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And like a dark horse out of the black night, GameStop (NYSE: GME ) appears. The company did surprisingly well last quarter, considering that its original business model is slowly going the way of the buffalo. Earnings per share came in at $2.16, which was well above the $2.09 that Wall Street was looking for. The company had less-than-stellar sales last quarter, but made up for it by cutting costs. As a result, the bottom line improved more than anticipated.
But the success of last quarter isn't going to make it a great year, or at least not according to the company. GameStop is predicting a very soft first half of 2013, while gamers sit on their cash in anticipation of new consoles that will start coming out at the end of the year. Sony's (NYSE: SNE ) PlayStation 4 is due out in time for Christmas, but not too far ahead of that. Here are some things to watch over the next few months.
Sony's launch is the biggest milestone for gaming this year, so far. The PlayStation 3 reportedly surpassed Microsoft's (NASDAQ: MSFT ) Xbox 360 in total worldwide sales earlier this year. That has helped heighten the anticipation of this year's launch, but it's also meant that the market is fairly well tapped. Sales are expected to slack off during the first half of the year, with relatively few interesting new titles available. GameStop called out Grand Theft Auto V as being one of the biggest launches in 2013, but it won't be available until the end of the year.
So the first six months should be slow, but that doesn't mean bad. GameStop still gets almost 50% of its gross profit from used merchandise, and that's a market that can heat up when there aren't new games to be had. A slow first half might just mean that gamers try out older games that they missed the first time around, and dump current-generation consoles and games at a higher rate. That would be good news for GameStop, and it could help the company through the slowdown.
It could also flood the market with current-generation wares and drive down demand and prices for those games. That would be a big problem for GameStop, and would put a huge dent in profitability. Right now, that's the future that the company is expecting. It forecast an 8.5% drop in revenue for the current quarter, which is a fall even compared to last year's 6% decline. But so far investors seem undisturbed -- the stock is up more than 7% in midday trading.
What's coming down the pike
One of the longer-term problems for GameStop may be the changing face of used games. Both the PlayStation 4 and the new Xbox have been shrouded in mystery regarding the use of used games. At first, there were rumors that used games just wouldn't be playable. But recent rulings in the EU suggest that the companies are going to be forced to allow the resale and replay of games. That hasn't clarified how the games will function, though, with some suggesting that gamers may need to repurchase a license from the developer or be connected to a PlayStation run network in order to allow the games to function.
Either of those would mean a shift for GameStop, which has traditionally not needed the oversight of Sony or Microsoft in order to sell used games. Right now, GameStop's official position is that it believes the PlayStation will allow used games.
The company also addressed the concerns that it had about Nintendo's (NASDAQOTH: NTDOY ) new Wii U on its post-earnings call today. While GameStop saw strong sales around the holidays, it's concerned that they've dropped off since the beginning of the year. The company reiterated what many analysts have said, namely that Nintendo has done a poor job marketing the system and explaining exactly how it works. That's meant a lack of consumer focus, especially as gamers look to Microsoft and Sony for new consoles right around the bend.
Given all the changes and challenges coming down the pike for GameStop, it's hard to be bullish, but I'm cautiously optimistic. I think there's a lot of room for used games in the video game world, and while digital delivery is becoming the new norm, it's not going to end the sale of physical media just yet. Having said that, I feel that GameStop needs to figure out a great digital strategy over the next year if it wants to survive.
More on Microsoft?
It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.