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Did Best Buy's Gamble Doom GameStop?

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GameStop (NYSE: GME  ) and Best Buy (NYSE: BBY  ) were two of last week's biggest losers -- shedding 17% and 36% of their value, respectively -- as they warned about coming up short this holiday shopping season. However, what if one retailer's gutsy move sparked the downfall of both chains?

Two months ago, Best Buy moved to enhance its My Best Buy Gamers Club Unlocked membership. The consumer electronics superstore's loyalty program for die-hard gamers, which offered double the points on purchases that could be used for reward certificates, 10% discounts on pre-owned games, and a 10% credit on trade-ins, introduced a new savory perk: Best Buy would offer members 20% off new video game purchases.

Now, a 20% price cut is a pretty big deal, especially for a retailing niche in which stores typically sell products at full value outside of the occasional sale. Give gamers a 20% price break on new titles at any time -- when coupled with the existing perks of the Unlocked program -- and it's hard to see GameStop standing much of a chance, even with its own PowerUp Rewards Pro membership plan.

Unfortunately, Best Buy got too greedy. The Unlocked program that rounded up a fair amount of die-hard gamers at $30 for a two-year membership -- similar to PowerUp Rewards Pro at $14.99 a year -- jacked up its price to $120 for a two-year tenure. 

Existing Unlocked members were allowed to renew at the old rate, and that's probably a good thing, since it's hard to fathom too many die-hard gamers paying $120 for two years for price breaks on game discs that are fading in popularity anyway. The new Xbox One and PS4 feast on digitally delivered games. Who would pay $120 unless they knew they would be buying more than 10 new games over the next two years? The industry is changing dramatically, and video game discs are becoming the next CD, DVD, or book -- any medium that has peaked in the era of Internet delivery and cloud computing.

GameStop saw new software sales plunge 22.5% during the holidays. Despite a huge uptick in hardware sales, gamers aren't buying new releases. A decline was inevitable, but did Best Buy's enhanced Unlocked program win over the most active game buyers? Did it force gamers to seek out bigger discounts, turning their attention to cheaper online retailers? Best Buy didn't break down how its video game software sales held up during the holidays, but it wouldn't be a surprise if they held up better than GameStop at the expense of squeezing margins with the 20% price cut. Best Buy's gamble to make a bigger play for the shrinking market of buyers of new software appears to have worked in taking down GameStop. Unfortunately, it has also delivered a blow to the niche's profitability, and last week we saw both companies pay the price.

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Read/Post Comments (4) | Recommend This Article (3)

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 January 21, 2014, at 6:38 PM, Hfish1212 wrote:

    Real gamers know to buy the disk and not download virtually Why? Because you can't sell a virtual copy. Game Stop will do fine, this is a great price point to buy their stock!

  • Report this Comment On January 22, 2014, at 12:05 AM, taintedwisp wrote:

    Gamestop stock dropped with the announcement of PS Now, That was investors being morons and having no clue what the f.uck they were doing.

    Ps Now isn't even a competitor of gamestop. its a digital rental service.

    If Gamestop was smart they would start a development company and would produce exclusive disk based games :) Digital Only being available on PSN through gamestops website(microsoft doesn't link their store to gamestops online store)

  • Report this Comment On January 22, 2014, at 11:08 AM, cosmo wrote:

    As an avid gamer..I don't get why these analyst thinks Gamestop will go down with PSNow. As previously posted, I agree I that disc games will not go away specially when you can sell them back.

    I hate to say it but the economy is not much better that people specially kids are dropping $60+ for games. If I do spend the $60+ it is nic eto know that I can get some of my money back when done playing.

    I'm sure PSNow will have subscribers and all, but if its like Netflix where it takes a few months for movies to come out before sale, I believe people will get bored with the old games available virtually.

  • Report this Comment On January 22, 2014, at 4:05 PM, dankusDLK wrote:

    Game sales at gamestop were bad because there really weren't any awesome games that came out this holiday season. The new consoles were the big push, and launch day games are few and far between and none of them were a killer app. Additionally, with the changing consoles, used games for last gen lost a lot of appeal.

    PSnow won't kill gamestop, but it heralds a trend that will- akin to streaming video killing blockbuster, PSnow explicitly shows a world where gaming using digital delivery is the norm, and that's no bueno for gamestop.

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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