Microsoft Just Forced GameStop to Slash Its Prices

Feeling pressure from Microsoft, GameStop has had to reduce the price of one of its games.

Feb 23, 2014 at 12:00PM

As I write this, video game retailer GameStop (NYSE:GME) is selling used copies of the Xbox One launch title Ryse: Son of Rome for $38. Last week, it had been charging $55 for the game, but it seems to have cut its price following an aggressive move from Microsoft (NASDAQ:MSFT).

While a price cut on a single game may seem irrelevant to the retailer -- after all, GameStop sells literally hundreds of different video games -- it's actually rather significant. As Microsoft ramps up its focus on digital games, GameStop's bottom line could suffer.

Microsoft cuts Ryse's digital price
Gamers who own Microsoft's Xbox One have a choice: They can buy a new copy of Ryse on a disc, or they can pay to download a digital version to their Xbox One's hard drive. Either way, they'd be paying the same price. Or at least they were -- last week, everything changed.

On Tuesday, Microsoft began selling the digital version of Ryse for just $40 (regularly $60). There are some obvious drawbacks to the digital version -- the game can't be resold or lent to friends -- but at a 33% discount, those shortcomings are easily overlooked.

Following the announcement, I posited that Microsoft had more or less devastated the demand for Ryse at GameStop: Even buying a used copy was far more expensive than the digital version. For the week that Microsoft was running that special, GameStop should've seen next to no demand for Ryse at its stores.

GameStop slashed its price in response
It seems GameStop's management came to the same conclusion, as the retailer cut the price of Ryse to $38 -- exactly $2 less than what Microsoft was charging for the digital copy, and perhaps enough to nudge would-be buyers over to GameStop's side. But even if GameStop managed to recapture sales it would've otherwise lost, the effect is ultimately just as detrimental: By offering a digital sale, Microsoft weighed on GameStop's profit, effectively taking about $17 out of GameStop's pocket for every copy of Ryse they sold at the new, reduced price.

This is particularly devastating to GameStop, as about half of the retailer's profit continues to come from the sale of used video games. While the company sells used copies of just about every game made in the past 10 years, it charges the most for the newest releases. In that respect, Ryse is particularly notable, as it isn't just some old, obscure game, but one of the best-looking titles available for Microsoft's Xbox One, and a game that's been on the market for about three months.

Microsoft continues to push digital distribution
From the very first day Microsoft revealed the Xbox One, it was clear that the technology giant wanted to center its video game business model around digital distribution. As originally designed, the Xbox One would've made it difficult (or impossible) to resell games, and the owners would've had to connect their consoles to the Internet regularly. Widespread backlash led Microsoft to reverse those policies, but the company's goals clearly haven't changed.

Ryse's $40 digital price is "far better than the used price at GameStop and others! Go digital," wrote Microsoft's Mike Ybarra.

Clearly, Microsoft is coming after GameStop, which puts the retailer in a uniquely poor position, given that Microsoft is one of its major suppliers. While Ryse is just one game, Microsoft's willingness to offer digital discounts could become a trend, wreaking havoc on GameStop's business model.

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Sam Mattera is short shares of GameStop. The Motley Fool owns shares of GameStop and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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