business. Charlotte Knight was promoted to the new role of Managing Director of the UK Retail Division whilst Pablo Crespo, Director General Spain, continues to lead our operations in the Spanish market. Stuart Rowe joined the Company in April 2015 with responsibility for leading the development and growth of our Digital Solutions division. Stuart has held senior positions at a number of consumer-facing businesses over the course of his career, including the role of Managing Director of Play.com between 2005 and 2011, where he led the strategy and expansion of the business. esports & Events Focused on creating long-term value by building the most valuable community of gamers Digital Solutions Craig Fletcher, the founder and Chief Executive Officer of Multiplay, heads the Group s esports & Events division. We have set out clear priorities for each of the divisions to ensure we capitalise on key opportunities, and are committed to investing across each business area where we believe we are able to drive attractive returns over the medium term. It will take time for the new areas to contribute at similar levels to the long established retail business. As such, we will review our level of segmental reporting on an ongoing basis as our Group continues to develop. For now we will continue to provide segmental reporting on a geographical basis because the internal reporting framework of the Group is still driven by geography. Strategy We are committed to putting our customers and communities at the heart of our business, maintaining strong relationships with our suppliers, building on our established market positions, and focusing on driving customer recruitment and lifetime value. By following this approach I believe we will increase sales, profits and shareholder value. By ensuring we deliver a compelling offer for every type of gaming customer, driving our digital sales, broadening the Group s reach and capabilities and developing new technologies, we are working hard to create a business that not only drives profitable top-line sales growth, but also succeeds in building more valuable relationships with both our customers and our supplier partners. Our five strategic pillars, which are designed to drive long-term value for the Group, have been refined during the year following the key strategic developments made. They are: 1. Build on our position as the #1 destination for gamers: Grow sales and share in our core console markets and successfully expand into new categories by delivering a compelling offer for every type of gaming customer, ensuring we retain our position as the #1 destination for gaming. We are committed to investing in our core retail proposition and are focused both on the delivery of current market opportunities and on the diversification of the business into new categories as new trends and market opportunities develop. 2. Drive digital growth: Grow our digital sales through category leadership, content aggregation and innovation. 3. Optimise the omni-channel journey: Deliver a great customer experience by improving our communication, community building, people, channels and technology. We will continue to invest in our website and multichannel opportunities across our business. 4. Expand beyond retail: Deepen community engagement and grow our customer base by broadening our proposition beyond pure retail, to the ways and places in which people participate in, or watch, gaming. Our plans include a continued focus on the expansion of our esports & Events business. 5. Develop and champion new online technologies: Innovate and pioneer digital technologies to improve and grow our community and customer engagement, and sell these technology products and services into new and existing territories. Our plans include a continued focus on the expansion of our developer and customer hosting solutions and much more. Related content Our strategy on page 38 Notes: 1. As defined in note 2 on page As defined in note 2 on page Free cash flow is calculated by deducting capital expenditure from cash generated from operating activities (Group capital expenditure amounted to 11.3 million in 2015 and 11.4 million in 2014). All of which is underpinned by our knowledge and experience of over 17 million Reward account members delivered through a dedicated in-house insight team, who make sure we know our customers better than anyone else, give us the ability to provide information about the products and services that are relevant to them and reward them with offers on the gaming products they will want to buy. If we implement this strategy effectively then our business will be well-positioned to compete successfully, leading to more customers, engaging with us more often, taking advantage of more products and services, creating value for our shareholders. Outlook The video games industry is changing incredibly quickly, presenting both opportunities and challenges to our business (you can read more about them on pages 28 to 33). We are focused on maximising the potential from the current console cycle, growing our preowned businesses and benefiting from the opportunities arising as a result of market developments including digital content growth, esports, virtual reality, licensed merchandise, Toys-To-Life, and new games devices. GAME is a fantastic business, led by an experienced management team, supported by passionate colleagues and underpinned by strong values and a clear purpose: to build the most valuable community of gamers. I believe we are making the right decisions to ensure we remain fit for the future and are able to capitalise on the many growth opportunities that lie ahead of us. Martyn Gibbs Chief Executive Officer 26 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

16 Our markets and key trends A dynamic market landscape It s an exciting time to be involved in the video games industry. From the record-breaking launches of the latest generation of consoles in November 2013; to the phenomenon of Minecraft (an indie title launched on a limited budget less than four years ago that has gone on to sell over 70 million physical and digital copies worldwide); to the explosive growth being witnessed in esports and live video game streaming, the continued developments in the rapidly growing Toys-To-Life category and the impending launches of several ground-breaking virtual reality devices. The industry continues to see significant investment, innovation and opportunity. All parts of the ecosystem are evolving the places and ways people participate in or watch gaming, the hardware and accessories they use to play, and the way they access and pay for the content. Each one of these factors is impacting the markets in which we are engaged in some way. Our strategy is based on positioning the Group to capitalise on these evolving paradigms, in order to drive future growth and profitability. Below we discuss 10 major trends shaping the future of video games and video games retailing. Digital driving growth of the global games market The games market is increasingly digital, connected and social. As a result of the expected growth in mobile/tablet gaming and following the launches of the latest generation of consoles (Microsoft s Xbox One and Sony s PlayStation 4), the total video games category is forecast to continue to grow strongly in the coming years and to maintain its position as the most valuable form of entertainment globally. International Development Group, the research consultants, forecast the global video games category will surpass $100 billion in sales ( 66 billion) by 2018, up from approximately $80 billion ( 50 billion) in Total global games market value ( bn) Source: IDG This includes all digital forms of gaming (such as PC downloads, social gaming, mobile and tablet gaming and digital content purchased for consoles) together with console hardware and software sales (but excludes accessories and other forms of gaming hardware). Importantly, market dynamics are forecast to remain supportive across all major categories: console gaming, PC gaming and mobile/tablet gaming. UK snapshot Closer to home, the games category in the UK is large and growing $4.2bn 19m 19 million gamers 8bn 8 billion hours of game play recorded in % Total category revenue in the UK is forecast to increase by 7% in 2016 to 4.5 billion Source: OC&C 2016 $4.5bn The generation game: new consoles surpass 30 million globally After 21 months (as of August 2015), sales figures show that the combined sales of the latest generation of consoles, PlayStation 4 and Xbox One, are currently far stronger than their predecessors over the same period since launch, with unit sales ahead by approximately 50% in certain markets, including the UK. Globally, sales of PlayStation 4 and Xbox One consoles now total over 30 million units, with around 4.5 million units sold in the UK and Spain, providing a large installed hardware base for the producers of content and peripherals. However, there is still a long way to go in this hardware cycle. In total it is estimated that there are over 18.5 million PlayStation 3 and Xbox 360 consoles installed in the UK and Spain. So significant sales of the latest generation of consoles are predicted to continue for years to come as console prices continue to fall making the platforms accessible to a larger audience. Installed user base in years following launch: PS3/XB360 vs. PS4/XB1 UK (Units sold, millions) Year 1 Year 2 Year 3 Year 4 Year Years following launch Of course, games consoles are simply a channel to access interactive content and so, as expected, the transition to the new generation of console hardware is driving a simultaneous shift in content sales, with prior generation (Xbox 360 and PlayStation 3) sales falling as new generation sales grow. Though the dynamics of this generational shift can create some short-term volatility, overall PlayStation and Xbox content sales are forecast to continue their long-term growth trajectory (as shown in the chart below). Indeed, the total market value of PlayStation and Xbox content (across all consoles) in the UK and Spain is forecast to increase from approximately 1.5 billion in 2014 to over 2 billion in 2017 (source: OC&C). To a large extent, console content sales are driven by the launch of major AAA software titles by the global video games publishers. As expected, with the latest generation of consoles reaching critical mass, the industry is seeing a strong pipeline of major new software titles being developed. Finally, the transition to the new generation of consoles, which offer enhanced connectivity and multiplayer gaming capabilities, is driving an increase in online gaming through Xbox Live and PlayStation Network. This is supporting increased consumer demand for console digital content as discussed in more detail in the following section. Total PlayStation and Xbox content sales UK and Spain () 2,500 2,000 1,500 1, ,280 1,411 1,440 1,677 1,960 2, E 2015E 2016E 2017E Source: OC&C (includes all PlayStation and Xbox console formats) 1, E Year 6 Year 7 Year PS3/XB360 PS4/XB1 Source: IHS, GfK Chart-Track Digital doesn t mean disintermediation Console digital content comprises Downloadable Content (DLC), subscriptions, platform currency (e.g. credit to spend in Xbox Live, PlayStation Network and Nintendo eshop) and full-game downloads. DLC refers to additional content for games, for example additional levels, maps, characters, online functionality and season passes. Subscriptions refer to access fees for online content. Content can either be purchased at retail (whereby a customer receives a code on receipt or via ) or directly via the console platform. It is widely known that digital sales are expected to rise across all forms of gaming, including console gaming with OC&C forecasting console digital content sales in the UK to approximately double to over 800 million in the four years to What is less well known is that a significant, and we believe relatively consistent, proportion of console digital sales originate at retail, and in particular, specialist retail. Indeed in 2014, OC&C estimate that approximately 35% of all console digital content in the UK was purchased at retail (with the balance purchased directly through the console dashboards). Every area of digital has a retail proposition with retailers able to sell both full game downloads and DLC. Our research supports the view that retail, and specialist retail in particular, will remain an important contributor to digital sales driven by effective in-store and online marketing and customer education, flexible payment methods (notably trade-in and cash), content aggregation, digital attach opportunities and an increasing range of products across both DLC and full game downloads. PlayStation and Xbox digital content sales by sub-category UK only () 1, Subscriptions Arcade & Old Game Full Downloads Premium Full Downloads Add-on DLC Revenue Related content You can read about how we are working to build on our leading market positions on pages 38 to F F Source: OC&C Related content You can read about our digital performance and how we are working to grow our digital sales in the Our strategy section on pages 38 to GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

17 Our markets and key trends continued Innovation, immersion and the future of gaming Innovation and new technologies are often catalysts for advances and growth in gaming, with the advent of online multiplayer gaming and the gesture-based controls of the Nintendo Wii being two such examples, allowing gamers to consume and interact with games in revolutionary ways. The industry continues to experience significant investment in technologies across a number of areas including new hardware (such as new Steam and Nintendo consoles), Toys-To-Life (TTL), and virtual and augmented reality. We believe each of these categories presents strong growth opportunities for specialist retail, and while Nintendo and TTL are categories with established track records, virtual and augmented reality remain in development stage with predictions for their take-up remaining speculative at this stage. The TTL category (created by Activision with its Skylanders range in 2012) has seen rapid growth over the last three years, with the latest and largest entrant, being Lego/Warner Bros. Interactive Entertainment (with Lego Dimensions launched in September 2015). Together with further investment from the established participants (Activision s Skylanders, Disney Infinity and Nintendo Amiibo), we believe the category will continue its growth trajectory and is set to become a 100 million market in the UK this year. Whilst we have no details of Nintendo s new console specifications or their launch plans at this stage, given the company s gaming heritage and ownership of some of the most successful and valuable gaming properties in the world, interest in the plans for the launch of their next console, scheduled for 2016 and codenamed NX, unsurprisingly remains intense. The next 12 to 18 months is also going to see an unprecedented number of virtual reality hardware, software and peripheral product announcements. With many of the largest technology companies in the world involved, including Facebook with Oculus Rift (with whom Microsoft has partnered for Xbox), Sony s PlayStation VR, Microsoft s HoloLens, HTC s Vive, Samsung s Gear VR and Google s Cardboard, virtual reality remains one of the most anticipated new technologies the gaming market has seen in years. Top 10 selling games of all time Game 1. Tetris 2. Wii Sports 3. Minecraft 4. Grand Theft Auto V 5. Super Mario Bros. 6. Mario Kart Wii 7. Wii Sports Resort 8. New Super Mario Bros. 9. New Super Mario Bros. Wii Year of launch Platform Copies sold (million) 1989 Multiple Nintendo Wii Multiple Multiple Nintendo Ent. System Nintendo Wii Nintendo Wii Nintendo DS Nintendo Wii 29 Cross-platform complexity Consumers are increasingly choosing to play and watch games across multiple screen types (i.e. TV, PC, tablet and mobile) and across multiple types and forms of gaming (such as single player, multiplayer, social, casual and MMO (Massively Multiplayer Online)). This is driving increased consumer appetite for both the latest generation of games consoles as well as growth in non-console gaming. Coupled with this, the industry continues to see experimentation with new gaming monetisation models such as streaming, subscription-based, advertising-based, freemium/f2p, paymium and episodic. This complex landscape will continue to evolve as a result of further developments across each platform, such as the ability to connect and play Xbox One across Windows 10 devices, PlayStation TV and Steam Link. As a result of these trends, sales from non-console digital forms of gaming such as mobile, social, casual and PC-based MMO and Free to Play games (for example MOBAs (Multiplayer Online Battle Arenas)) are expected to grow at a compound annual growth rate of 6% from 2014 to 2018, reaching 1.8 billion. Though retail has historically had limited opportunity to monetise non-console gaming areas to date (predominantly through PC download sales and POSA cards), this is a growing area of focus as game developers and publishers look to expand their reach to the widest population of gamers possible. Many view partnering with retail as a cost-effective option to achieve this, particularly as licensed merchandise becomes a growing participant in the profitability of a gaming franchise. esports ignites Consumer behaviour around how content is consumed has drastically changed in recent years. A growing proportion of society prefers to watch each other, rather than professionally created content, and have an increasing desire to create, share and ultimately be part of the experience. The explosion in esports seen in the last three years (loosely defined as watching or participating in a gaming title that has a competitive scene or aspect in the game) is a direct consequence of this trend. The growth has been further fuelled by the massive increases in broadband penetration together with the rise of Video on Demand and live streaming services (such as YouTube and Twitch), which has combined to create perfect conditions for the industry to rapidly develop. esports market snapshot 2015 $600m Source: NewZoo The global esports market is expected to be worth over $600 million in 2015 and analysts forecast this to reach over $1 billion by Like mainstream sports, the esports value chain is multi-layered, with key The socio-economic characteristics of esports enthusiasts (with higher income, employment rates and spending than the average population) make them a valuable target market for brands. In addition, esports viewers typically spend a far greater proportion of their viewing time online (as opposed to watching live TV) making esports an effective way of reaching this audience. Multiplay, which the Group acquired in March 2015, run esports tournaments and events at their Insomnia gaming festivals, as well as many other types of gaming events. Related content You can read about Multiplay and how we are working to develop the Group s esports strategy on pages 38 to $1bn components comprising games developers and publishers, amateur and professional players, tournament and league organisers, broadcast platforms, consumers and brands. 10. Wii Play 2006 Nintendo Wii 28 According to industry research, it is estimated that in 2014 over 200 million people watched or competed in esports globally. It is further estimated that of this total population around 89 million can be classified as esports enthusiasts (those who participate frequently). This figure is projected to grow further as consumer awareness and investment in the space continues. By way of comparison, the number of people who regularly watch American football is estimated to be approximately 150 million globally. 30 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

18 Our markets and key trends continued Through our acquisition of Multiplay we have entered the fast-growing world of esports. Over 300 teams and 10,000 individuals took part in esports competitions at the most recent Insomnia festival, held in August 2015 at the Ricoh Arena in Coventry. Expanding preowned markets The ability to trade-in and purchase preowned gaming products has always been an important part of the games market and one which is highly valued by consumers. Consumer adoption of the trade-in/preowned model has been further supported in recent years by the economic climate, which has created savvier shoppers looking for the best deal, and who are more inclined to buy cheaper, comparable products where possible. In 2014, it is estimated that over 10 million preowned games were sold in the UK, representing over a quarter of the entire (mint and preowned) games market, with over a third of all games buyers purchasing at least one preowned game. Whilst the preowned software market, like the mint market, will be effected by the transition to the new generation of consoles, the expectation is that preowned sales will continue to grow over the coming years as the supply of new generation hardware and software products increases and the proportion of consumers participating in trade-in and preowned grows. In 2013, GAME expanded its trade-in and preowned offering by entering the preowned device market, notably smartphones and tablets, which has grown rapidly since its launch. This adjacent market shares many of the same characteristics and dynamics to the preowned games market and is also forecast to grow over the medium term as a result of the proliferation of these types of products. The connected consumer As gaming is becoming more connected, so too is retail. Customers are able to shop 24 hours a day, seven days a week. They expect a seamless integration of digital and offline channels, greater convenience and a consistent experience. Stores remain the retail touch point with the highest frequency of contact but online channels have grown and will continue to grow in their importance as a channel. As online shopping continues to grow, retailers increasingly need to deliver a unique, differentiated in-store offer that excites, engages and keeps customers coming back. Similarly, as online shopping grows and competitors invest in and develop their own websites and services, customers expect their shopping experience to develop and become more exciting, more convenient and easier to use. Across gaming, it is estimated that approximately 32.5% of all UK retail sales (mint hardware, software, accessories and digital) were transacted online in the year, up 0.7% from 31.8% in This trend is expected to continue going forwards. The online channel in Spain is less well developed, accounting for approximately 8% of retail sales in the year. Again, from a lower base, this is also expected to grow. A key driver of the dynamic between offline and online retail is the growing adoption and usage of smartphones and tablets. Conversion rates on smartphones and tablets are rising quickly as a result of website improvements, enhanced delivery options, greater personalisation and better product information and are rapidly becoming a key shopping tool, both in store and on the move. In 2015, 50% of our UK web traffic was accessed via a smartphone or tablet device, up from 42% a year earlier. Black Friday Having begun as a promotional event in the US in the early 2000s, the consumer phenomenon that is Black Friday exploded in the UK last year. Most notably for games retailers, last year s Black Friday also acted as the triggering event for increased and sustained levels of promotional activity across the market in the weeks after Black Friday, leading up to Christmas. As a result, hardware and software bundling deals reached unprecedented levels, above any previously experienced. The extent of the change in consumer behaviour was unprecedented for all of UK retail and it s something that we have learned from. Larger spikes in consumer activity are not particularly efficient for retail, but we expect Black Friday to become an even more significant part of the consumer calendar going forwards. The main product dynamics around Black Friday are driven from consumer electronics. As the market shifts to a position where more consumers already own a console it is expected that a greater proportion of purchases will shift from low margin console sales to higher margin games, accessories and preowned sales. Evolving competitive landscape We compete with supermarkets, department stores, electrical retailers, online retailers and other independent retailers for a share of the market. We also compete with the platform manufacturers, games publishers and other digital distributors, who are now able to build their own direct relationships with customers via the web. These competitors are also our suppliers. Our belief is that continued co-operation and collaboration between the platform holders, content owners and retail (and in particular specialist retail), who take the products to market and engage with the consumer of that content every day, is the key to ensuring the potential of the games market is fully realised over the long term. For that reason, we see a future where console manufacturers, games publishers and the specialist retailer are all able to co-habit and prosper in mutually beneficial relationships. As the specialist retailer it is our job to publicise and promote products to our customers whilst aiding and assisting in their purchases and engaging with them to maintain and grow their interest. Related content You can read about how we are doing this in the Our strategy section on pages 38 to 51 As a retailer we know we must continue to develop an integrated consumer proposition that delivers a consistent brand and customer experience regardless of touch point or channel and a strong multichannel strategy. You can read how we are doing this on pages 38 to 51 of this report. 32 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

19 Launch Welcome to our world We are on a journey to evolve and grow our business so that it can capitalise on the market opportunities around us. As physical and digital products continue to co-exist, premium, freemium and other models are developed to serve different audiences; and as console gaming maintains its key position in an increasingly cross-platform world, our industry is becoming increasingly complex. Layer on top of this the continued proliferation of internet enabled devices for both gaming and shopping, the transforming potential of virtual reality and the continued growth of esports, the only certainty is that gaming will continue to remain a large and dynamic market with passionate gaming communities at its heart. Through each of our divisions we are focused on building a sustainable business that not only drives profitable growth, but also deepens engagement with our customers, by giving every person who is part of the gaming community the opportunity to discover and engage with a huge range of gaming products through the channel of their choice; by delivering a market leading customer experience; by developing digital technologies to increase gamers enjoyment; and by bringing communities together to build excitement and a shared passion through local, regional, national and international gaming events. We believe that this will lead to more customers, interacting with us more often, taking advantage of more products and services, creating value for our shareholders. In short, it will ensure we continue to build the most valuable community of gamers. Our vision and mission To build the most valuable community of gamers by providing maximum gamer enjoyment. Our values Bold Connected Focused Fun What we do Specialist Retail The best omni-channel shopping experience for physical and digital games and an authoritative range of new and preowned gaming lifestyle products, merchandise and technology. #1 market position in the UK and Spain 319 UK stores; 275 Spanish stores New and growing product ranges Expert advice and specialist gaming services Omni-channel offer In our blood It s what we are known for. It allows us to stay close to our customers, hear exactly what they want and think, in real time. We understand the importance of pricing, margin and making every square foot of retail space and every page of the website work hard. What is required to be successful Engaged and enthusiastic retail teams, loyal customers, strong supplier relationships, real-time customer insight, dependable infrastructure. esports & Events End-to-end management of gaming events for the masses, bespoke events and esports tournaments that enhance every gamer, friend and family s enjoyment of all things gaming. Producers of Insomnia, the UK s largest gaming festival Major event design and management Stage production and broadcast esports expertise Shared passion Led by Multiplay, the division places us at the heart of our communities and allows us to get even closer to our customer. Growing awareness and engagement with the products we sell, the division supports our retail business, extends our brand reach and is adding new revenue streams to the business such as ticket sales and event sponsorship. What is required to be successful Knowledgeable teams with extensive experience running major gaming events. Partnerships with the leading games makers, YouTube stars, teams and talent around the world. A brand customers trust supported by leading edge marketing. Digital Solutions The provisioning of consumer and enterprise technologies to deliver more seamless, better connected and enriched commerce and gaming experiences. Proprietary server management tools for multiplayer gaming Award winning e-payment, e-wallet and reward (GAME Wallet) Purpose-built IT infrastructure for digital code distribution Mobile engagement tools Central to our offer and growth potential Technology is at the heart of our business. It encourages the business to break new ground and think beyond what already exists. Fast moving, exciting with huge potential to drive growth in our business. Play online with Clanforge (for PC gamers) Personalised marketing campaigns Merchandise (in-store/ online via Marketplace) Insomnia events and esports competitions Add-on digital content Online game hosting for publishers with Clanforge Post-launch Exclusive announcements and preorder campaigns Pre-launch lock-ins Adding value to every part of a game s lifecycle Exclusive editions The GAME customer journey Insomnia events and esports 36,000+ attendees at Insomnia 55 (held in August) Lock-ins/nationwide store events 4,000+ individual in-store events held (lock-ins and midnight launches, other) Pre-launch Purchase with GAME Wallet Nationwide launch events 1st plays at Insomnia Trade-in launch offers Scan It! activity Trade-in 26% of UK customers traded in during the year Play online with Clanforge 1.1m Multiplay accounts What is required to be successful Investment in people, research and robust risk management. A close and ongoing relationship with customers and strong relationships with our IT partners and developers. 34 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts

20 Our business model Our business model is transforming from a business that has been predominantly retail focused, to one that is broadening and intensifying the customer experience. The decision to form our esports & Events and Digital Solutions divisions is part of our vision to create the most valuable community of gamers to drive value creation for our shareholders and other stakeholders. Key inputs: People and culture Customer relationships Business and supplier relationships Brand Distribution and logistics Technology Cash and capital Digital Solutions Online, mobile, app Build customer and community relationships Specialist Retail In store, at home, on the go How we do it Building the most valuable community of gamers As well as further improving our core specialist retail offer, we are focused on rapidly developing these newly created divisions to both support and supplement our retail operations. Though it will take time for the new areas to contribute at similar levels to the long established retail business, we expect these divisions to develop substantially over the next three years. Grow insight Improve our offer esports & Events Local, regional, national, international Key outputs: Creating value over the longer term for: Shareholders Employees Suppliers/partners Creative communities How our business model works Our Group operates to generate revenue across all stages of the customer journey (see page 35). We bring those elements of the business together by: Building customer and community relationships to ensure they are long-term and result in high levels of engagement and loyalty Growing insight from gathering data and analysing it to better understand the needs and interests of customers and gamers Using the analysis gained to continually improve our offer of products and services to engage customers and gamers, thereby continuing to grow the gaming community and further strengthen our customer relationships Our revenue streams Retail sales and add-on services Event sales (including ticket sales, sponsorship and other event-based income) Contract event sales Software licensing sales Key activities Our business model is built around a number of key operating activities: Omni-channel retailing and merchandising Efficient sourcing and buying from major suppliers as well as thousands of individual customers through our trade-in model Dynamic pricing Training, development and employee engagement Marketing and CRM Supply chain management and distribution Event management and production Software and technology development Key inputs People and culture Our business currently spans operations in the UK and Spain, with over 4,500 colleagues in almost 600 stores, offices, call centres and distribution centres. Our store teams are passionate and knowledgeable. They set us apart from other retailers of gaming products. Customer relationships By delivering our customers a differentiated, specialist proposition which they cannot find elsewhere, combined with one of the most generous reward programmes in our markets, we are able to stand out from our competition, increasing loyalty. Business and supplier relationships Our scale, leading market positions and insight help us to maintain close and valuable relationships with our major suppliers, acting as a key partner for successful product launches. Brand The GAME brand is highly recognisable in its markets and well known across a very wide demographic. Distribution and logistics Our infrastructure is built for our business needs today and for future multichannel growth. Technology Our digital technology platforms are leading edge and our technology development teams are talented and innovative. Cash and capital Our balance sheet is strong and we remain committed to maintaining a robust capital base so as to maintain investor, creditor and market confidence. Through careful working capital and balance sheet management and a focus on cost control and efficient capital allocation, we are focused on ensuring we deliver a sustainable business with strong cash generation. Key outputs: Creating value over the long term for our stakeholders Shareholders We create value for shareholders through dividends and capital growth as well as continuing to grow the business through acquisitions and reinvestment to continue to make us more competitive in the markets in which we operate. Employees We reward our employees through salaries and bonuses whilst providing opportunities for career development. Suppliers and partners From the continuous engagement and interaction we have with our gaming communities through to the insight we collect and analyse from our customers, we support our suppliers and partners in the development of their products, and increase demand and sales of their products. Creative communities Our commitment to responsible gaming creates a positive, safe and inclusive environment in which individual gamers can thrive. 36 GAME Digital plc Annual Report and Accounts 2015 GAME Digital plc Annual Report and Accounts