GameStop's Management Knows Sony's Streaming Service Means the End

GameStop has come out in support of Sony's new streaming service. Investors shouldn't buy what GameStop is selling.

Jan 9, 2014 at 10:26AM

Video game retailer GameStop (NYSE:GME) has taken Sony's (NYSE:SNE) PlayStation Now announcement in stride. Although Sony's streaming video game service, if successful, could have a devastating affect on GameStop's business, publicly the company's management says it will work with Sony to sell PlayStation Now subscriptions.

Don't take that confidence at face value. GameStop has a history of going to great lengths to discourage video game streaming services. As Sony and Microsoft (NASDAQ:MSFT) push cloud-based gaming, GameStop's business is likely to go the way of Blockbuster.

GameStop has tampered with games to discourage streaming
GameStop drew the ire of customers in 2011 after it intentionally tampered with some of its games. GameStop's management instructed employees to open copies of Deus Ex, a PC title, and remove coupon codes that would give purchasers access to the game through the streaming service OnLive.

Sony's forthcoming PlayStation Now grew out of its 2012 purchase of Gaikai, which at the time was OnLive's major competitor. If GameStop went so far as to tamper with games to discourage its customers from going to OnLive, why would it support Sony's streaming effort?

Streaming makes GameStop's business model obsolete
It's likely that GameStop removed the OnLive codes in 2011 because it knows precisely what sort of effect streaming services will have on its business. Although GameStop has begun to branch out into other areas, the majority of its earnings and revenue still come from the sale of new and used games.

GameStop's business would be devastated if streaming services catch on. Sony hasn't announced the exact details for PlayStation Now, but earlier this week it explained how the service will work. When it launches, gamers will have the ability to purchase a subscription. Once they become subscribers, they'll get access to a catalog of games from previous Sony PlayStation (1, 2, and 3) consoles. They can then stream the games over the Internet to their Sony PlayStation 4, HDTV, or mobile device.

Even more than digital purchases, streaming games weigh on GameStop's business by completely eliminating both the hardware component and the ownership of individual games. Access to games will be part of a service, and getting that service won't even require buying a console from GameStop if you have a compatible TV.

Microsoft isn't going to save GameStop
But Sony is just one game company. Even if Sony becomes a competitor, GameStop will still be able to rely on sales of games for Microsoft's consoles, right? Unfortunately for GameStop, Microsoft is also moving in the streaming direction. Various reports have indicated that Microsoft has its own streaming service in the works, and given Microsoft's technological acumen, its offering could turn out far better than Sony's.

Microsoft has been aggressively moving into cloud computing in recent years -- its Windows Azure technology, which drew the attention of activist hedge fund ValueAct, is based around serving up cloud-based applications from Microsoft's servers. Microsoft has already dedicated a number of Azure servers to the Xbox One, allowing game creators to tap the power of the cloud for their titles for that console. Tweaking that technology to allow for full-on streaming certainly seems possible.

GameStop has no place in a world where video games are streamed over the Internet
GameStop, as a seller of physical copies of video games, has no place in a market where video games are wholly digital, particularly if the games themselves are streamed over the Internet and never actually owned.

GameStop management showed its hand when it told employees to rip out those OnLive codes. It understands the effect streaming services will have on its business. Of course, it's possible that Sony's service will never catch on -- but if it does, GameStop is doomed.

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Fool contributor Sam Mattera owns puts on GameStop. The Motley Fool owns shares of GameStop and Microsoft. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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