#145. Every week on the podcast we’ll challenge a recently-announced business strategy to understand the upside and downside of the brand’s approach. We discuss Atari’s decision to open a handful of hotels across the U.S. and whether or not this move into experiences makes sense for the OG gaming company.

Check out the full transcript below.

Richie: [00:00:02] Welcome to the Loose Threads Podcast, where we challenge a recently announced business strategy to understand the upside and downside of a brand’s approach.

Richie: [00:00:09] I’m Richie Siegel, the founder of Loose Threads, which analyzes and advises next-generation consumer companies, and FaceLift by Loose Threads, a retail incubator and accelerator for leading brands and retailers. For our latest analysis and insights, check out our free weekly newsletter at LooseThreads.com. Joining me for our discussion this week is Rebekah Kondrat, a partner at FaceLift by Loose Threads, and Caroline Tibbetts, who leads our research at Loose Threads.

Richie: [00:00:32] This week, we analyze the decision by Atari, one of the OG gaming companies, to open a handful of hotels across the U.S. With consumers spending more time and money on entertainment and experiences, the move puts the gaming company at the center of where attention is going, in line with entertainment and hospitality brands like Disney. But does the business model and proposed scale of Atari hotels make sense? Here’s what we thought.

Rebekah: [00:00:58] I think this is so smart. If you kind of look at what’s been happening in the e-gaming space—a couple of things. One, colleges are now giving scholarships for e-gamers. I mean, that’s like…

Richie: [00:01:11] E-sporters.

Caroline: [00:01:11] Are Ivy League schools doing that, or…?

Rebekah: [00:01:13] I don’t think this has hit Harvard and Yale quite yet. However, the same scholarships that are going to elite athletics are, in some schools, starting to go to e-sport, call it elite athletes, elite players. So I think that’s one. The second one is Fortnite just had its first ever World Cup last year, and the Billie Jean King Tennis Center was full of enthusiasts, like, fans. So, not only is this making money because people are playing it, it’s also making money because people like watching it. And then, of course, you have like, Twitch and all of those other platforms. Kids sit at home and watch other kids essentially play these games. And then there’s also just the rise of experiential hotels. I mean, Disney has done a Star Wars-themed hotel, and everybody’s kind of looking to this as the next frontier of, I guess, entertainment. And so, with all of those things combined, I feel like this is a perfect storm and this is the perfect time for something like this to happen.

Richie: [00:02:21] So, I think this is a great idea and I do not understand why they picked these locations for it. So the first ones in Phoenix, the next one will be in Vegas, which makes sense. Then Denver, then Chicago, then Austin, Texas and Seattle, then San Francisco, then San Jose. Beyond Vegas and maybe Chicago, I don’t understand why they picked any of those locations.

Rebekah: [00:02:42] Well, Austin makes sense because South by Southwest is there. It’s kind of become this, like, discovery hub.

Richie: [00:02:47] But I guess this begs the question, “Who is this for?” Is the thought that, because it’s Atari, it’s actually for like, an older generation of gamers, or is it for actually a younger generation of gamers? My existing thought was it’s for a younger generation of gamers and, therefore, the locations makes zero sense. If this is actually for like, people in their 30s, 40s, 50s, who grew up on those games and just want to have like, a retro moment and be, like, child-adults, then maybe it makes more sense.

Caroline: [00:03:14] Yeah, I think that it’s for all generations, and I think it’s designed for family travels in general. They will have co-working spaces, fine dining, movie theaters, bakeries, meeting rooms and gyms. I don’t think, like, the typical gamer has meetings.

Richie: [00:03:29] Disney—from what I know—if you look at their cruises or their vacations, definitely caters to the family, but definitely, definitely caters to the kids. I think you’re there because the kids will have a great time. I think the kids will have more fun at Disney than the parents, often. Not saying the parents won’t have fun, this seems to be the opposite if what you said, Caroline, is true, which is, is the goal to get the parents hooked on this so they bring their kids there versus having, like—again, Disney to me is a kid-first experience, or it’s built for the kids.

Rebekah: [00:04:00] Okay. So the thing that I think that Disney does right is they make it very easy for the parents to not have to worry about the kids having a good time. And so, therefore, the parents have a good time—

Richie: [00:04:12] Because the kids are having a good time.

Rebekah: [00:04:14] And they even have things like onsite babysitting and things where you can drop your child off for hours and go have a nice meal with whomever, your family, significant other. The thing about this, though, is you’re right, it is built more for the, call it like, parent or the older adult, 30s, 40s, 50s, who maybe played these games as a child or at least who’s familiar with the Atari name. But I do think that it will be a family destination, and I think, as long as they can handle having the younger generation there, and I—there’s not a lot of information about what kind of programming there will be. But as long as they offer programming for the younger generation, I think that this will catch on. I could actually see this becoming like, a bachelor party mecca for maybe some of the folks who are not so much into going to the traditional bachelor party places.

Richie: [00:05:07] I guess it’s just a question of like, if you think of the widest addressable audience for any sort of e-sports hospitality experience, I would go think about the kids first, who are the ones playing all these games. I know there are, of course, adults playing these games, and people in their 20s and 30s and so forth. But it would seem younger people are playing these games way more than older people, in a super, kind of, generalist way. And so I think I go back to Disney again of, yes, obviously, the parents have a good time ’cause the kids are having a good time, but their strategy is, “let’s have the kids have the best time.” And then, if that happens, the parents are gonna be happy versus this is the opposite. And to me that just seems like a way smaller market than if Fortnite made a hotel.

Richie: [00:05:49] Atari is a pretty retro brand. Minecraft, on the other hand, from what I know, is actually a pretty like, age-transient brand, of like, there are older people that play, there are younger people that play, there are people in the middle that play. Versus, like, Atari is kind of this relic of a thing. So it’s interesting from a retro perspective, but I just don’t see that as like a huge audience in a sense.

Rebekah: [00:06:08] There’s a difference between what Disney is offering, which is this like, wholesome family entertainment that most people would agree is like, good and teaches your children good lessons, etc. Video games are a little bit more polarizing, in that there are some parents that don’t want their children to play video games. And then there are some that play video games with their children. And so I think if you’re kind of going for that like, large addressable audience, it actually does make sense to go for the parents first. Because if it were just for the kids, I could just, in my mind, imagine a scenario where they’re like, “We want to go to the Fortnite Hotel. And one of the parents is like, ‘We’re not going to take Jimmy to the Fornite hotel! We don’t want him playing video games 24/7.’” Video games [are] still not always viewed as positive.

Richie: [00:06:58] Yeah. So why Phoenix then?

Rebekah: [00:07:00] Space?

Richie: [00:07:00] But if it’s for, like, the bachelor party or whatever, why not literally put it in Vegas? I know they’re gonna come to Vegas but, again, Phoenix to me is just like a really random place to put it.

Caroline: [00:07:10] And why not abroad? That was also my question. Why such an expansive offering in the U.S.?

Rebekah: [00:07:16] Well, I think, to answer that question, Atari probably understands the U.S. audience a bit better. I’d imagine that if this is successful, they will probably go abroad. But, [as] to why Phoenix, I would imagine because they can get cheaper real estate build costs.

Richie: [00:07:31] Yeah. But you get what you pay for on this, right? Like…

Rebekah: [00:07:32] I guess, why do you need an environment outside of the hotel, though, if all you’re gonna be doing is staying in the hotel and playing video games? I mean, that’s what they want. They don’t want you to come and go see the Grand Canyon. They want you to stay in the hotel and play video games. So, by that logic, it doesn’t matter where it is.

Richie: [00:07:48] So it’s basically a resort. It’s like a nerdy resort.

Rebekah: [00:07:51] Yes, that is a perfect description of it.

Richie: [00:07:54] That makes sense to me if that is the premise. But then again, why Vegas? Why San Francisco? Why Chicago? Just ’cause that’s where people are who like video games? I mean, I guess that makes sense.

Rebekah: [00:08:05] They would have all the data to know who’s playing their video games, who’s buying their video games. It must make sense from their standpoint, by their numbers.

Caroline: [00:08:15] Yeah, but it’s weird. San Francisco and San Jose. Why do you need the two of them?

Richie: [00:08:19] Yeah, I mean, those are an hour apart.

Rebekah: [00:08:20] But, having recently been to San Francisco, I totally understand why people don’t want to drive an hour to get from one end to the other. I mean, the only other thing I can think [of] with location is major airports. Are those all near major airports? Like I said, if we are thinking about this as a resort, don’t we just want people to drive from the airport, get to the resort/hotel/gaming mecca and literally not leave until their trip is done?

Caroline: [00:08:45] If it is taking the resort route, why do you need seven in the U.S., in general, why not have just two? And it’s a really specialized destination in, I don’t know, Vegas and say, New York City.

Richie: [00:08:59] Yeah. East coast, west coast. That’s what I think we’re getting at, is just like, the conflict between who it’s for, where it’s located, and then how many of them they need, as well. And I’m sure a lot of that, frankly, is driven just by the property development company they’re working with. Like, Atari doesn’t know how to do hotels, obviously, they have a hospitality partner.

Caroline: [00:09:16] But is it risky for them to start with this many? Why not even just start with one, and test that concept and see how it goes?

Richie: [00:09:22] Well, technically, the hospitality partner’s taking all the risk. Like, Atari’s just likely gonna license their name and like, help with the programming and stuff, but GSD Group, which is the hospitality partner, is really the one taking all the risk. In terms of signing the leases and hiring all the people and doing all the food and beverage. If they weren’t there, it’d be way riskier for Atari. So like, I get—I’m sure they had a good deal, I’m sure it makes sense. But, frankly, it’s like the same model that likely a Trump uses, of like, they put their name on the thing, and then figure out how the inside looks and then have someone else, you know, run it, basically.

Caroline: [00:09:50] Yeah. My question though, is, does video gaming lend itself to this Disney model? In the sense of like, Disney’s walking around, and being outside and you can swim in a pool. This is literally, you could go to different rooms to experience different games, but you’re sitting, and in a dark room perhaps.

Rebekah: [00:10:08] Well, okay, so a couple of things about that. Yes, Disney wants you to walk around as long as you’re on Disney property, continuing to spend your money at Disney restaurants and attractions and whatnot. So, yes, but they want you to stay contained. And then, in terms of gaming, I mean, I think we think of gaming—or at least I often think of gaming—as like, sitting in front of a console in front of a television. But the truth is, there’s a lot of AR/VR gaming out there that you need a lot of space to do. And so I think that this is something where you could also be able to experience those things and not have to worry about, I don’t know, knocking over your bookshelf in your living room or whatever it is.

Richie: [00:10:52] I think what, kind of what you’re asking is like, is video gaming a lifestyle that is lived in the world in the same way that Disney is? Because most of it is literally people sitting on a couch or in a chair or so forth. And even when you go to an arena to watch e-sports, you’re still just watching people play games, which people find captivating, but there is definitely some passivity to it. I guess there is a frequency question, ’cause I get the idea of e-sports and stadiums and so forth, of like, the same way that there is the Super Bowl and there are other like, major sporting events. Of having the World Cup once a year or whatever it is. I would be skeptical if you go to this thing more than once a year. Like, I don’t think this becomes a ritual, especially if it is this like bachelor/resort kind of thing. So it’s a super-touristy thing, which maybe is fine.

Rebekah: [00:11:39] Right. But you also don’t go to Disney more than once a year. In fact, most families don’t go more than once in five years, unless you live there.

Richie: [00:11:47] Right. But the reason that’s okay for Disney is you sign up for Disney+, you buy Disney products, etc. Atari doesn’t have that same vertical integration, effectively, to still earning from your wallet after you leave Disney, ’cause Disney is like the Mecca, right? Of, you go there and then you’re brainwashed effectively, and you live a Disney life from there on out. Versus, I don’t think there’s that same level of affinity for Atari just ’cause it’s a throwback kind of premise, of them bundling all these retro games. Like, they’re still a retro company, which again, further goes to this idea of catering to older people.

Caroline: [00:12:21] Ultimately, I think there is an audience in its niche and I don’t know that it merits seven hotels in the U.S. I think it’s a great idea, I just think one or two would have sufficed…in the U.S., anyway. I think in Japan it might have been a brilliant idea. Louis Vuitton—I know it’s a luxury product company, very different—but just opened their first restaurant cafe in Japan. Muji has their branded hotel in Japan. I think it’s kind of a different culture in that respect.

Richie: [00:12:49] I would’ve done one in Vegas and waited and see what happens, versus committing to seven.

Caroline: [00:12:54] Right. But since you have this hospitality partner who’s taking all of the risk for you, why not open as many as they want, and gather all of the data about your current and future customers, and be able to produce games for like, my children?

Richie: [00:13:08] Right. But I would argue their gaming service should do that for them, in a sense. And the risk is, if you open too many, they don’t work. The occupancy rates are too low. They shut all of them down and—

Caroline: [00:13:20] Tarnishes the brand in general.

Rebekah: [00:13:22] So we just have a supply and demand problem.

Richie: [00:13:24] Too much supply, and I would say, unknown demand.

Richie: [00:13:32] Thanks for listening to Espresso, a Loose Threads Podcast. You can read full transcripts of the podcast and join the newsletter at LooseThreads.com. Feel free to leave a review on iTunes, we always appreciate it, and thanks to George Drake, Jr. for editing this episode. We’ll be back with more.