More Bad News for GameStop

• Email
• Share
• Print

Will online distribution be the death of video game retailers like GameStop (NYSE: GME)?

I dismissed most of the buzz building earlier this week around OnLive, a startup that is specializing in a server-stored solution for delivering high-end gaming experiences through both computers and console-tethered televisions. However, when even this morning's Los Angeles Times is jumping on the bandwagon -- with an apocalyptic "No more stops at the video game store" headline, no less -- it's a tough story to ignore.

Digital delivery is already thriving, of course. Microsoft's (Nasdaq: MSFT) Xbox Live Marketplace is a hotbed of downloads. Valve's Steam is going beyond casual games to serve up high-end fare directly to diehard gamers.

However, digital success -- for now -- has done little to rain on GameStop's parade. The retailer had blown through Wall Street's expectations for nearly two years before stumbling in its fiscal third quarter. It reports fiscal fourth-quarter results tomorrow.

Be on the lookout for a lively conference call. Analysts will likely be aiming all over. Amazon.com (Nasdaq: AMZN) and Toys "R" Us entered the company's high-margin software resale business earlier this month. Now it's also likely to be asked about OnLive.

Don't dismiss the threat of OnLive. It has already won over most of the leading video game publishers, like Electronic Arts (Nasdaq: ERTS), Take-Two Interactive (Nasdaq: TTWO), and THQ (Nasdaq: THQI). Why not? The merits of inventory-free delivery are obvious. Besides, they've been itching to get back at retailers, given the growing popularity of GameStop's resale business (where they naturally don't double-dip into the royalties that they only get on new sales).

Oh, but it's not only GameStop that is likely sweating OnLive's arrival. The beauty of server-stored games is that you don't need a next-generation Xbox -- or any Xbox -- to play. Whether it's through a computer or OnLive's own MicroConsole, all a player needs is an online connection.

That is the allure of cloud computing. Companies that turn to Salesforce.com (NYSE: CRM) for their enterprise software solutions no longer have to worry about updating their computers. All they need is to go online, and all of the updating is done on Salesforce's servers. The same laws would apply to OnLive, and that has implications that will naturally eat into both video game retailers and the console makers if OnLive succeeds.

So what's it going to be? Is OnLive going to disrupt several gaming niches in a single salvo, or will the industry wise up and kill it while it's still in the crib?   

Other cheat codes to investing:

• Toys "R" Us is testing trade-ins in a few stores.
• I have three similar stocks that I think will beat out GameStop.
• Want to play? Here's Your Shot to Score Big.