Why Digital Distribution Won't Kill GameStop (Yet)

GameStop has been hurt by digital distribution trends, and will continue to hurt into the future. Rumors of its imminent demise may have been exaggerated, however.

Jan 27, 2014 at 1:30PM

Despite what looked like a good holiday season propped up by the release of two next-generation gaming consoles, GameStop (NYSE:GME) recently had to cut its earning forecasts due to lower-than-expected sales. This adjustment was accompanied by more bad news for the company as analysts with firms such as Merrill Lynch and Sterne Agee downgraded their recommendations for the company's stock.

The digital distribution of games is often cited as the underlying cause of GameStop's problems, and even the company itself acknowledges this. It's such a common attribution that almost every potential advance in digital distribution is met with claims that it will "kill" GameStop. (Yes, I've even been guilty of this myself.)

Don't get me wrong: digital distribution can and likely will have a significant impact on GameStop's business in the long run. Before we declare it dead and buried, however, let's take a look at some of the potential threats that have recently been accused by some of being a "GameStop killer."

Steam Machines
Behold, the might and majesty of the Steam Machine. Not only have some touted these as GameStop killers, but fans of the machines have even claimed that they could be a real threat to major consoles like the PlayStation 4 or Xbox One.

Steam Machines are console-like custom gaming PCs designed to run Valve's SteamOS operating system; this allows players to use the Steam digital gaming platform on a console-like machine in the living room. The machines will be available from several manufacturers at multiple price points, and gamers can also download the operating system for free and build their own.

The problem is that only a small portion of Steam's gaming library is compatible with SteamOS, and the Steam client itself already has a "Big Picture Mode" that allows for TV play. Steam Machines won't offer much that gamers can't do now if they want to, and aside from out-of-the-box convenience won't be much of a draw for those who shop at GameStop.

PlayStation Now
When Sony (NYSE:SNE) released information on its PlayStation Now service, once again the calls went out that it would be the next GameStop killer. On the surface, it's easy to see why people might say that... after all, GameStop makes a lot of money from the sale of used games, and PlayStation Now is designed to let people rent or buy older games digitally. Consumers wouldn't even need to buy a PlayStation 4 console to use the service, potentially cutting off additional GameStop revenue. Digging a little deeper, though, there are a few holes in this murder story.

At launch, PlayStation Now will feature select PlayStation 3 games. More PS3 games, and eventually PS2 and original PlayStation games will be added over time. No one yet knows the size of the initial release or how many games will be released at a time, meaning that PlayStation Now could end up being a bit lackluster. The rollout sounds similar to that of Nintendo's (NASDAQOTH:NTDOY) Virtual Console for the Wii and Wii U, which even die-hard Nintendo fans will often admit has been painfully slow in releasing games. Only a portion of Nintendo's library was released during the Wii's lifecycle, and the Wii U has been even slower (while releasing many of the same games as its predecessor.)

Rumor has it
It doesn't even take an actual product to cause people to label something a GameStop killer; even rumored features bring about claims of the company's demise (even if those features never see the light of day). Early rumors that Microsoft (NASDAQ:MSFT) would include a feature in the Xbox One that prevented the playing of used games without paying an additional fee led that console to be labeled a GameStop killer before the actual console specs had been released. Of course, Sony had investigated similar technology, and some game manufacturers have even incorporated a version of it in the form of one-time-use codes for multiplayer features or other in-game goodies.

Power to the players
Digital distribution will remain a thorn in GameStop's side for years to come, but it isn't as imminent a threat as some would have you believe. While the PlayStation Now service may provide a glimpse of the future and Steam Machines will give some gamers the ability to play PC games on the TV as an out-of-the-box experience, neither of these potential GameStop killers is going to make a major impact in the near term. PlayStation Now will take time to roll out and gain popularity, while the Steam Machine will likely remain a niche item at best.

There may be a real GameStop killer out there somewhere, and the company would do well to learn from these potential threats so that it can avoid the truly devastating technology that lies in the shadowy future.

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John Casteele owns shares of Microsoft. 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.

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