Why GameStop Shares Popped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of video game retailer GameStop (NYSE: GME  ) climbed 10% today after Microsoft (NASDAQ: MSFT  ) announced that it will not charge a fee for playing used games on its new Xbox One entertainment system.

So what: GameStop shares plunged last month on uncertainty about how its model would look if Microsoft levied a special fee for playing preowned games on Xbox One, so the announcement naturally comes as a huge sigh of relief for investors. In fact, GameStop generates nearly half of its profits from selling used games, triggering bullishness over the company's ability to not only survive but possibly even thrive going forward.

Now what: GameStop announced that is now taking preorders on Xbox One, as well as for Sony's PlayStation 4, which will also allow used-game sales. "Our pre-owned game business has slowed with the decline in new titles," CEO Paul Raines said in a recent conference call. "In spite of that decline, our pre-owned video game business has performed far better than the new software category, and we expect that business to return to growth as consoles accelerate." So while GameStop continues to face powerful long-term digital headwinds, used games may be able to fuel outsize gains for at least one more console cycle.    

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Comments from our Foolish Readers

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  • Report this Comment On June 11, 2013, at 4:32 PM, Terikan wrote:

    Microsoft didn't announce anything of the sort. It's left up to publishers. Microsoft enables it. Nothing about that has changed.

    Last night, Sony announced they would allow unfettered used game sales and game sharing/lending, UNLIKE Microsoft.

    That's why shares popped. With the lower price point and better freedom, it's clear the PS4 will have the greatest share of the game market that Gamestop is involved in. And since it will allow used game sales, this is a relief for GME.

    Can you guys at fool stop posting bogus nonsense articles?

  • Report this Comment On June 12, 2013, at 12:48 AM, effminus wrote:

    WHAT??? Seriously??? I suspect this article must have ben from a disgruntled employee due to the fact that it is made up nonsense.

  • Report this Comment On June 12, 2013, at 2:11 AM, MacAvoy wrote:

    Motley got partial story. As of June 11, 2013 at 11:00 P.M. Microsoft XBone has two requirements: games can only be given once and the person you give it to has to have been on your friends list for at least 30 days. Game lending will not be available at launch. But they won't charge a fee for used games, but allow their publishers to charge.

    Also you will spied on by Microsoft every 24 hours to see if you own the game and if they can't spy on you, you can't play. Not everyone or every country has consistent internet connection. For me, staying with Sony PS4.

  • Report this Comment On June 12, 2013, at 2:36 AM, Mattenth wrote:

    I think GME is in HUGE trouble. It's fairly surprising that the problems that GameStop was facing are being downplayed with the stock surge over the past year. I'm happily shorting GameStop now at 38.

    The major threats are...:

    - Digital Distribution. Both consoles have a 500gb hard drive. The only reason to have that size is so that you can download games. Most people use their CURRENT consoles to access digital distribution games (like Game-of-the-Year winners "The Walking Dead," "Journey," and "Minecraft"), and other digital distribution services like Netflix. The only reason digital distribution hasn't taken off yet is that most consoles in this generation are 20gb or less.

    - Publishers cutting out used games. Both Sony and Microsoft have said that if publishers want to utilize DRM, they can.

    - Game Subscriptions - Sony requiring playstation plus for multiplayer - now tons of people will get access to a large library for free as they start subscribing. Gaikai is going to offer a huge library, and could be a subscription basis. If it works for Netflix and movies, why not games?

    - Changing business landscape. Sony has some GREAT Free-To-Play titles like Dust 514, Warframe, and Planetside 2. Big-budget games aren't the only players now, either - we've seen a swath of great games that are $30 or less capturing the market, and most of them bypass retailers or offer them tiny margins.

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