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Video Games: Software Wins, Retailers Lose

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The next few days will be ripe with video game industry headlines. The annual E3 powwow kicks off tomorrow, displaying the latest advances in hardware, software -- and new, market-shifting ways to get games to players.

Electronic Arts (Nasdaq: ERTS  ) didn't wait until this week's conference to play its latest digital distribution card. EA introduced Origin on Friday, offering gamers the ability to buy downloadable PC games directly from the company the same day they hit stores.

If you're sensing that your local GameStop (NYSE: GME  ) feels a little emptier than usual, it's because the retail chain just got Blockbuster'd.

"Wait a minute," bulls will argue. "You're talking about PC games. GameStop's bread-and-butter is the sale -- and especially the resale -- of console games."

I hear you. Unfortunately, so does Activision Blizzard (Nasdaq: ATVI  ) . When Call of Duty: Modern Warfare 3 launches in November, the gaming giant will also roll out Call of Duty Elite, a community-based platform that enhances gameplay across all of the franchise's most recent installments. A lot of the gaming features will be available for free, though Elite will reserve its best treats for those who pay up for a premium subscription.

As the maker of World of Warcraft, Activision Blizzard is no stranger to snaring repeat customers with premium gaming hubs. The Call of Duty games' free multiplayer action has helped Activision amass 30 million online gamers through that combat franchise alone.

Add it up, GameStop longs. As EA cuts out the middleman, Activision Blizzard extends the playable life of its hottest franchise (and profits in the process). In the end, gamers buy fewer physical titles, and thus make fewer trade-ins and used game sales -- the transactions in which GameStop scores its chunkiest profit margins.

Gamers still rally around "tentpole" releases. Take-Two's (Nasdaq: TTWO  ) Grand Theft Auto IV and the past couple of Call of Duty releases have set new initial sales records. However, sales outside of these hits have been surprisingly dry. Casual gamers have moved on to free or nearly free diversions available through smartphones and social networks. Die-hard gamers are simply devoting more time to fewer purchases.

GameStop has held up surprisingly well through all of this. Sales, comps, and earnings inched slightly higher in its latest quarter. The retailer hit a fresh 52-week high two weeks ago. It survived the success of online game distributor Steam and the initial hype of "virtual game console" OnLive, a subscription service that lets you remotely play a vast library of games through a terminal connected to your TV.

GameStop has also been making cautious acquisitions in digital delivery, hoping to escape the same fate that squashed CDs and is now demolishing DVDs, Blu-rays, and even books. All the same, you don't necessarily want to buy GameStop near its highs.

The next few days will show how publishers and console makers aim to make direct connections with hard-core gamers. Even if GameStop can steer through these challenges, it probably won't be as relevant in the future as it has been in the past.

Your move, GameStop.

Would you buy or sell GameStop at present? Share your thoughts in the comment box below.

The Motley Fool owns shares of Take-Two Interactive Software, GameStop, and Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision and Take-Two, writing covered calls in GameStop, and creating a synthetic long position in Activision. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.  

Longtime Fool contributor Rick Munarriz will admit to still playing video games, though finding time is tricky. 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.

Read/Post Comments (4) | Recommend This Article (1)

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 June 06, 2011, at 1:14 PM, Varchild2008 wrote:

    Battle. Net didn't destroy Gamestop and so won't call of duty elite.

    The reality is your best argument against us longs is the exclusivity scare tactic.

    However there are already dozens if not nearly a hundred or more game offerings exclusive to Gamestop.

    Take Jolt plus Kongregate plus tons of exclusive games and game developers on Impulse and you have your answer to exclusivity issues with EA or ATVI.

    Gamestop still has tons of cash and owns over 20% of their common stock. That is a lot of assets to use to keep acquire g enough exclusivity to compete in digital downloading market share.

  • Report this Comment On June 06, 2011, at 7:53 PM, Varchild2008 wrote:

    One more thing to add RICH "I hate all of Varchild's Investments" Munarriz....

    You say that Electronic Arts is trying to take out the middle man....interesting.....considering that Electronic Arts (IS) the middle man.

    Why would Nintendo, Microsoft, Sony, who manufacture Consoles allow Electronic Arts to sell their games?

    They could force people to have to buy their games through Microsoft, Sony, Nintendo.

    But then..... Microsoft, Sony, Nintendo would then be the Middle Men.....

    Why would a Video Game Developer allow Microsoft, Sony, NIntendo to sell the video games they create? Why would they allow Electronic Arts?

    When STARDOCK owned IMPULSE, they essentially becamse both Developer and Publisher.

    The creators sold the video game...... Not ELECTRONIC ARTS selling STARDOCK video games through IMPULSE.

    So middle man?

    If there was some sort of Middle Man crisis then Electronic Arts, Activision, Take Two, Vivendi, Microsoft, Sony, NIntendo, Amazon, Gamestop, Best Buy, Walmart, Meijers, Target, Bethesda, VALVE: STEAM, and countless other games companies, retail companies, and every other Middle Man you can think having anything to do with selling video games they don't create...

    They are all MIDDLE MAN!!!!!

    STOP THE MIDDLE MAN!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

    From now on.... If you create a game.... You sell it with your own Digital Downloading Software Program.

    No Retailer is allowed .... No Publisher shall exist... Just Games Developers!!!!

    we do not need anyone any more!!!!!

    Man!!!! Why didn't we think about doing this decades ago?

    This Awesome!!! Let's Just Eliminate virtually every retail company in existence from the Stock Market!

  • Report this Comment On June 07, 2011, at 5:13 PM, GregLoire wrote:

    I currently work for Kongregate and previously worked in a GameStop store, so take my biased opinion with a grain of salt.

    I keep hearing about digital distribution as if it's the future. It's not. It's the present. Steam is a great service that has been mainstream among gamers for years. Xbox Live allows you to download games right in your living room. Many individual games can be downloaded straight from the publisher.

    Digital distribution is already here, and it's been here for a while. Why are GameStop's profits still growing?

    It's because the gaming industry is not like the music industry. Sometimes people just want to browse around a store, pick out a game, and have a physical copy of that game right now. Having a physical copy of a music CD isn't appealing because most people listen to music while moving around -- they need something portable. Most games are played while sitting at home, and people like having a physical library.

    Even if you disagree, it's worth noting that GameStop's and Kongregate's digital sales are also growing very rapidly.

  • Report this Comment On June 08, 2011, at 3:07 PM, asparky59 wrote:

    It's all about staying ahead of the curve. Forget user experience for a second, this brand loyalty will cause stocks to soar. Guy's a monster (and apparently a good guy?):

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