GameStop Goes Viral

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If time is money, and free online games are one of the biggest time-eaters around (as I can attest from time spent playing Pac-Man on Google's (Nasdaq: GOOG) homepage), then does it follow that online gaming is ... a big, big moneymaker?

GameStop (NYSE: GME) seems to think so, because earlier this week, the biggest name in bricks-and-mortar retail gaming made a move into free online gaming, when it purchased Kongregate, a distributor of online games. Now, we don't know how much GameStop laid out for its latest acquisition; management is playing coy on the exact sum. But here's what we do know.

GameStop told investors earlier this year that it intends to spend about $100 million beefing up its digital gaming business. This assurance puts a lid on the acquisition price for Kongregate. And that would suggest that, whatever the exact price paid, GameStop got itself a good deal. Within just hours after GameStop announced its deal, Walt Disney (NYSE: DIS) confirmed that it, too, is expanding into the space, and at a much steeper cost -- $563.2 million to purchase social-gaming developer Playdom. Earlier, Electronic Arts (Nasdaq: ERTS) laid out $400 million to acquire Playfish (another developer). And then there's Facebook, Google (which owns a piece of Facebook friend Zynga), Apple (Nasdaq: AAPL) and its iEmpire, and any number of other companies rushing to position themselves to profit from the trend.

What's in a game?
The question for GameStop investors today, of course, is whether GameStop is taking the right position. The company is sitting on upward of $430 million in cash and pulled in close to half a billion in new free cash flow last year, but is staring at a calendar marked with a bright red "X" -- the day that digital game delivery replaces bricks-and-mortar retailing. The day GameStop becomes Blockbuster.

So what's the best way to sidestep that day? Should GameStop leverage its knowledge of "what customers want" by moving into gaming development, as EA and Disney have done? Or should it apply its retail savvy as a distributor of electronic product -- as it seems to be doing, as Apple and Facebook have done, and Google wants to do?

Foolish takeaway
As an investor, I have a genetic predisposition for letting other people do the work, so I can reap the profits. Maybe it's this predisposition that has me believing GameStop has made the right move to avoid the messy business of game development, and stick with distribution. It's still not a sure thing, mind you. That "X" still looms upon the calendar if GameStop fails to make the transition to digital. But at six times free cash flow, I'm willing to bet GameStop can make a go of it. Are you? Tell us on Motley Fool CAPS.