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

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.

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  • Report this Comment On January 18, 2014, at 2:37 PM, lordraptor1 wrote:

    sadly the op is wrong, the console makers are the ones that will be dead due to the recent event with het neutrality going out the window.

    the isp's will impose massive fees on companies that offer streaming and will continue to lower download caps meaning that the "digital" streaming and downloading of games, and game console makers plans to push "digital" will be dead before gamestop is, I for one think gamestop needs to go under simply put they are ripping customers off buy charging full retail for opened games which they sell as new, used games at gamestop? why bother?, with the negligible price difference ( example: "new" 54.99, "used" 39.99) why bother buying used at GS one might as well hit up a mom and pop place for a used game for a far better deal.

    to summarize, gamestop is killing gamestop not digital and not anyone or anything else and besides with net neutrality getting shot down recently the ISP's will kill "digital" which will make certain features "like Netflix" skyrocket in cost when the isp's impose fees on them for streaming which in turn Netflix will pass along it along to consumers.

  • Report this Comment On January 18, 2014, at 2:47 PM, ff7legend wrote:

    GameStop isn't doomed at all. They offer exclusive bonus content for pre-ordered games not found anywhere else. There's also the issue of some consumers not having access to broadband/high-speed internet due to their place of residence being in areas where it isn't available at all, namely out in the countryside. Plus, there's the issue of ISP-sanctioned monthly data caps/limits on even home internet service these days. I have a monthly 150GB data cap on my home internet service & streaming video/games over the internet would easily cause me to end up over my monthly data limit, resulting in huge overage charges on my bill. What happens when millions of gamers overload the servers dedicated to streaming gaming content? The answer is horrible LAG, server errors, server disconnects, & not being able to access the games/servers at all period. Need proof of what I mean? Take a good look at the epic failure launches of games (courtesy of the dreaded "always-on" internet connection requirement) like Diablo 3 (PC version), online multiplayer function of GTA 5 & SimCity 5. These are the reasons the streaming of games simply will not work & will ultimately spell the eventual demise of the "always-on" DRM too once enough angry gamers get fed up with all the hassles associated with the streaming of games/"always-on" internet DRM. Look what happened to Microsoft when they tried to force the "always-on" internet DRM down its customer base. They had to backpedal in an effort to contain the damage done to their brand via catering to their demands that the "always-on" DRM be abolished, along with the requirement that the Kinect (NSA Spycam) be connected to the X-Box One at all times for the console to even function. GameStop will persevere & ultimately come out on top once gamers realize that the streaming of games/gaming content isn't cut out to all the hype it's receiving right now by the likes of Motley Fool.

  • Report this Comment On January 18, 2014, at 3:32 PM, nemisis0 wrote:

    I don't care for digitial downloading a heavy content file, 25 gig a pop download with how the size of games are going, with a average american household internet connection, good luck with that. What if your gaming system is set up and you don't have it on the net? What if a hacker nails the provider and you can't redownload your games or get a game for over a month which is what happened to the sony network when hackers nailed them? What if your gaming system hard drive konks our and you want all your games back and have to download 500 gigs worth of games? Not to mention the sellers over the internet will be able to charge inflated prices because if everythign goes digital you will have zero choice in the matter. There are so many pros to owning a hard disc and so many cons to going 100% digital when it comes to the real gaming market that it's ridiculous to think the world would go 100% digital gaming without everyone on a fiber connection and fiber is so far away from being put in everyone's household that we will all be dead by the time that happens. Imagine buying a car or a piece of furniture and you weren't able to sell it, that would be some BS now wouldn't it, welp if gaming goes 100% digital that is what is goign to happen. Good bye consumer, hello companies and corporations screwing the living hell out of you and they will lose business because of it.

  • Report this Comment On January 18, 2014, at 3:36 PM, nemisis0 wrote:

    And yea lordraptor1 is right, if net neutrality goes down the tubes which is what seems to be happening right now, then digital downloading will only be in for trouble.

  • Report this Comment On January 18, 2014, at 4:24 PM, edejeu wrote:

    Game Stop will be just fine, Amazon as well. The problem with digital gaming is that I can't sell my copy of the game when I am done playing with it. Which I do and many other gamers do as well. I purchased GTA5 played it for a month and sold it to buy something else. My entire loss about $7.00. Basically, I rented the game for the entire month for $7.00. The only thing digital gaming works is for the expansion packs of the video games, but to purchase the main product; buy the hardcopy and save your $.

  • Report this Comment On January 18, 2014, at 4:35 PM, rcouellet wrote:

    If Gamestop doesn't survive, they can only blame themselves. Digital sales are huge and continue to grow, but I don't see that at Gamestop's biggest problem. You see, no matter what, there's always going to be a % of customers who go to the store to buy a product. Even if digital sales acccount for 90% of net revenue, if Gamestop got the majority of retail copies they'd be doing pretty well. Their biggest issue is that they've angered too many customers with greedy and poor business tactics. Their high prices drive people away, as do their strict return policies. Let's not even bring up the "resale" they so kindly offered. You'd practically be better off going to a pawn shop. Overall, Gamestop can succeed if it convinces people to shop there instead of Walmart or Bestbuy. The people who purchases games at a retail store will continue to do so, and Walmart's very strong video game sales accurately represents this fact.

  • Report this Comment On January 18, 2014, at 6:10 PM, Mattenth wrote:

    Everyone clamoring "digital won't happen" clearly missed that it's already happened in PC gaming.

    You can't resell PC or mobile games, both of which are distributed digitally, so why is console gaming some "sacred haven"?

    Look at where Microsoft and Sony have been pouring their resources - every bit of effort now is being put into a digital distribution service.

    Sony has worked on giving Amazon a way to distribute digitally on the PS4. They're continuing to update partial downloads. They're working on PlayStation Now.

    Microsoft has publicly stated that they thought about shipping a console without a disc drive. That implies that they have all the infrastructure and such ready to go. They'll continue to work on making their console the point of sale.

    When everyone else in the industry is actively working to cut out GameStop, you can't argue that they won't be in trouble.

    Console makers hate GameStop for taking away the distribution profits they could be making.

    Publishers and developers hate GameStop for cutting them out entirely of reselling games.

    GameStop is screwed - there's no way around it.

  • Report this Comment On January 18, 2014, at 6:11 PM, Mattenth wrote:

    Everyone clamoring "digital won't happen" clearly missed that it's already happened in PC gaming.

    You can't resell PC or mobile games, both of which are distributed digitally, so why is console gaming some "sacred haven"?

    Look at where Microsoft and Sony have been pouring their resources - every bit of effort now is being put into a digital distribution service.

    Sony has worked on giving Amazon a way to distribute digitally on the PS4. They're continuing to update partial downloads. They're working on PlayStation Now.

    Microsoft has publicly stated that they thought about shipping a console without a disc drive. That implies that they have all the infrastructure and such ready to go. They'll continue to work on making their console the point of sale.

    When everyone else in the industry is actively working to cut out GameStop, you can't argue that they won't be in trouble.

    Console makers hate GameStop for taking away the distribution profits they could be making.

    Publishers and developers hate GameStop for cutting them out entirely of reselling games.

    GameStop is screwed - there's no way around it.

  • Report this Comment On January 18, 2014, at 8:19 PM, uncoveror wrote:

    Video games have never been analog, FYI.

  • Report this Comment On January 18, 2014, at 10:18 PM, Dragonslayer wrote:

    Gamestop isn't going to die anytime soon for two reasons:

    (A): There are still lots of people who actually believe that if they pay $65 for something they have a right to own an actual physical copy of the disc that works rather than a computer file on a server somewhere.

    (B): The inly people who genuinely want digital only are the developers and they want it for one reason only: they want to have complete and total control over consumers gaming experiences for their own benefit.

  • Report this Comment On January 18, 2014, at 10:37 PM, URALLFOOLS wrote:

    I would absolutely refuse to buy a digital version of a game I would not be able to trade in. So gamestop may suffer but so wouldnt annual release games. Unless they give us some sort of "trade" value to upgrade to the newer version of sports or other annual releases (Assassins Creed, CoD, etc.) I dont want a collection of Madden 2015, 16, 17, 18 and never use them again when I have 2019. Digital or otherwise. Be able to get half of my money back in trade value for a game that I beat in a week has allowed me to buy many more newer games that goes into the distributors pockets anyways. If I am not allowed to get some sort of trade value towards new games the publishers and distributors will lose my money completely and I am sure I am not alone...

  • Report this Comment On January 18, 2014, at 11:07 PM, stupidarticles wrote:

    This article is SOOOOOO stupid. Games may be adding a digital element but will NEVER go all digital. At least not any time soon. I really think these gaming articles are written by some ignorant non gamers or perhaps by some fool who believes playing farm town makes them a gamer. Either way it's just wrong wrong wrong. Gamestop will stick around, people like getting an actual copy of their games and especially used versions that are cheaper. Gamers probably will always want a real copy of their games because at the end of the day if all else fails you still have the actual copy that you can loan/trade/sell/piss on etc lol. You can't do that with a useless digital game. So article writer, STFU lol

  • Report this Comment On January 19, 2014, at 11:00 PM, Njancek wrote:

    No, I'm sorry, but no. No matter how much people think digital content is going to "destroy physical games", it isn't going to happen. That's like saying gaming on your iPhone and Android are going to someday over take your PC and Console. The day the gaming market goes 100% digital is the day either everyone has cheap fast-speed internet, or the day that gaming dies.

    Not only will you deprive unconnected/dial-up/limited connection users of games, who won't buy them, but you're also going to see digital prices get jacked up like crazy. You think they're cheap now? That's because they're factoring in the fact that you don't have the cost of the case/CD. If that went away, then that isn't a problem, so there wouldn't be a "convenience savings."

    And not to mention, digital-only sales means more DRM. DRM is what is killing EA, and we all know how Microsoft got treated when they opted for the always-online approach towards anti-piracy. And we won't even *Get* into how piracy would be even worse, simply because I just got out of work and can't be bothered.

    And I don't anyone telling me that I'm wrong and that digital-only sales is the way of the future, because I'm not saying that. I'm saying that with the way things are now, it isn't going to happen. Not now, not next year, probably not even next-gen unless we actually manage to get fantastic global internet.

  • Report this Comment On January 20, 2014, at 8:58 AM, StormFireX wrote:

    Gamestop may be facing some challenges, but there are facts that suggest they are far from out of the running. Here is why I say that:

    Broadband internet is still limited in it's US distribution. Approx. 30% of households don't yet have internet, there are going to be a number of gamers in that 30%. Now that doesn't sound so bad, excepting that the term "Broadband" is a bit loose in its definition - anything that is not dial up is considered broadband, and if you have ever had to work on a 256/512/768 connection, you wouldn't want to try to game on one. I have seen no figure on how much of the Approx. 70% of "Broadband" households are Sub 1 Mb. Now we have the Net Neutrality ruling on top of this, which could adversely effect how people use their internet in the near future.

    In a related matter - the suggestion that Sony's PS Now service will deliver a sort of Coup De Grace to gamestop or similar companies is flawed. Does anyone remember On Live? How'd that go? They are still out there, but have they even put a dent in the console market's sales? It is a valid question because they are offering many of the same options that Sony's PS Now service is, and many of the same popular titles. Services, such as Gaikai/PS Now and On Live rely on Heavy Bandwidth Usage to maintain the quality of the product. This was an issue with On Live, and if the FCC fails in any appeal attempts on the Net Neutrality issue that is only going to become a larger issue.

    Now, all of this is funny coming from me. I find Gamestop's treatment of its customers abhorrent. Any company that is going to give me $10 for a new title in trade, then turn around and charge $55 for that same game is pretty questionable. This doesn't count the numerous reports of poor conduct by the chain. If you can't tell, I'm not a fan. That said, I think Gamestop will be around well throughout this console generation. I would also be surprised if Gamestop is also not already making plans to adjust its business model for the increase in digital distribution. It is foolish to think that a business that has stayed the course as they have would be static and blind to the changes that we have all seen happen in the last several years.

  • Report this Comment On January 20, 2014, at 2:29 PM, Hfish1212 wrote:

    As usual the Fool is babble. The current systems that just came out will not be changed for another 5 years, just like the last ones. Add to that gamers are wise to owning disks instead of owning vapor. If the hard disk fails and needs replacement, you are SOL with ddl. Add to that the additional content you get from bms (brick and mortar stores) and GME will be in business for the long term. Sure, things may change but not in the forseeable future. So quit screaming the sky is falling, it only makes you sound like either a short or an idiot.

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