3 More Reasons GameStop Corp. Is Doomed

GameStop's (NYSE: GME  ) critics have long argued that the retailer's days are numbered. Video games, like other forms of media, are going digital, and the future of the industry is unlikely to include physical game discs. Still, GameStop has persevered -- for nearly a decade, console gamers have been able to download their titles over the Internet, and yet GameStop's business remains as viable as ever before.

But the tide has begun to turn, and the move toward digital distribution is accelerating rapidly. Things just keep getting worse for GameStop, with Amazon.com (NASDAQ: AMZN  ) and Microsoft (NASDAQ: MSFT  ) looking to pressure the company.

Microsoft said to be considering disc-drive-less Xbox One
Microsoft's Xbox One isn't selling as well as Sony's PlayStation 4. According to vgchartz, a website that tracks third-party sales data, Microsoft has sold 1.7 million fewer next-generation consoles than Sony. There are a number of reasons to explain the discrepancy, but one factor overwhelmingly trumps all the others: The Xbox One is $100 more expensive than Sony's console.

Late last month, a rumor emerged that Microsoft was testing a modified version of the Xbox One that it would sell for just $400. This version, in contrast to the $500 model, would ship without a disc drive.

Responding to the rumor, a Microsoft official said that "you can't believe everything you read on the Internet." Yet The Verge confirmed with its sources that Microsoft has been testing a disc-drive-less Xbox One console.

If a $400 disc-drive-less Xbox One is ever released, it would be a massive blow to GameStop's business. Any consumer who purchased the console would be unable to play physical discs -- in effect, they would no longer be GameStop customers.

Amazon hints at forthcoming game console
Amazon, as a retailer of video games, has long been a competitor to GameStop. But the competition could intensify significantly in the near future if the widely rumored Amazon video game console finally comes to fruition.

Earlier this month, TechCrunch reported that Amazon has acquired Double Helix games, a studio known for the well-received Xbox One launch title Killer Instinct. While Amazon could be planning to use Double Helix to produce games for its Kindle Fire tablets, Double Helix's development history would suggest a more living room-focused effort.

It's possible that Amazon's console could use physical games, but it seems highly unlikely. Given Amazon's extensive cloud assets, and its digital app store, the more likely scenario is a completely Internet-dependent console. Like a disc-drive-less Xbox One, a disc-drive-less Amazon console would pose similar problems for GameStop -- owners of the console would not be GameStop customers.

Capcom admits digital distribution is the future
Capcom, one of the world's largest game creators (known for franchises like Resident Evil, MegaMan, and Devil May Cry), admitted last month that the video games of the future would be digitally distributed. In an open letter, Capcom's chief operating officer wrote:

[Capcom's recent] performance reflected the momentous shifts in the composition of the entire game market caused by changes of an unprecedented magnitude...Advances in networks are causing software sales to move from packaged goods to digital distribution. This is why Capcom must concentrate on both the quality of our content as well as our services.

Capcom sees a bright future for the industry but not for GameStop. If digital distribution is the future, it's difficult to see how GameStop -- a company centered around physical game sales -- survives.

How much longer can GameStop survive?
Last month, I laid out the case against GameStop, touching on the myriad of challenges the retailer faces. Since then, things have only gotten worse -- the rumors of a disc-drive-less Xbox One, combined with a forthcoming Amazon console and Capcom's comments suggest that GameStop's future is indeed bleak.

I'm not sure how anyone who follows the industry could make the case for owning GameStop's shares. The company is committed to returning cash to shareholders, and if the chain survives long enough, it could return enough capital to justify owning it. But GameStop's days are clearly numbered -- video game distribution is shifting from physical discs to digital files, and GameStop's business model is rapidly becoming obsolete.

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Read/Post Comments (14) | Recommend This Article (1)

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 February 12, 2014, at 9:46 PM, masterimmortal wrote:

    Who will die first - GameStop or Nintendo? Stay tuned weekly to Motley Fool for regular "updates".

  • Report this Comment On February 12, 2014, at 10:30 PM, poornamelessme wrote:

    This article would make a whole lot more sense for the next gen after xbox one/ps4 than this current generation. Currently all major games are available in physical format, and plenty of people are still using older consoles, which of course use physical discs too. As for the proposed Amazon console, I wouldn't expect it to impact gamestop in the least, seeing as most likely it'd be an android flavor system, and probably geared to casual downloadable games from amazon in small numbers. It's like saying Amazon's fire app store is impacting gamestop's income...

    Years from now, yeah, I can see digital becoming an issue with gamestop. But they do have time to change their business model if they so wish.

    The big companies want to go all digital so they can sell using a subscription model, which brings in a ton more money than one-off sales, especially if buyer's purchase used games. The consumer in the end will decide if this is worthwhile... usually it's not.

    And finally: "Sam Mattera is short GameStop."

    That really says it all.

  • Report this Comment On February 13, 2014, at 3:22 AM, JaredM80 wrote:

    it's doomed, it's not doomed, it's doomed again, it's not doomed again, it's doomed, it's not doomed, and again it's doomed. make up your freaking minds. it can't be doomed and not doomed. here's an idea for the "writers", pull your "sources" together try to agree on something

  • Report this Comment On February 13, 2014, at 9:06 AM, breezious wrote:

    I have probably read this article about 20 times over the past 3 years... what a joke

  • Report this Comment On February 13, 2014, at 9:35 AM, deadcooke wrote:

    Game Stop might have a chance if they honored the return policy on their receipts. SOn bought a PS4, got it home, hooked it up and the drawer just keeps opening and closing and wont play the game disc. Tried another, same thing. Brought it back to Game Stop. No systems in stock...keep checking in. After 2 weeks he is told we wont take it back since it is opened. You need to call SONY. How would we know if it didnt work if he didnt open it. They have lost a good customer.

  • Report this Comment On February 13, 2014, at 10:25 AM, thatsbillshut wrote:

    You know, all of these "doomed" articles would hold more water if it wasn't for the death of net neutrality. Just look at what ISPs have done to streaming content from Netflix.... throttled it down to terrible speeds in the last 45 days or so. If you think streaming games will be any different, you're delusional. Perhaps streaming/ cloud gaming IS where the industry is going, but broadband - either the technology or the providers' deployment of the technology- simply isn't ready to support it and won't be for more than a few years.

  • Report this Comment On February 13, 2014, at 10:39 AM, TMFMattera wrote:

    ISPs have an incentive to throttle Netflix and other video providers because they are competitors with paid-TV services. Last I checked, the cable companies don't offer video games. Net neutrality is therefore a non-issue.

    In fact, streaming/downloading video games benefits the ISPs, as it allows them to sell faster Internet packages at higher prices. Comcast, for example, markets its faster, more expensive Internet tiers directly to gamers. Unless you game, you really don't need a 25mb+ connection.

    The state of broadband in this country isn't as bad as people make it out to be. I already covered this extensively in part two of my original GameStop series:

    http://www.fool.com/investing/general/2014/01/19/why-gamesto...

    Indeed, PC gaming has been solely digital for many years now, and yet PC gamers are working with the same Internet infrastructure.

  • Report this Comment On February 13, 2014, at 11:15 AM, MrContinuity wrote:

    Hmm...isn't this the same site that predicted doom for PS4 and outright unquestionable dominance of the XBOX One? Yeah, I think I'll take this "prediction" with a bucket of salt. Not sure why someone would completely dismiss the used gaming market. Plenty of PS3 and XBOX 360 units still out there and very active. Not to mention console and accessory sales (used and new.)

    And as far as cable companies not offering videos games, there should be a "yet" after that. As media consolidation continues to grow and diversify, there will be many traditional cable providers that offer all inclusive media services and have their fingers in far more than or or two entertainment pies. And until rural broadband speeds are a true match for what you can get in metro areas, looks like Gamestop will still have a client base there.

  • Report this Comment On February 13, 2014, at 11:17 AM, funonesun wrote:

    @TMFMattera...if online gaming requires a faster/more expensive internet connection, does this make digital distribution more expensive than physical gaming? What about the other costs of digital download like inability to trade, risk of file loss.

  • Report this Comment On February 13, 2014, at 12:49 PM, scalan15 wrote:

    Gamestop will be fine, the Xbox One and PS4 both have a BLU RAy drive, meaning most of the games will be released on DISC. This will happen for the life of the consoles, probably for 7 more years. True gamers will always purchase games on disc and trade them in towards new games. Unless they start selling new games for $40 digital instead of the same price for the disc version. Gamestop will be fine

  • Report this Comment On February 13, 2014, at 9:35 PM, SkyfangR wrote:

    joined these forums for one reason, and one reason only.

    WE GET IT!!!

    you HATE gamestop and Nintendo.

    you don't need to post the same article every single day with different words.

    but you know what?

    you're completely wrong.

    gamestop has been around in various incarnations for much longer than your silly little website, and probably longer than most of your employees.

    they know what they're doing, and won't go out of business from something like this.

    Nintendo has been around longer than 90% of all businesses in the WORLD. they ALSO know what they're doing. so the wiiU is bombing, you know what? Nintendo doesn't really care. they're already drawing up plans for the next handheld and console.

    please, please stop posting the exact same articles with different authors and actually post something interesting and relevant

  • Report this Comment On February 13, 2014, at 11:37 PM, mctexx wrote:

    This is a gag article right? I mean what do you have against GameStop? Are they stealing money from you? Did they sell you a faulty game? Come on I've heard ALL of this before when I worked for them in 2000 and they are still here so what,s up? More power to anyone who can get past this economy.. you need to take care of those anger issues.. lolol.. anyway take are and stop with the GS articles. Bye for now.

  • Report this Comment On February 14, 2014, at 5:25 AM, Richard233 wrote:

    Consumers don't like digital downloaded games when priced at or near the ones that have a disk that can be lent/traded/sold/given.

    If they stop jerking around the gamers or allow for transfer of the games, then maybe it will happen.

  • Report this Comment On February 14, 2014, at 9:50 AM, scooterge558 wrote:

    The problem with digital downloads which nobody ever seems to mention is that people that do not have very good internet connections still want to be able to play their games. Will games go towards digital distribution, they already have, but until everyone in America can get at least a good 50-60Mbps line, there will always have to be physical copies. Even on my decent 30Mbps line, it takes too long to download a game, I'd rather buy the disc, not to mention when I'm done with the game, I can trade it in and get something for it, can't do that with digital content (AT THE SAME PRICE).

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