GameStop Stock: Game Over?

Microsoft (NASDAQ: MSFT  ) has cleared up some details on the way that the Xbox One will work, and it doesn't look good for GameStop (NYSE: GME  ) .

Yesterday afternoon's official Xbox.com update includes two particular items that will probably not sit well with owners of GameStop stock.

  • Access your entire games library from any Xbox One—no discs required: After signing in and installing, you can play any of your games from any Xbox One because a digital copy of your game is stored on your console and in the cloud. So, for example, while you are logged in at your friend's house, you can play your games.
  • Buy the way you want—disc or digital—on the same day: You'll be able to buy disc-based games at traditional retailers or online through Xbox Live, on day of release.

Let's weigh the gravity of these two literal bullet points.

Every game release will be available online. Sure, Microsoft is throwing retailers the courtesy of a bone. You can head out to the store, deal with inventory issues unless you pre-order, and generally delay your eventual gaming experience. You can also just play the game right away through Xbox Live.

Let's put this in terms where you can see how damaging this is to GameStop. The Xbox One is a Kindle, and the instructions say you can head out to your local Books Be Here for a hardbound best-seller or you can take advantage of the digital depth of the device you just bought and start reading the ebook you want right away.

If that's not clear enough, consider this in terms of the iOS App Store. Every game is online. You buy it once. You own it forever on the cloud. How popular do you think the App Store would be if it offered you the option -- instead -- of trekking out to buy a physical copy? It's just not necessary.

Now, fast-thinking owners of GameStop stock won't see this as problematic. They will smell an opportunity. If you don't need the discs beyond the initial registration process, diehard gamers can just sell them back to GameStop the next day or share them with friends. Isn't this the way that music fans would buy CDs, rip them, and then resell them?

Really? Do you really think Microsoft is that stupid? Do you think Activision Blizzard (NASDAQ: ATVI  ) would've shared the stage with Mr. Softy for last month's Xbox One unveiling of Call of Duty: Ghosts -- Activision's first announced game for the new console -- if it was just going to sell one copy that would then be passed around?

Let's assume that this would be true. GameStop would be toast in that scenario, too. See, the original buyer wouldn't trade in the game at GameStop the next day. He would share it with dozens of his buddies who would've bought it at GameStop, and then maybe consider reselling the game.

Microsoft's smarter than that. Activision is a smarter cheerleader than that. Xbox One games will come with unique registration codes so only one person can own that actual copy. This would seem to validate GameStop's resale model, and shares of the retailer opened nicely higher this morning on Microsoft specifically describing the ability to trade in games or pass them along. However, what's missing here is that Xbox One still makes it more convenient to buy digital games directly through the Xbox Live marketplace, cutting out GameStop as the clunky middleman that has been siphoning off sales for itself over the years with its once-lucrative resale business.

Activision has always had a beef with GameStop's resale business. Developers don't profit from the resale of games. Microsoft needs developers more than it needs retailers, especially now that every game made for the Xbox One will be available on Xbox Live's cloud. This is why gamers will continue to migrate from physical discs, just as media consumption has moved away from actual books, DVDs, and CDs.

Where does GameStop fit in that digital scenario?

If you thought this past quarter was bad for GameStop with global sales falling 8% and net income plunging 25%, just wait until the holiday quarter. Sales may hold up as folks buy the initial hardware, but that was always GameStop's lowest margin business.

Once it sells a gamer the Xbox One system, the retailer may never see him or her again. There won't be a need to pre-order a hot release, because digital inventory is infinite, and the growing popularity of digital downloads will mean less games to trade in.

Bulls will argue that physical games will become even more popular in this scenario. Discs won't get scratched up, and the value of used games will increase since there won't be a distinction between new and used after the initial insertion. That may all be true, but what if this is paving the way for a digital marketplace of resales where Microsoft and developers actually profit from the secondhand exchanges? It makes evolutionary sense. 

Why did GameStop stock hit a four-year high last month? Did investors not see that the name on the store is about to change to Games Be Here at a time when the gamers won't be?

It's not looking good for GameStop stock.

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Read/Post Comments (23) | Recommend This Article (2)

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 07, 2013, at 2:12 PM, dmgincracing wrote:

    Looks like another article paid for by Microsoft that shows less than half of what is REALLY happening in XBone land...

  • Report this Comment On June 07, 2013, at 3:04 PM, linksmit wrote:

    I get that everyone at the Motley Fool does not like GME as an investment. But is seems a bit desparate to put out 2-3 articles per week rehashing the same bearish sentiment.

    We get the point. Can you move on to something more interesting?

  • Report this Comment On June 07, 2013, at 3:18 PM, t3HLoU wrote:

    For those of you who think digital distribution is great, keep this in mind.......You don't "own" anything you "buy" from iTunes, or Playstayion Network, or XBOX Live....

    2 years ago a lawsuit between Microsoft and Retro Game Studios made it that everyone who had "bought" Double Dragon on XBLA lost access to the game. Did we all get a refund? What do you think?

    I OWN my SNES games, my Sega Saturn games, my PS2, 360, PS3, NES, Dreamcast games....ect......

    The only way Sega/Nintendo/Sony/Microsoft could take them back from me would be to get through my 12 gauge.

  • Report this Comment On June 07, 2013, at 3:23 PM, mastedon2 wrote:

    I'm not buying the new Xbox 1. What a ridiculous offering, to sit around a table to say to each other as salesmen "lets create a console that will not play older games!!"

    I mean,, someone should be stricken from the roles of employment for that lamebrained idea.

    complete and utter FAIL of microsoft...

    When this 360 fails, I may just go the way of Sony.

    Greed, can kiss my asss.

  • Report this Comment On June 07, 2013, at 3:23 PM, Duckiewillpower wrote:

    It may be true that Digital downloading a game is more convinent. But when you take into account how horried Microsoft servers traditionally have been. You will surely save time by spending 30 minutes to go out and buy the game a retailer. Or you can sit at home and wait over an hour for it to download from the horrible servers they use, aswell taking into account of the millions using that same server at the same time. Making it even slower..... Not to mention I just flat out refuse to put my credit card info in any computer let alone a game console...

  • Report this Comment On June 07, 2013, at 3:23 PM, westlafadeaway wrote:

    Actually if you live near a retailer you'd probably be playing the game faster if you picked up a disc. Big games still take hours to download.

  • Report this Comment On June 07, 2013, at 3:28 PM, westorniss wrote:
  • Report this Comment On June 07, 2013, at 3:29 PM, westorniss wrote:

    Sign the petitions at change.org to save used games/offline play/kinect always on

  • Report this Comment On June 07, 2013, at 3:36 PM, zadavat wrote:

    As long as the PS4 doesn't dublicate Microsoft's boneheaded maneuvers of "must-connect" and the way they intend to handle used games, then no one will even buy an X-Box One. Sony will bury the X-box like the Atari Jaguar, and Gamestop will be just fine. As someone else wrote, you must get paid by Microsoft to write this crap.

  • Report this Comment On June 07, 2013, at 3:37 PM, Prowly wrote:

    Not only that, but digital prices typically do not fall as quickly as those of retail copies. You'll often be able to find new disc versions of games selling for $30 or $40 while XBL still has them listed for $60. Am I willing to pay an extra $20 or $30 for the convenience of not having to go to a store? Yeah, no.

    Besides, I have no intention of getting an XBone. The 24 hour mandatory check-in killed it for me. I like to take my systems with me on vacation just in case, but I don't bother with trying to set them on the local wi-fi network (if one is even available at no extra charge), which means the new console would become a paperweight after 24 hours. Yeah, that's convenient. Screw you, MS.

  • Report this Comment On June 07, 2013, at 3:40 PM, mmexp wrote:

    Luckily the clerks at GameStop don't act like pretentious jerks, with thinly disguised contempt for people who come in their stores, or this could be a crushing blow to their brick & mortar operation. Luckily, going to GameStop is a friendly, pleasant experience for customers...oh wait....

  • Report this Comment On June 07, 2013, at 3:46 PM, fwe43 wrote:

    I'm still going to buy the disc. When I finish the game, I'm reselling it. But nobody is going to buy your "used" download on ebay.

    But it's not just microsoft. This issue existed since at least the itunes store. No body is going to buy your itunes download if you get tired of watching a movie or an album. You can however resell your DVD or CD. But one day I'm sure there will be no more discs. It wil happen.

  • Report this Comment On June 07, 2013, at 3:53 PM, Lakerman24 wrote:

    Why are we forgetting that gamestop is just as big of a crooked business as MS is becoming. If you don't plan on re-selling your games then why buy a disc then have to buy a extra warranty with it? I absolutely hate taking brand new games with no scratches, and getting 20 cash offers within a week or month of release.

    At the same time I will never buy the xbox one as long as it continues to support only new digital dled games. All MS is trying to do is make more money by making you buy new games. I guarantee by 2015 or sooner they will stop making new games for xbox360 all together then I pray Sony has the ps4 ready for me to switch to.

  • Report this Comment On June 07, 2013, at 3:56 PM, desertracer1 wrote:

    Even the jerks they sponsor in Nascar cannot stop the failure of this nothing company. They neither create or provide any meaningful product or service for our society.

  • Report this Comment On June 07, 2013, at 3:56 PM, Lakerman24 wrote:

    The day I stop playing video games is the day they take away our right to buy discs instead of forcing everyone to buy name digital dled games. All it takes is your xbox to get screwed up then they'll be no way to get your games back because its stored only on your profile, and HD. If you have your profile only on the xbox you use and your HD is internal within the xbox itself then your gonna be S.O.L.

  • Report this Comment On June 07, 2013, at 3:58 PM, dmoney54 wrote:

    if you remember Microsoft said theyd b offering their own trade in system too, prob b able to trade in your game license and get credit to the online store. everyones concerns will be answered at E3 then people will look stupid.

  • Report this Comment On June 07, 2013, at 3:59 PM, Lakerman24 wrote:

    Plus are we all forgetting if we really wanted to just DL games we can just mod our xbox 360s. LOL... but thats also another reason why MS is making the xboxone the way they're doing it. Also lets not forget we can basically do the same thing xbox one does on a simple PC or laptop. OMG!

  • Report this Comment On June 07, 2013, at 4:01 PM, Lakerman24 wrote:

    I don't trust MS to handle something like a trade-in system online. You'll get ripped off probably more than gamestop. Plus how can you trade in a digital copy of a dled game thats saved in your HD. Once it's saved you can't remove it and if so then MS basically knows everything on your HD, and then privacy is out the window!

  • Report this Comment On June 07, 2013, at 4:04 PM, Licryon wrote:

    Totally going to the PS4 now

    Mostly for the prospect of Kingdom Hearts 3

    They could potentially just resell the license bought from Xbox live and have gamestop resell licenses to keep prices down. Probably not going to work, but it's a start

  • Report this Comment On June 07, 2013, at 4:07 PM, Lakerman24 wrote:

    Plus what's funny about gamestop is I gotta pay 15dollars/year just to basically save the 15 dollars back in "savings". Also the clerks at gamestop are no more qualified to work there than a blind monk that don't believe in video games. They're that stupid. I walk in, and they automatically try to rob you, and talk in a manner as if they're above you, and know more than you. It's all sooo funny.

    Looks like MS and gamestop got our nut$$ in a vicegrip.

  • Report this Comment On June 07, 2013, at 4:09 PM, Lakerman24 wrote:

    Plus the playstation network would have just as good online experience as xbl if people just stop friggin hacking the PSnetwork bunch of morons.

  • Report this Comment On June 07, 2013, at 4:46 PM, kev72 wrote:

    Sony is the king of DRM. Just look at their history with the famous rootkit - just google sony rootkit. It was basically a virus that would send them a list of the files that might be music oriented on your hard disk. There's a full wiki on it. What about the Playstation Network terms of service. It is 1000x worse than the scenario MS is using that is described in this article. You own nothing and they can nuke anything you own purchased from within the PSN network at Sony's sole discretion. MS is terrible too on this generally speaking as you can almost describe the TOS on the Win8 store as a PSN TOS lite edition.

  • Report this Comment On June 07, 2013, at 4:56 PM, kev72 wrote:

    I don't think this is as negative for GameStop stock as is described in this article. This should give GameStop the ability to also sell electronic copies of the software. They effectively say for a fee you can transfer ownership and they could take a piece of this part too. This also gives their online business a large potential boost. This will reduce their stock of physical media but then running out of units and the large upfront investment for the media will be eliminated. If they can prove to be a friendlier outlet for the same software than the XB One store ( which I bet will be easy). It can be full of reviews and loads of other information MS is not good at presenting. Seems to me this is not at all the bad thing you are presenting in this article. Less cash tied up, faster end to end delivery, no packaging and shipping expense, risk is mitigated as they won't have to predict the number of units sold and more.

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