Why GameStop Is Doomed, Part 1: Video Games Are Going Digital

Video game seller GameStop is challenged as its primary suppliers, Sony and Microsoft, embrace digital streaming.

Jan 18, 2014 at 12:00PM

The steady growth of online shopping has hit physical retailers hard over the years. Once mighty chains such as Circuit City have found themselves unable to cope, eventually closing their doors for good. Other retailers have remained resilient -- sellers of specific goods including cars, clothing, and groceries have persevered.

Most of those that have fallen by the wayside -- Tower Records, Blockbuster video, Borders Books, among others -- shared a similar characteristic: What they sold wasn't actually a physical product. When you purchase a CD, for example, you're not really buying the plastic disc -- you're buying the album it contains. Whether it was movies, books, or songs, once digital distribution became viable and widespread, many of the brick-and-mortar retailers that specialized in that media eventually were driven from business.

GameStop (NYSE:GME) fits this profile perfectly -- its primary product, video games, is going digital, and we're closing in on the tipping point. In this series of articles, I will lay out the many and varied challenges facing GameStop -- its relationship with suppliers Sony (NYSE:SNE), Microsoft (NASDAQ:MSFT), and Nintendo; the rise of digital-only consoles; the issues its new initiatives will have to overcome -- and explain why I don't believe its business (at least, at it currently exists) is viable.

Sony's bets on video game streaming
Sony is one of GameStop's top suppliers -- sales of PlayStation hardware and software compose a big chunk of the retailer's revenue and profit -- and starting this summer, it could become its single biggest challenger.

PlayStation Now, Sony's latest effort, stands to do to GameStop what Netflix did to Blockbuster. Subscribers to Sony's new service (set to launch this summer), will, for a flat monthly fee, get access to a catalog of old PlayStation games. These titles won't be shipped through the mail, but streamed over the Internet, delivered to a PlayStation 3, PlayStation 4, PC, Sony HDTV, or mobile device.

If this service catches on, it stands to wreak havoc on GameStop's used games business, which accounts for about half the retailer's profit. Admittedly, PlayStation Now will not serve up PlayStation 4 games (at least not at launch), but as the technology progresses, it isn't difficult to imagine Sony offering the latest titles. Moreover, until the PlayStation 4 has a robust catalog of games (which should take several quarters) it doesn't matter -- GameStop will remain dependent on older PlayStation 3 software. GameStop's management continued to reference sales of games released for the PlayStation 2 and Nintendo GameCube as best sellers well into 2007, even though the PS3 and Wii both launched in late 2006.

Microsoft aims at digital future
As a competitor, it's no surprise that Microsoft's Phil Spencer downplayed PlayStation Now, declaring on Twitter that he thought games played locally (not on some distant server) would be important for a "long time."

But reports have indicated that Microsoft is working on a PlayStation Now competitor, which doesn't seem so far-fetched given Microsoft's enormous investment in cloud computing. Even if Microsoft doesn't ever offer a full-on video game streaming service, the company has long supported digital distribution.

As originally designed, Microsoft's Xbox One would have been the most digitally dependent console ever. Had the company not changed its mind, Xbox One owners would have needed a regular Internet connection to use their console, and buying or selling physical games would have been difficult or impossible.

Although a widespread backlash in the gaming community led Microsoft to reverse these policies, it is quite obvious the company favors digital distribution.

But digital distribution is much more than streaming. Even if Sony's service fails, GameStop is still challenged by its suppliers in the form of digital game downloads. In part 2 of this series, I'll take a look at the evolution of digital game stores and how they challenge GameStop.

Learn how to start investing today
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Fool contributor Sam Mattera owns put options on GameStop. The Motley Fool recommends Netflix and Twitter. The Motley Fool owns shares of GameStop, Microsoft, and Netflix. 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

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information