Pay Attention, GameStop

You know things are getting hairy for GameStop (NYSE: GME  ) when even a fading pioneer like Atari is calling you out.

Speaking at the Atari Live event in London this week, CEO David Gardner -- not our David Gardner -- pointed out how secondhand sales of video game software have been "extremely painful for the industry" economically because "the publishers don't benefit" from the resale of the titles.

Selling used games and gear are a big part of the GameStop retail model. The chain scores chunkier margins there than in selling new hardware and software. Unfortunately for developers, they don't profit from GameStop encouraging the hand-me-downs.

Sure, one can argue that gamers who trade in their tired games and gear typically use the credit to buy new titles, but just the very presence of marked down consoles and games on the shelves disrupts the value proposition.

As it turns out, the publishers know just how to fight back.

"As games change and they become more and more network centric, the disc in the box becomes only one part of the experience," Gardner says, as recounted by GamesIndustry.biz.

In other words, as publishers emphasize digitally-delivered add-ons and enhanced game features, the physical disc becomes just the introduction. Real world retailers like GameStop are the ones who get shut out when Activision (Nasdaq: ATVI  ) is selling Guitar Hero music tracks directly to the axe-strumming gamers.

Take-Two Interactive (Nasdaq: TTWO  ) scored a $50 million deal from Microsoft (Nasdaq: MSFT  ) for a pair of episodic installments to the popular Grand Theft Auto IV franchise. The two stipulations are that the episodes will be Xbox exclusive and that they will be delivered digitally through Xbox Live's marketplace. You won't find this at GameStop.

This isn't just about cutting out the middleman. It's a tactically brilliant way to keep secondhand sales in check. Digitally-delivered titles can't be resold through GameStop. One would also think that someone who invests in Web-delivered add-ons and game enhancements is unlikely to simply flip the original game at the local video game reseller.

Sony (NYSE: SNE  ) , Nintendo (OTC BB: NTDOY.PK), and Microsoft aren't making it any easier on chains like GameStop. They keep enhancing their consoles with fatter storage and easier connectivity.

What will GameStop do to be more relevant in a digitally-delivered future? Your move, GameStop.

Other cheat codes to investing:

Microsoft is a Motley Fool Inside Value pick. Take-Two Interactive Software is a Motley Fool Rule Breakers recommendation. Nintendo, GameStop, and Activision Blizzard are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz loves playing video games but he doesn't own shares in any of the companies mentioned 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.


Read/Post Comments (5) | Recommend This Article (4)

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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 December 05, 2008, at 12:38 AM, jdawgog wrote:

    Check your facts please. GameStop will be selling the GTA IV download in stores.

    I think that GME has some trouble ahead with downloadable content, but that's not for another few years after they have downed billions in new and used game sales.

  • Report this Comment On December 05, 2008, at 9:37 AM, yellowmnm wrote:

    The real problem with this is the fact that Gamestop has figured out a very successfull way of making money off the used sales of games and the publishers are just upset that they are not getting a piece of the pie that someone else has come up with. You do not see the makers or publishers in any other industry getting paid for used sales. Using the game publishers logic in thinking would mean that every time You sell a used car you would have to pay GM or Ford or who ever manufactured the vehicle. Or when you sell your house you would have to pay the original builder. The publishers would be a lot better off to work with Gamestop to come up with something like an add on to sell or download for the used games, that way both parties would benifit with a win win situation.

  • Report this Comment On December 07, 2008, at 12:51 AM, jlwood830 wrote:

    Sorry, but as both a gamer and an investor I know that most gamers prefer to have a hard copy of "the game." Any additional, downloaded content is just that... extra... even if its a freeby to the original user. Well guess what? The content provider will still sell that content to others later or allow them to earn it in the game. These are just perks, not products because anything truly worth having the original content provider will sell to whoever has money to buy it. So if the gamer really wants the DLC or has to have it they'll spend the $5 or $10 to download it, but if it's just some perk or item a character has in a game they'll pick it up off his dead body and drive on. This does not hurt the GameStop model. It just makes some games more interesting. I pass on a heck of a lot more DLC than I ever consider buying. It's just not that pertinent because when people buy DLC it is very specific to their personal interests and not that of the masses.

  • Report this Comment On December 10, 2008, at 4:40 AM, TheDragonclaw wrote:

    Well said, If I can't own the hard copy I get very leary of making a purchase...I don't own very a lot of downloaded music either...hard drive crashes happen (and complete system failures in the case of the 360!) which hardly inspires confidence. If anything Gamestop should encourage add-on content. The ability to purchase additional content for the game means that no matter how many times Gamestop sells that same used game the developer has the chance to make money again and again...on a trade that will likely still happen, and to a customer who may have been reluctant ot buy the game in the first place but was drawn in by the cheaper price tag. If Gamestop and the developers can really come together to push together I think it makes both entities stronger.

  • Report this Comment On December 15, 2008, at 6:07 PM, anotherjames wrote:

    If I'm deciding on what to buy off the shelf, I'll go with the title that doesn't require me to download content that will essentially tether the disk to one particular consule. Usually, in a competitive free market, its the expansion of customer satisfaction, not the restriction, that wins out. This will be no different. Publishers will need to learn how to develop at leaner overhead so the prices of new won't differ too much from the used. Or offer us amazing must-have-this-minute products.

    Gamestop has virtually no overhead. Ever notice how cramped Gamestop shops are? It employs a small handfull of dudes. Then there is a power bill to light the place up, and that's about it for expenses. We spend $40 on a game which they buy back at $8 and then sell for $40 again. But Gamestop exists at the mercy of having few competitive threats. Gamestop needs to stay ahead of this curve by pre-emptive marketing while buying and strategically eliminating threatening upstarts. It also needs to work out better logistics (Does a GameStop in Tuscaloosa really need tons of phantasy titles on the shelf? Does the store in Gilford, New Hampshire, really need all the NCAA titles on its shelf?)

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