Beware of Falling Video-Game Prices

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Holiday shoppers with video games to check off their lists took comfort in Wal-Mart's (NYSE: WMT  ) announcement that it will lower software prices this month. Shareholders of GameStop (NYSE: GME  ) and other rival retailers naturally offered a more chilly reception.

Yes, it's another Wal-Mart price war. The world's largest discounter is slashing prices by 15% to 20% on 25 of its top-selling games through Christmas Eve. It will also throw in a $50 Wal-Mart gift card to buyers of Wii consoles next week.

Wal-Mart has aimed at specific categories before. It recently played limbo with (Nasdaq: AMZN  ) on book prices and took on the wireless carriers with contract-free plans. It has fired up its pricing gun in years past on generic pharmaceuticals, toys, and consumer electronics.

There is usually plenty of collateral damage when Wal-Mart drops a bombshell, and yesterday's victim was GameStop. The video game retailer's stock took an 8% hit Wednesday, as investors connected the dots behind Wal-Mart's aggressive video game pricing.

GameStop rarely sways from suggested retail prices. It has to hold firm, because it has to protect the margins on the used games it sells for slightly less than new, shrinkwrapped wares. The chain's chunkiest margins rest in the resale business, so it can't afford to slash prices on the new stuff. It disrupts the entire ecosystem.

The Wii promo also stings. Hardware is GameStop's lowest-margin business, but parents who head out to Wal-Mart on Saturday to buy the console for the $50 gift card will probably buy a few games while they're there. In short, Wal-Mart's move hits GameStop all over.

Amazon, on the other hand, rolled with the changes. It's currently matching many of the discounter's new prices, including $40 for the Wii version of Viacom's (NYSE: VIA  ) The Beatles: Rock Band and $50 for Left 4 Dead 2 on Microsoft's (Nasdaq: MSFT  ) Xbox 360. Amazon perpetually experiments with pricing to make sure that it's competitive.

Best Buy (NYSE: BBY  ) is sticking to its original prices for now, but it won't have a problem slashing them if it starts losing holiday sales to Wal-Mart. Best Buy practically invented the loss-leader game in consumer electronics when it began to sell CDs at dirt cheap prices a decade ago, to help drive bigger-ticket purchases.

GameStop is the small-box retailer that can't fall back on a Plan B. It wasn't doing so hot even before yesterday's price war, as comps took a 7.8% hit in its latest quarter. The silver lining is that Wal-Mart's sale doesn't include all of the hot releases. Call of Duty: Modern Warfare 2 broke sales records last month, and it's not on the markdown list.

However, Wal-Mart and Best Buy have left plenty of specialty retailers dead in their wake once they have disrupted pricing perceptions. If GameStop isn't careful, it may very well be the next FAO Schwarz or Tower Records., Best Buy, and GameStop are Motley Fool Stock Advisor recommendations. Best Buy, Microsoft, and Wal-Mart are Motley Fool Inside Value picks. The Fool owns shares of Best Buy. Motley Fool Options has recommended a diagonal call on Microsoft. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz still likes playing video games, when he can find the time. He owns no shares in any of the companies in this story and 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.

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  • Report this Comment On December 04, 2009, at 4:49 PM, swwind22 wrote:

    We have seen this news going around and it has caused GME to fall in stock price but have you checked the prices at Wallmart and Gamestop?? GameStop has much more games and will beat the Wallmart prices in most cases. Examples: Halo 3 ODST (360) 39.99 WalMart 50.00 Lost 4 Dead (360) 39.99 WallMart 50. I could cite more but the games are at GameStop and that is where gamers go! GME is a buy here and you can expect it to go to 38 near term. That is 14.9 X 2.55, this years earnings times the growth rate. Now it could be at the higher end and then you will get a higher growth rate like 25% which is lower that the last five years of 38% and so the stock could easily be 75 next year still only giving it a 25 PE or past history says 114, much less than AMZN PE at 75. Note the thought that downloading games is cutting into it's sales is crazy, Many games can not be downloaded!!

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