Is Video Game Rental a Thing of the Past?

An industrywide shift to digital distribution and console giveaways threatens the video game rental industry as we've known it. Just look at the numbers. GameStop (NYSE: GME  ) revenue declined 7% last year and is up just 0.2% over the trailing 12 months, and that's including sales of megahit Grand Theft Auto V. Investors, naturally, prefer better numbers. GameStop stock has lagged the market as a result:

^SPX Chart

^SPX data by YCharts

Of course, GameStop isn't the only company that stands to lose. Redbox parent Outerwall (NASDAQ: OUTR  ) has seen its shares soar not because of better results, but because of a massive stock buyback and the impact of last year's acquisition of e-recycling specialist ecoATM. Management never once referred to its video game mix in the follow-up conference call.

Seem strange? It would, if Redbox offered more than 40 games for rent across all platforms. By contrast, privately held GameFly offers more than 2,500 titles for rent on digital alone and more than 8,000 by mail. What Netflix is to movies and TV, GameFly is to video games.

The serious business of playing around
Yet GameFly has been around going on 12 years. Why the sudden acceleration in the demise of retail video game rental? According to Geek Legacy Executive Editor Justin Cavender, enhanced subscription services from Microsoft (NASDAQ: MSFT  ) and Sony (NYSE: SNE  ) may be playing a role with free games delivered digitally.

"Sony has PlayStation Plus while Microsoft has Games with Gold. The idea here is that, each month, they offer free games for their subscribers, which are free to keep and play so long as you have an active subscription," Cavender says.

Microsoft gamers pay as little as $5 per month for Xbox Live Gold, which includes new titles distributed twice monthly. Sony charges either $9.99 for a single-month membership, $17.99 for three months, or $49.99 for a full year -- on par with Microsoft's lowest rate.

Of the two services, Cavender says PlayStation Plus offers the better deal because it includes games for PS3, PS4, and PS Vita: "Theoretically you can have three different systems and never buy games because you get six of them a month. I mean, what more do you need?"

Plugging into the PlayStation Plus service gives players access to as many as six games per month. Source: Sony Entertainment.

Goodbye, GameStop?
Fair point. So does this mean we nearing the end for GameStop? Cavender isn't optimistic, saying that "in the traditional sense, game rentals are a thing of the past." I'm inclined to agree, even if Wall Street analysts are forecasting 14.5% annualized profit growth over the next five years.

Who's going to pay for those gains when Sony has at least 150 million users for its PlayStation Network, a portion of which are Plus members? Microsoft has at least 48 million Xbox Live members. And Valve, the company behind the Steam platform for playing popular games primarily on PC, Mac, and Linux computers, now boasts 65 million members. Add it up, and there's every reason to believe GameStop is out of power-ups and nearing its last life.

"It's a brave new world and I am so grateful to be a part of it," Cavender says. Given the millions signing up for digital distribution, I suspect he isn't alone.

Now it's your turn to weigh in. What's your take on the video game rental business? Leave a comment in the box below to let us know where you stand, and whether you would buy, sell, or short GameStop stock at current prices.

The surest path to $1 million
Gold. Bonds. Real estate. None of these perform so well as stocks for generating wealth over the long term. Yet with 5,000 publicly traded companies to choose from in the U.S. alone, it can be daunting to single out the one that'll make you truly rich. So, we've done the work for you. Our chief investment officer names his top pick for new money now in the special free report "The Motley Fool's Top Stock for 2014," and it's yours for the asking. Click here to get your free copy now.


Read/Post Comments (2) | Recommend This Article (0)

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 23, 2014, at 8:59 AM, virgilcole wrote:

    When Redbox first started renting games I took advantage of that opportunity, and rented games from them several times, but as time went on, they stopped having any new selections, and the one day rental became way too expensive.

    They rarely have any new releases, and it's not worth the price when they do.

    If they had new games when they were released, and added a day to the rental, then I might give it another chance, but as it stands, it's just not worth it.

  • Report this Comment On February 23, 2014, at 11:12 AM, bluesky64 wrote:

    Tim,

    You've made some good points and it looks correct with gms and ourt with rentals. So what you investors do Short the stocks or double down.

    What's your point. Sure there is a shift but the void my be filled with something new. Just look at AMD most thought and bet big AMD was going away for good.Shorts are at all time highs. Now we know AMD was in the metamorphosis and the head lines of sold out products from the cyber coin to game consoles. I will agree with most analyst and recent upgrades AMD is a strong buy.

    Recent referencing confirms this with saving millions per yr and give great flexibility for suring up demand and deployment of new products.

    best

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2850167, ~/Articles/ArticleHandler.aspx, 8/21/2014 6:44:18 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