Why GameStop Is Doomed, Part 3: The Coming Wave of Digital-Only Consoles

In my first two articles in this series, I covered the challenges GameStop (NYSE: GME  ) is facing in its dealings with its own suppliers: The traditional video-game console manufacturers are increasingly embracing digital distribution.

But the bigger threat to GameStop's business could come from new businesses entering the space. New consoles, powered by NVIDIA's (NASDAQ: NVDA  ) chips and running Google's (NASDAQ: GOOGL  ) Android, could put pressure on GameStop, while Valve's entrance into the living room stands as a more concrete threat.

Why GameStop should fear NVIDIA and Google
At the recent Consumer Electronics Expo, NVIDIA unveiled a new mobile chip that should deeply concern GameStop shareholders. NVIDIA's Tegra K1 is the most powerful mobile processor ever -- based on some early benchmarks, it even outperforms some of Intel's chips meant for traditional PCs.

While NVIDIA's Tegra K1 could be used in everything from tablets to cars, its most intriguing use could be in video consoles. Based on reporting from The Information and The Wall Street Journal, Google is currently working on an Android-powered set-top box that would be capable of playing Android games. Paired with NVIDIA's Tegra K1, Google's device could offer gamers graphics on par with modern video game consoles.

That could be an issue for Sony and Microsoft, but it's an even bigger problem for GameStop. The Android platform exists in a world beyond discs -- the entire ecosystem is based around a digital app store. If Google's Android console catches on, there would be no room for GameStop in any part of the equation.

Moreover, Google isn't the only company rumored to be working on an Android-powered console: reports have long indicated that Amazon.com has something similar in the works. Android-based consoles were somewhat of a trend last year, but have continued to gain steam: Chinese firm Huawei announced that it will begin selling an Android-based console later this year.

PC gaming enters the living room
But the Tegra K1 isn't the only NVIDIA product GameStop should be worried about: Many of NVIDIA's graphics cards will make their way into the Steam Machines that will go on sale later this year. Steam Machines are PC gaming giant Valve's attempt at expanding its business to the living room. Valve, in addition to making several well-regarded video games, is known mostly for its digital storefront, Steam.

Through Steam, Valve sells thousands of PC games. While it has several competitors (including GameStop -- more on that in Part 4), Valve has been wildly successful, capturing a huge portion of the PC gaming market: by some estimates, more than seven out of every 10 PC games sold are purchased through Steam.

Valve's success has likely been due to its legendary sales. Once in July, and again in November and December, Valve holds week-long flash sales, offering games at discounts of as much as 90%. Valve is able to do this because its market is completely digital -- there are no used-game retailers like GameStop to get in the way. Every time GameStop sells a used-game, it keeps all the money it makes -- video game publishers don't get a cut. In contrast, because there are no used Steam games, every time a game is purchased through Steam, the company that made it collects at least some of the revenue.

During its recent December sale, Valve was offering a copy of Tomb Raider for $9.99. In contrast, GameStop currently charges $29.99 for a copy of the same game on the Xbox 360.

The allure of less-expensive games could entice some console owners to purchase a Steam Machine instead of a traditional console. PC gaming, while offering cheaper games, is still challenging -- buying or building a gaming-class PC is often difficult and expensive. Valve's Steam Box initiative, if successful, could turn former GameStop customers into Steam converts.

Of course, GameStop's management would tell you it has a place in Valve's ecosystem, but investors should be skeptical. In the last part of this series, I'll cover that, and GameStop's other new business initiatives.

The $2.2 trillion war begins right now
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.


Read/Post Comments (10) | Recommend This Article (2)

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 25, 2014, at 9:39 AM, bluesky64 wrote:

    Sam,

    Great work. Your idea will take many yrs. to work themselves out. So for now the best way to profit are the 2 leaders Xbox and Play Station component suppliers. AMD chip win is getting the most buzz. Projection for world wide sales in 2014 30 million consoles this equates to $ 3 billion additional sales for AMD and net profits of $ 600 Million over 2013 revenue. That's what's happening now.

    Thursday MSFT sales confirm the strong demand for Xbox.

  • Report this Comment On January 25, 2014, at 6:45 PM, pedaltank wrote:

    Here is the problem as to why a digital based gaming system might never take off. If you have a digital based system the software developers will create software that has restrictions. Whether in trading games or DLC there will always be restrictions or at least the desire to place restrictions.

    Xbox One's initial press release at E3 was proof that consumers won't go for it. The gaming companies need to wrap their headed around the idea that once he game is sold whoever bought the game owns that copy. Its why digital streaming hasn't destroyed movies. CD sales are a completely different thing we won't get in to.

    But game companies are greedy and its their own greed that will prevent us going into an all digital gaming world.

  • Report this Comment On January 25, 2014, at 10:06 PM, walleye117 wrote:

    As soon as the restrictions are on, consumers will flock away as Microsoft found out foolishly. Games Stop is still the best spot aside from pawn stores to buy games cheaply. I wouldn't buy any games if it wasn't for used ones that I can afford.

  • Report this Comment On January 25, 2014, at 11:41 PM, Richard233 wrote:

    The problem with pure digital, is that consumers don't like it. People like to borrow/trade other people's games before deciding to buy one for themselves. The ability to sell a game, once you are bored with it, is an important element of risking the money.

    The valve sales are successful, because, when it comes down to it, only at a significant discount do they justify the loss of freedom to transfer a game.

    When x-box announced they were going to heavily control the ability to transfer games, the consumers voted with their feet. For many of my gamer friends it was the straw that broke the camel's back. Not only did they lose the sales, they also have planted the seed of suspicion that they will flip a switch at some point down the road.

    There are a few hand held devices that came out that were download only. They failed miserably. Likely at least part of the factor was they attempted to keep the prices of the games high, which was insulting to the consumers who saw the identical games available on other platforms for less money. The result of the short sighted greed was the loss of countless dollars pushing a platform that was ultimately doomed to failure.

    This is not to say that game stop might not eventually get hurt by the concept, but it requires a company that is able to fully capture the market. An Iphone device that only played games while connected to an exclusive "store" can very well work, but only if it is perceived as a great value.

    One other point. Game Stop is not stupid. The company not only is a place for games, its a source for information and a retail outlet for the new hardware. If your product will likely harm their bottom line, chances are not only will they not carry it, they will push the "propaganda" about how sucky the company is trying to treat the consumers. It helps that what they are saying happens to be true.

  • Report this Comment On January 25, 2014, at 11:48 PM, vdj29 wrote:

    just the other week i traded in call of duty ghost for xbox 360 and battlefield 4 gamestop gave me 13.46 for battlefield and 14.50 for cod ghost. whats messed up is they sell them used for 54.99 still when you can get them on amazon for 30,00 thats why gamestop is dead

  • Report this Comment On January 26, 2014, at 12:23 AM, Tw1tch wrote:

    @vjd29

    Game Stop is not here for you to get a full price refund on your used games, it's here to make money.

    Like any business you need to make money in order to stay in business, you can't do that by overpaying & selling low. Game Stop is not your friend, they are a business, they are there to make money. They can't loose money just so you're happy.

    Game Stop has rent to pay, utilities to pay, incomes for employees to pay, taxes to pay & has to earn a profit as well. They can't do that by selling you a game at $60 then buying it back at $55, you're not forced to sell your game to them. Put it on Ebay & you might get $25, that's better than the $14.50 you got.

  • Report this Comment On January 26, 2014, at 2:41 AM, puppybone69 wrote:

    We can only hope that something, anything, will finally kill Gamestop and banish it from gaming!

  • Report this Comment On January 26, 2014, at 6:15 AM, taintedwisp wrote:

    This article hurts my head... as a gaming enthusiast, you are a total fuc.king moron. Seriously this is the poorest written article I have ever seen. AND I READ YAHOO NEWS OCCASIONALLY!

    1. Digital will never take consoles. Ever. Because console players want to play their games and quickly switch them. They want to resell, they want lend PHYSICAL copies, they want to buy used copies, and there is something different about having a disc and having it digitally.

    2. PC is not coming to the living room, these "Steamboxes" are never going to succeed in the living room, What they will be is windows Pirate machines. same thing most linux based pre-builds are. PC gamers like to BUILD their pcs, and already have their PCs hooked to a TV for streaming. The reason it doesn't work is because the large the screen is, the less a mouse and keyboard works for it. And the steam controller is quite honestly total garbage when compared to a mouse and keyboard, it is about on par with a 7th generation console controller(PS2 or that might be 6th)

    and on top of all that, you truely showed your stupidity, by even mentioning mobile gaming towards gamestop

    Android and the code that it runs on will never make games as strong as the PS3 or Xbox 360 its just not that versitile, its made to do less powerful things easier. an android console would take the place of a plug and play set that you find in the toy section with pac-man. that's about it. No one is going to run to google, and sure as hell no one is going to buy a console from the same people who run youtube.

    YOU SIR ARE A DUMBA.SS

  • Report this Comment On January 26, 2014, at 1:35 PM, uncoveror wrote:

    Whether downloaded or on physical media, all video games are digital, not analog. That is a technically illiterate headline.

  • Report this Comment On January 27, 2014, at 1:57 AM, crymsonkyng wrote:

    1. Digital will NEVER overtake physical copies. For two reasons...the first being that, no matter what the law says about ownership of digital media, if a person buys a game, they feel it is THEIRS to do with as they please. And they DO NOT want to lose that ability, unless prices are around 10 or less, and that is not an price model for long term success. ALSO with ISP's placing data caps on monthly bandwidth(blatant cash grab but that is another article), and with the state of broadband speeds in the US, the vast majority of people won't have access to modern games, with 30 to 60gb file sizes(not counting updates and DLC). For the average American that would be a full day minimum to download a single game, WITHOUT accessing the net for other things.

    2. Mobile gaming will NEVER pose a threat to console gaming. Mobile games are a bad joke for the most part, and even the good ones do NOT deserve a place in the living room. They are time wasters when your out and about, and there is not a SINGLE game in either app stores that could even REMOTELY be considered a console or pc type game. ALSO, even if there are a few developed, you run into the same issue as a console that is all digital...speed and data caps.

Add your comment.

DocumentId: 2809045, ~/Articles/ArticleHandler.aspx, 4/16/2014 12:50:53 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement