Steal This Download

By Rick Aristotle Munarriz
November 20, 2008 | Comments (3)

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Sorry, retailers -- someone just jacked your ride. Take-Two Interactive (Nasdaq: TTWO) finally has a release date for the first of two Grand Theft Auto IV episodes. The Lost and the Damned will go on sale Feb. 17, but don't look for it at a video game store near you.

The new installment will be available only through the Xbox Live Marketplace, Microsoft's (Nasdaq: MSFT) subscriber-only network for its Xbox 360 gaming console.

Most of this is old news. Microsoft agreed to pay $50 million to Take-Two for a pair or episodic installments two summers ago. Take-Two's press release this morning offers up a firm release date and a few details of the new game. The episode will revolve around an entirely new Liberty City character, but with a storyline that intersects with the GTA4 plot.

This is a major score for Microsoft. It struck the deal with Take-Two before GTA4 became the fastest-selling game of all time this year, generating $500 million in sales during its first week on the market.

Digitally delivered episodes will naturally cost a fraction of what the original game did, but any revenue the add-ons bring in are only part of the deal. It's highly likely that Xbox 360's exclusive arrangement influenced buyers to pick up the Xbox version of the game back in April, rather than its version for the rival PlayStation 3.

Microsoft scores another hot exclusive for its  Xbox platform, while Take-Two gets to cash in on an ever-expanding franchise. Even the original GTA4 game will likely see a pickup in activity next February, since gamers will need a copy of it to play the new chapters.

So who loses? Sony (NYSE: SNE), of course. This is not what its specs-rich PS3 needs right now. But it's not the only loser -- nor the biggest.

Full stop at GameStop
I made GameStop (NYSE: GME) the focus of my weekly "Throw This Stock Away" column two months ago. Part of my thesis involved the migration from in-store purchases to game downloads.

"Digital delivery lies at the heart of connectivity in all of the next generation of video-game consoles and handhelds," I wrote. "As software developers reach out directly to the consumer, isn't GameStop the odd chain out?"

More than a few readers disagreed with my bleak outlook.

The video-game stores are holding up better than their retailing cousins. GameStop shares may be getting slammed this morning, after the company posted softer-than-expected sales in its latest quarter, but go ask mainline retailers whether they wouldn't kill for a 1.8% uptick in same store sales.

GameStop investors are used to seeing those loftier gains. In this case, it probably doesn't help that Blockbuster (NYSE: BBI) upstaged GameStop by posting a 30.7% spike in store-level video game merchandise sales earlier this month.  

Model interrupted
My real concern lies more with GameStop's future than its past. The company has been able to grow, despite the recent popularity of digital delivery, but the migration away from physical disks will only intensify in the future. Why do you think Sony and Microsoft keep putting out machines with more capacious hard drives? Both are trying to sell or rent games and movies.

Software developers will naturally flock to the inventory-free merits of digital delivery. Bypassing local distributors will hurt specialty chains like GameStop in the near term, and crush them in the long run.

See, GameStop does big business selling used games and gear. It has greater pricing power in buying back secondhand titles and consoles, so that's where GameStop scores the highest margins. What will GameStop's future look like when folks are buying digitally delivered games that can't be traded in?

What will GameStop do in a few years, when folks are getting their annual Madden football games delivered digitally from Electronic Arts (Nasdaq: ERTS)? GameStop is there for the hardware -- like the bulky instrument controllers that come with Activision Blizzard's (Nasdaq: ATVI) Guitar Hero World Tour -- but Activision rules the software, pushing piecemeal song downloads through the Xbox Live marketplace.

So mark your calendar. Drive by your local GameStop on Feb. 17, 2009. If you see a few more empty parking spaces than usual, you know where the gamers really are. Get used to it.

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Longtime Fool contributor Rick Munarriz has played a few of the Grand Theft Auto games, though he's never been much of a carjacker. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 20, 2008, at 4:55 PM, andrelon wrote:

    Let us confine ourselves in this pitchblack,

    unchartered stock- market territory (by any living human

    being!) to the industries that provide essential

    necessities.

    What's the no 1 necessity?

    Food and shelter.

    World wide: tens of thousands of industries are competing.

    What;s no 2?

    Medicine for the sick (and I think there are going to be many

    sick people)

    The largest single maker and distributor or

    most of the medicine sick people need is

    TEVA.

    This year alone they haver added some 15 new and most

    big selling drugs, no longer protected by

    patents, to their lines.

    Governments Health Services, hospitals, and

    phamacists are happy with the significant savings

    of these first class generic drugs in these

    barren times to come.

    Do you know of other candidates that appears to be

    significantly profitable under the lean years ahead?

    A

  • Report this Comment On November 20, 2008, at 6:40 PM, flyerd wrote:

    LOL… Wow, I have to laugh when people like Munarriz try to somehow “take credit” for being right on the direction even as they are completely wrong in their reasoning. The reason GME is down is, for the most part, due to the exact same reason the other 99.9% of stocks are down so congrats on the err…call? I guess digital downloads are the reason that FNM/FRE, GM/F, C/BAC/JPM, DO, CHK, POT, CVX, FSLR, CHK, etc., etc…are down ehh?

    Try this: Maybe it’s down for the same reasons as the rest of the mkt? Multiples are compressing for ALL stocks (ref: the collapse of all the mkts) due to the PANIC in the mkts. Some big reasons for the panic are MBS’s, CDO’s, CMBS’s, LEH, AIG, “inept Govt”, etc. For GME, it’s further impacted by the mkt being unwilling to believe in ANY retailers even as the VG sector continues to show significant strength. The mkt simply will not “believe” that the VG sector will continue to be strong (especially on a relative basis to any other “discretionary” items). The stock is easily worth at least 2x where it’s trading but, like ALL stocks, it’s will only trade for what people are willing to spend on it at any given time. This is the same reason that the $100 bill in your pocket will only buy what someone else is “willing to give you for it”…

    As for BBY having a better spike in store-level VG merchandise sales: No kidding? Isn’t that to be expected from a store that’s still in the “entering the sector” mode?... I.E. If you were starting from $1 in sales and it went to $2 you would have a whopping 100% increase. Gee, by those standards BBY has some work to do…

    Digital downloads of the “big game” new releases aren’t going to happen for a long time (at least 7-10yrs) for many technical reasons. Many, many people want a physical copy of a game. Additionally, there are a lot of people who want to talk to a gamer in the store to help them decide what game they want to buy for themselves or as gifts. Add-on’s and expansion sets of limited size will definitely get more traction but the main starter game will be in the stores for a long time.

    I have no idea where GME, or any other stock, will be 3-12 months from now but 3-4 yrs from now I’ll bet it’s “at least” $40 a share (with no splits required).

    I wonder if this will get posted? Probably not…LOL

  • Report this Comment On December 12, 2008, at 10:57 AM, dirkness wrote:

    I wouldn't be so bullish on GME. In the short term they will be fine, but they're in the position that many used CD and record stores were back in 1990 when record labels were complaining that used albums were cutting to deeply into their profits. Garth Brooks even refused to sell his records and CDs in stores that also sold used albums. All this hot air didn't amount to much at the time, but it's the type in inside the industry in-fighting that began it's demise.

    GME is in the middle of the same fight with publishers right now who are looking for ways to encourage customers to buy games new, rather than used at Game Stop. Part of the reason Game Stop is able to do so well is they make a near 70% margin on used games while publishers get zip. Naturally publishers are profoundly annoyed by this and are trying to create ways to ensure that the games they sell will be bought new.

    Case in point, the new Gears of War 2 game from Microsoft comes with a package of downloadable maps that are only available to customers who buy it new. There's simply no other way to get it and you can't buy it at Game Stop for any amount of money.

    As for downloads of the "big game" new releases not happening for 7-10 years? It's already happened in PC gaming. No one buys computer games in boxes any more, they get everything over Steam. If things continue to progress in the industry the way they have you can expect this trend to happen on the console side in more like 3-4 years.

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11/6/2009 4:00 PM
MSFT $28.52 Up +0.05 +0.18%
Microsoft Corp CAPS Rating: ***
GME $24.63 Up +0.44 +1.82%
GameStop Corp. CAPS Rating: ***
TTWO $11.41 Down -0.01 -0.09%
Take-Two Interacti… CAPS Rating: ****
BBI $0.86 Down -0.03 -3.36%
Blockbuster, Inc. CAPS Rating: *
ERTS $19.00 Up +0.84 +4.63%
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SNE $28.87 Up +0.14 +0.49%
Sony Corp (ADR) CAPS Rating: **

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