Microsoft Just Declared War on GameStop

The video game industry is shifting toward digital distribution. At some future date, physical game discs will simply cease to exist -- gamers will download their purchases directly over the Internet.

Many of them already do, but many more could be about to make the switch to digital. Both Microsoft (NASDAQ: MSFT  ) and Sony (NYSE: SNE  ) are aggressively pushing digital alternatives to physical game sales.

As a retailer dependent wholly on physical video game sales, GameStop (NYSE: GME  ) is uniquely positioned for failure.

GameStop's last stand
Most of the video game industry is already dependent on digital distribution. If you're going to game on your iPad, for example, you couldn't use a disc even if you wanted to. PC gamers, enthralled with services such as Steam and GOG, have long traded in their discs for digital downloads.

There's only one area of the industry where physical discs remain common: living-room consoles. Most owners of Microsoft's Xbox and Sony's PlayStation still purchase hard copies of their games, and play them directly from their console's disc drives. They can buy a digital version from Microsoft's and Sony's respective online marketplaces, but there isn't much incentive to do so.

While it does save them a trip to the store, the games aren't any less expensive. Moreover, they can't be resold or traded to friends. And gamers with slow Internet connections may find the long download times unbearable.

But all that could be about to change.

Microsoft is going to make gamers an offer they can't refuse
Earlier this week, Microsoft announced that it would begin experimenting with digital game discounts. If you own Microsoft's latest console, the Xbox One, for a limited time this month you'll be able to buy a digital version of Ryse: Son of Rome directly from Microsoft's online marketplace for just $40.

This is such a tremendous blow to GameStop's business model that it's difficult for me to overstate the matter.

Right now, your local GameStop would charge you $60 for a physical, brand-new version of Ryse. If you were willing to buy a used version (and GameStop would prefer you did), you would still have to shell out $55. In other words, while Microsoft is running that deal, gamers have virtually no reason to buy a copy from GameStop.

What's important to note is that Ryse isn't just some old, obscure game -- it is one of the Xbox One's best-looking launch titles, and has been out for less than three months. This is the type of game GameStop is most dependent upon for its business.

To be clear, Microsoft has said this is only a test; a trial balloon to gauge gamers' reactions. But if this were to become a common trend -- a discounted, digital version of a game offered shortly after its release -- GameStop would have a real crisis on its hands. Gamers may prefer to buy physical when the digital game is the same price, but a digital game offered at a 33% discount would be an offer most could not refuse. GameStop would be forced to counter with its own price cuts, or lose out on business entirely.

Sony isn't any better
But that's just Microsoft, and as I've pointed out, the Xbox One isn't even selling well. Sony's PlayStation 4 has outsold Microsoft's console around the globe, and even if Microsoft undercuts GameStop, the company still has a partner in Sony -- right?

Not really. While Sony hasn't offered up any cheap, digital PlayStation 4 launch titles, the Japanese giant is pushing digitial distribution in other ways. Last month, Sony unveiled PlayStation Now, an on-demand video game streaming service that promises to digitally deliver old PlayStation games over the Internet -- no downloading required.

More menacing might be Sony's Instant Game Collection. Each month, subscribers to Sony's PlayStation+ service get a slate of free digital games that they can download and play so long as they remain a member. While this service has been available for years, it's much more a threat to GameStop today than it's ever been in the past.

Sony's last console, the PlayStation 3, offered free online multiplayer. In that era, PlayStation+ was simply an optional service for dedicated gamers. But today, that's no longer the case -- PlayStation 4 owners must purchase a PlayStation+ subscription in order to game online.

Given the popularity of online multiplayer games, the great majority of those owners will subscribe, so more Sony gamers than ever before will have access to the Instant Game Collection. And while that won't, by itself, eviscerate the demand for PlayStation 4 games at GameStop stores, it will have a negative effect.

Countdown to the inevitable
The move toward digital distribution is in full swing. The debate is no longer about the inevitability of the outcome, but about how long it will take. Wedbush's Michael Pachter, a notable GameStop bull, believes the company has at least 10 years left on its core business.

While that's certainly possible, I would be utterly shocked if the company manages to survive another five years, let alone 10. Its two major suppliers, Microsoft and Sony, are moving against it aggressively.

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  • Report this Comment On February 18, 2014, at 7:08 PM, stamnx5 wrote:

    One thing missing. If I purchase a physical game at Game Stop, I have an opportunity to resell the purchased game at any given time, where as a digital download will not give me any return.

  • Report this Comment On February 18, 2014, at 7:09 PM, Nightrob wrote:

    Sony and other studios sued Blockbuster, Hollywood video and large Game stores in the Mid 90s to put a permanent halt to game rentals and used game sales. They lost that lawsuit. If Sony had its way there would be none of that for almost 20 years now. I bet that Sony was secretly hoping the DRM strategy of MS wasn't so widely disapproved of because that is what they have wanted all along. A sure fire way to protect the properties of their studios and of course more profit. They will get that soon. There is maybe one more traditional generation of gaming systems after the PS4 and X1. After that all will be downloaded or streaming.

  • Report this Comment On February 18, 2014, at 7:14 PM, speculawyer wrote:

    Meh. MS is just trying to keep people from getting rid of their 360s so quickly while they scramble to improve the value of the Xbone.

  • Report this Comment On February 18, 2014, at 7:21 PM, puppybone69 wrote:

    I guess you never noticed that Gamestop sells digital downloads on their website, because you're too busy telling everybody that they're doomed to fail because digital downloads will soon put them out of business.

  • Report this Comment On February 18, 2014, at 7:49 PM, Valentine26 wrote:

    Look's like gamestop will be cheering for nintendo lol.

  • Report this Comment On February 18, 2014, at 8:21 PM, Hfish1212 wrote:

    Poor reporting. GS does dd AND buy-backs, used games. The average gamer is that stupid. They know if their harddisk toasts they need the disk.

  • Report this Comment On February 18, 2014, at 8:29 PM, Ukot wrote:

    Two things:

    1) Say what you will about wanting to own a physical copy, the industry of most physical media has been moving towards digital distribution for year. Books, newspapers, comic books, and movies are already there (I personally haven't bought a movie in years, instead opting for streaming or disc rentals which I'd gladly stream as well if not for the much steeper price). And as the article mentioned, video games have been moving towards that area as well with Steam and the Arcade models. Yes, not everyone has access to the internet or the speeds this would demand, but that's like people complaining about the potential death of a land-line because not all areas are still able to get quality cellular service.

    2) I find it ironic that in the article about internet downloads being the future of all things, the advertisement below is about the death of the internet how to capitalize on it by clicking here now! Seriously, some target advertising would be nice if you want to swindle people with BS.

  • Report this Comment On February 18, 2014, at 9:03 PM, antipropaganda wrote:

    GameStop are crooks. Can't wait for their demise.

  • Report this Comment On February 18, 2014, at 9:10 PM, wizardaeon wrote:

    one thing this article is completely wrong about= gamestop does have digital download sales, and they are often cheaper than playstation network or xbox live

  • Report this Comment On February 18, 2014, at 9:15 PM, moopert wrote:

    The Xbox one isn't selling well? It's the second best selling console at launch EVER! It just happens to be launching against the best selling launch console.

  • Report this Comment On February 18, 2014, at 9:31 PM, ericday wrote:

    I'm actually surprised Game Stop lasted this long.

    It's not like we haven't seen this before. Tower Records? Blockbuster? The writing's been on the wall for 10 years.

    I don't see what all the fuss is about either. We see cassette players or floppy disks and giggle, but heaven forbid you can't sell your copy of Crash Bandicoot for a $6 store credit?

    Digital gaming will have similar benefits as other media. Instant access to everything at any time without leaving the house, and for measurably less.

    I think one major new aspect that will come of this is more user produced and published games, apps, and tools geared toward the systems. Just has taken place with other digital download mediums.

  • Report this Comment On February 18, 2014, at 9:38 PM, thowar1 wrote:

    Wait. Are you saying a console that's sold 3+ million units in 3 months isn't selling well? What planet do you live on? Sony Planet? As a "journalist", and I use that term loosely here, you shouldn't be spreading Sony FUD.

  • Report this Comment On February 18, 2014, at 9:54 PM, GuitarJim wrote:

    People might be willing to settle for simple 2D side scrollers and modern "Tetris" style games on their smart phones and tablets, but they still expect massive and immersive 3D worlds on their TV sets. The relative success of the current generation of consoles proved that. However, they're going to quickly get fed up with having to wait hours to download 50+ GB of game data when they buy the digital form of the game, or only having room on their console hard drive for a couple dozen downloaded games.

    I worked in the video game industry for more than 25 years. I predict this will be the last generation of game consoles. I also predict that future digital game sales will consist of subscriptions rather than massive downloads, and the game itself will run on cloud servers. Gamers will only need a "thin" client computer and a broadband pipeline so they can stream the video and sound. At that point, you'll be able to play the game on your phone, your tablet, your PC, or your TV. Game developers will be limited only by the size of their server farm.

  • Report this Comment On February 18, 2014, at 10:34 PM, Dimmer13 wrote:

    what nobody ever seems to mention is that the ps4 is in 3x as many countries as the xbox one...of course its going to be selling more...with that being said, the xbox is actually doing fairly well

  • Report this Comment On February 18, 2014, at 10:48 PM, rgsky wrote:

    If you are lucky enough to live in an urban area with 10mb or faster service plus uncapped bandwidth then sure, digital download makes sense. But not everyone enjoys those luxuries. Why screw over a large segment of the population by making digital download mandatory? Even if I wanted to I cannot and will not buy a console that requires high data rate streaming or fast internet in order to play a game. When we all have massive, cheap internet pipes then it makes sense, But until then I want physical media. End of story.

  • Report this Comment On February 18, 2014, at 11:00 PM, genjigem1337 wrote:

    if games just go digital we better be able to able to get physical items for collectors, and limited editions with codes to download and hardrives that can hold up to 2 terrabytes for the same price! so go on microsoft and everyone else make bytes cheaper!

  • Report this Comment On February 19, 2014, at 12:12 AM, hardenedchild wrote:

    So it seems that the only way gamestop would be able to stay in business for the long haul would be to strike a deal with sony and microsoft, to buy a surplus of gaming cards with the redeemable codes and split profits with the companies. It would be stupid to fight the two.

  • Report this Comment On February 19, 2014, at 12:17 AM, sheven18 wrote:

    Your forgetting about data caps I have a 15GB data cap per month from Comcast if I go above that I will be charged an extra $25.00 for every gig that exceeds my cap and if I were to download GTA V a 17GB game for my PS3 I would have to pay an extra $50,00 to Comcast just to install GTA V. I save $50,00 if I buy the game at Gamestop and not use the internet to download GTA V.

    In other words I don't have Steam or Netflix just so I can save on internet data why would I use cloud gaming or download online when that that alone could cost me allot?

  • Report this Comment On February 19, 2014, at 12:46 AM, Chim912 wrote:

    $40 for a DD with no trade in value, hours to download and only fit a dozen games on my hd, no thanks!

  • Report this Comment On February 19, 2014, at 1:08 AM, ChuyG wrote:

    There is nothing to worry about. Gamestop still has nothing to worry. Digital download is stupid, and only retard will do that. I run 20mbps and it took me 24 hours to downloaded Battlefield. Besides, I can't resell it. If I buy a physical copy I can go and resell it again.

    One thing that do represent a threat to gamestop is playstation now. That service will provide game streaming online without download the game. That sounds like a good deal to me. IF they implement that with new games, then gamestop is in trouble.

  • Report this Comment On February 19, 2014, at 1:53 AM, theohhdude wrote:

    The only way i would ever completely give into digital distribution, would be if the games price points came down. I can see the cost being at 59.99 a game, since they have to produce the physical copies, but everyone i know and myself exclusive purchase the games with the intent to eventually sell it off. If they made the digital versions resalable or even trade-able then this would make more sense.

  • Report this Comment On February 19, 2014, at 2:02 AM, MrContinuity wrote:

    Yet another completely non-objective article about Gamestop by Sam Mattera. Instead of exercising your petty vendetta against Gamestop, it might serve you and your readers best by actually attempting to be a real analyst for a change. Your bias is obvious. And for a site dedicated to providing sound investment guidance, such a sin is unforgivable.

  • Report this Comment On February 19, 2014, at 2:25 AM, scorpionking0000 wrote:

    Please do NOT support digital download games. We need disc versions even if the cost is more. Things to think about.... 1) A digital game can not be brought over to your friends house. 2) Should the network ever go down temporarily or permanently you will not be able to get a copy of that game again. 3) No resale value if you no longer want to play the game. 4) Long download times to get the game. 5) Gamestop and other retailers may go out of business causing people to be out of work (Not a good thing for the economy). 6) Once video game retailers are gone and Microsoft and Sony have full control of the market of game selling then the discounted prices you are seeing will go up in price. PLEASE DO NOT SUPPORT DIGITAL DOWNLOADS!!!

  • Report this Comment On February 19, 2014, at 3:47 AM, ff7legend wrote:

    The author of this article is missing one major con to an all-digital download world for gaming. That con is ISP data caps. Most, if not all, ISPs here in the U.S have enacted data caps on both smartphones/tablets & home internet service. I'm capped at 150GB of data a month on my home internet service & 4GB of data on my cell phone data plan (non-smartphone). If these caps are exceeded, I would be charged $15 per 10GB over the cap on my home internet service & $15 per GB over the cap on my cell phone data plan. This is why streaming games/all-digital downloads for buying games would be unfeasable/unwise by Sony/Microsoft since there would be millions of angry gamers voicing their rage over a mandatory digital download service in order to purchase games for them to play. Not to mention the fact that we still have some folks out there still stuck with dial-up internet service as their only option for internet access since broadband internet is only available in urban areas/mid-sized towns. The fastest internet speed available in my area without having to fork over an arm & a leg to Charter Communications for sub-par service is 6Mb/sec DSL service, which is what I have through my cell phone carrier. I get a discount on my monthly bill for both since I've bundled those together too.

  • Report this Comment On February 19, 2014, at 4:03 AM, octagramt wrote:

    Cloud Computing offers you convenience but at the price of control.

    once the Cloud decides to not service your product, your ability to use that product no longer exists.

    netflix is a great example of this. you see a movie but don't have time now to view it, and then when you do have time, it's no longer offered on netflix.

    same goes for music

    same goes for video

    same goes for all types of media

    if you truly value a movie, album, or game, you will own a physical copy of it so that your ability to access it can never be stripped of you, not give control over your access to it to a Cloud that is purely driven by profit.

  • Report this Comment On February 19, 2014, at 5:45 AM, DogB wrote:

    Declared war on GS? Hardly. Selling a 2nd tier sub par game for $40 is not a "blow" or a stupidly termed act of war, pull your head outta your garden.

    You can use a coupon to get that game at or around $40 as there are plenty of GS ones out there. And guess what? When you are done, sell it back and make a good chunk of your cash back, can you do that with Digital Download?

    I will only buy a game on DD if it's 75% or more cheaper than the disc format, I still buy DVD's, vinyl and Nintendo games because I STILL want the original, not up in somebody's flippin' cloud but in my closet or on my shelf where I can access it anytime I want. A lot of people still go that route so please author, stop it.

  • Report this Comment On February 19, 2014, at 6:38 AM, FSKI82 wrote:

    Who wrote this? The Xbox One is not selling well....over 3 million consoles in a couple months and it is not selling well? Actually it is selling great, but it is not selling as well as the PS4 which launched at the same time...

    How about a little unbiased reporting next time....

  • Report this Comment On February 19, 2014, at 6:40 AM, FSKI82 wrote:

    I only do digital downloads through Steam...it is easier, way way way cheaper, and I can play it on my laptop while my wife still can watch the tv......

    Especially with the Steam sales, humble bundles, and other sites offering cheap digital downloads...why would I pay 60 bucks just to have a hard disk....

  • Report this Comment On February 19, 2014, at 6:41 AM, masterimmortal wrote:

    Pre-owned Ryse is $37.99 on Gamestop.com.

  • Report this Comment On February 19, 2014, at 7:28 AM, starflyer59 wrote:

    We all know that the motely fool hates the xbox one. So here is another attack doom and gloom article on how they think they xbox one is a total failure.

    Anyway, if gaming ever goes to just digital downloads then I will simply just quit gaming.

    I want the case, the booklet the actual game disk.

  • Report this Comment On February 19, 2014, at 8:31 AM, mobrocket wrote:

    1. Ryse isnt a very good game, so the price drop is to get people to buy it, cus its not worth $60

    2. The guy who said Gamestop are crooks is a moron, u know u dont have to take their buyback offer

    3. Used game sales will still exist for years, unless SONY and MSFT offer a netflx like service, were u can play all the games digitally for one monthly fee.

  • Report this Comment On February 19, 2014, at 8:56 AM, nyccvs wrote:

    I haven't purchased a music cd in years.

    ( do record stores even exist anymore?)

    If the games are cheaper and work, I would rather download than go talk to those greasy faced kids at game stop any day of the week!

    Also........last time my iphone died I was able to get all of my purchased music just fine! so who cares about a dead hard drive!

  • Report this Comment On February 19, 2014, at 9:07 AM, Ebby720 wrote:

    Not gonna happen....I only buy them when they've been out for a long time and around $20......that way if it is a dud I'm not out....I would rather purchase the physical copy and at least I can get 2/3 rds back when it first comes out our half down the road when traded in at Gamestop......I don't think the jockeys that write these things actually play.

  • Report this Comment On February 19, 2014, at 9:43 AM, dbenitez30 wrote:

    Digital distribution is great and all but with internet speeds being as slow as they are its just not practical to be downloading 10gb+ games. Not to mention the fact that ISP's are trying to institute data caps. If I get 20gb total for a month there is no way i'm going to be able to download a bunch of games as well as check email, surf the web, stream movies, download music, play games, etc.

  • Report this Comment On February 19, 2014, at 9:48 AM, dbenitez30 wrote:

    Also, to address cloud computing and game streaming the same data cap issues come into effect.

  • Report this Comment On February 19, 2014, at 10:16 AM, jonfromny wrote:

    Somehow I don't think GameStop is scared. If you purchase a digital copy of a game, play through it all the way, and get 100% of the trophies, what happens next? That's at least a few gigabytes of game you'll probably never play again - and you can't get a dime for it.

  • Report this Comment On February 19, 2014, at 11:16 AM, HenryHayne wrote:

    Microsoft is number two in cloud computing and making headway against Amazon. Gates loves the cloud. He is moving strongly to it. It may not be the greatest investment since many of the gains will be offset with losses, but saying Gates hate it is just wrong.

  • Report this Comment On February 19, 2014, at 11:18 AM, eQil1 wrote:

    First of all you need to change the title of your articles even through I know the only reason you title them this way is to get more responses. Ok, since when is an experiment to be taken as a declaration of war on Gamestop. This is their way of getting more sells for their game. I don't think much of the world is ready for complete digital ditribution, look at the uproar Xb1 caused by wanting to go this route. A lot of things would have to change. There would have to be a lower price point & some kind of trade value for digital games & internet availibility & speed just to start. These console would need much larger HD, 500G! Really! What where they thinking, that's ridiculous! Gamestop has nothing to worry about for a while, besides you can do some digital downloading from them now & not everyone wants to keep every game they buy. For me now I would download only game I know I'm going to keep & get physical copy for everything else.

  • Report this Comment On February 19, 2014, at 11:23 AM, scruffymatt wrote:

    1) I actually prefer physical copies of my things and as a consumer want to continue to have that option. Fine, I'm a dinosaur. I worry that my account information may be wiped and thousands of dollars in games go down the drain. If my house burns down I have home owners insurance that replaces my games. I don't have insurance on the Microsoft server, so yeah I want a physical copy. if it makes me an old man or not with the times I don't really care.

    2) Ryse wasn't a very good game and the critics have not been kind to it. It may look pretty but when you cram quick-time events down my throat, and even worse quick-time events where failure holds little consequence, I'm not interested even at $40. Which makes me wonder if the $40 price is more of a last ditch "Hey we need to push this crappy/mediocre game" as opposed to a shot at Gamestop.

  • Report this Comment On February 19, 2014, at 11:42 AM, jas75249 wrote:

    Seems you forgot just about every ISP (Internet Service Provider) has Data caps and pricey charges for going over that cap. Until Cable and Telecomm companies change this policy which with the TWC and Comcast merger, is even less likely now. I mean, I would rather buy a physical copy and use my bandwidth to watch a movie or stream some music. Not to mention not every one has a fiber optic connection, I'm not willing to wait half a day to download the game, then wait another hour or so for it to update. I'm also willing to bet MS will not keep this discount for online purchases, they have never done it for the 360 games, why do it now?

    And Ryse is a joke, that's why it is being discounted.

  • Report this Comment On February 19, 2014, at 12:16 PM, fasttalker77 wrote:

    I love the DD and will never buy a disk again, but to each their own. Both Sony and MS want this, Sony did the whole DMR is bad for you the gamer, and we are standing up for you to sell more units. It worked and I say bravo, I like Sony and think they make a good product, but I have never thought they want whats best for me. Both companies stand to make more money with DD, and so to the VG makers, but alot of people myself included will ask. If you are making more money because the DD cost less to distribute shouldn't it cost a little less? If either Sony or MS would sell brand new games for DD even $5 less Wouldn't they stand to make a ton more because they have cut out the middle man? And they would force the other one to match them, food for thought guys.

  • Report this Comment On February 19, 2014, at 1:55 PM, zman313 wrote:

    The name of the site explains the person who wrote this article, a fool.

  • Report this Comment On February 19, 2014, at 2:39 PM, WhoSaidWhatNow wrote:

    This whole thing is based off of the writer's thoughts and not facts.

    Fact is, people who play on the XBOX or PS systems don't download all their games, because the size takes over 3 hours to download.

    With that said, the file size is huge! For the amount of games that are bought in the lifespan of a system, the hard drive would not hold all the games bought, and some would have to be deleted.

    Also, everytime I have ever gone to Gamestop, it is packed with people.

    Finally, why would I want to buy something I can't trade in or sell. Or even buy a cheaper used version because the only ones that need to be bought new are games for online.

    The only way they will make money is with add-ons. Pay 1.99 for a add on is more realistic and is where the future will be.

    This writer doesn't know anything about gaming.

  • Report this Comment On February 19, 2014, at 5:46 PM, gtizzo wrote:

    I have a Game Stop I shop at on a regular basis. When you walk in and take about 4 steps and look to the right what do you think I see? Used tablets,phones...looks to me like Game Stop is making the adjustment needed. Used electronics has just as lucrative a market as used games...just ask you local used car salesmen. I seem to recall a time when Game Stop was wall to wall computer games. Then they adjusted to the rise of consoles, next they will adjust to used electronics. Steam is a resource hogging POS...I wouldn't with that on anyone.

  • Report this Comment On February 19, 2014, at 6:19 PM, Death215 wrote:

    People are dooming themselves. If you cant hold it, YOU DONT OWN IT.

    Wake up people. They are pushing us into a digital world for the sole purpose of limiting our purchase rights.

    We are going into a world where people buy content and dont really own nothing. An imaginary digital library they pretend to own.

    THink of all the downfalls of going digital and stop it before its too late.

  • Report this Comment On February 19, 2014, at 7:02 PM, TheCaptainHowdy wrote:

    I'd still rather have physical copies. You can't sell or trade DD (yet), and there is nothing that says 5 years from now that the Digital Copy of Ryse that I buy will still be available for me to DL if my HDD fails. Physical copies last forever (with proper care).

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