Gamer Survey Shows Why GameStop Might Not Be Doomed After All

The bear thesis for video game retailer GameStop (NYSE: GME  ) is well known -- sales of cloud-based digital games will eventually overtake sales of new boxed games, which account for over half of its top line. Netflix (NASDAQ: NFLX  ) and Apple (NASDAQ: AAPL  ) iTunes' respective victories over Blockbuster and Sam Goody/Musicland also seemingly support the notion that GameStop could soon be irrelevant.

Yet new data from GameSpot GameTrax, which surveys 3,500 gamers across its CBSi Games Network monthly, revealed that the vast majority of Sony PS4 and Microsoft Xbox One gamers still preferred buying boxed versions of the games.

Even though 48% of Xbox One owners and 42% of PS4 owners had purchased at least one full-price digital title, these games only accounted for a small percentage of total games sold. Over 75% of the PS4 and Xbox One titles purchased by the CBSi audience were boxed retail copies.

When asked about their overall preference in game purchases, the gamers overwhelming supported boxed retail versions over their digital counterparts:

Source: GameSpot GameTrax, March 2014.

Here are the five leading reasons that the surveyed gamers disliked digital downloads:

  • Lack of resale and trade-in value

  • Preference of a physical copy for a collection

  • Lack of sufficient hard drive space on the console

  • Slow downloads or throttled speeds/download caps from their ISP

  • Lack of digital ownership rights

The first two reasons strongly indicate that GameStop's core businesses of selling and trading video game software and hardware could still have a bright future despite its low-tech approach.

GameStop's quarterly sales remain robust
During the third quarter, GameStop posted year-over-year comparable-store sales growth of 20.5%, fueled by strong sales of triple A titles such as Take-Two's (NASDAQ: TTWO  ) Grand Theft Auto V.

Sales of new video game hardware and software soared by the double digits, despite the fact that GameStop's third quarter ended on Nov. 2, prior to the North American launches of the PS4 on Nov. 15 and Xbox One on Nov. 22.

GameStop Segment

Sales

Percentage of total sales

Year-over-year growth

New video game hardware

$213 million

10.1%

15.3%

New video game software

$1.102 billion

52.3%

43.1%

Pre-owned video game products

$487 million

23.1%

(2%)

Other

$305 million

14.5%

(5.2%)

Source: GameStop 3Q report.

GameStop's fledgling mobile and digital sales segments respectively reported sales and receipts growth of 14.4% to $49.9 million and 8.6% to $137.9 million.

Despite that robust top line growth, bearish arguments portraying GameStop as the next Blockbuster or Sam Goody have caused the stock to tumble more than 20% over the past six months. An NPD report that software sales fell 17% year-over-year in the crucial holiday quarter of 2013, reinforced by GameSpot's own sales decline over the holidays, also spooked investors.

Yet investors had already expected weak video game sales throughout fiscal 2013, since gamers were expected to hold off on purchases until GTA V hit the market in September and new consoles arrived in November. While it's clear that sales of GTA V boosted GameStop's new video game software sales, its double-digit growth in new video game hardware during the tough third quarter is admirable.

Bears oversimplify the mind of the gamer
Leading publishers like Activision Blizzard (NASDAQ: ATVI  ) and Electronic Arts (NASDAQ: EA  ) are eager to embrace the model of digital distribution for an obvious reason -- it's a high-margin business that eliminates the costs of boxes, manuals, and physical discs.

Gamers, however, aren't the same as Netflix or iTunes customers.

Video games are frequently classified with toys, and not movies or music, for a key reason -- they are products that are meant to be played with. Video games are digital toys and sandboxes, and not simply films or CD tracks that are purchased, downloaded, and played.

Activision's Skylander interactive toys. (Source: Giantbomb.com)

That's the reason Activision reached out of the digital world and into the physical one with its Skylanders interactive toy figures, and why publishers still sell massive collector's edition packages filled with physical items. The film and music industries have tried similar tacticst, but rarely in packages as large as collector's edition video games.

GameStop bears also miss the fact that gamers love to buy their consoles at retail stores for two simple reasons -- instant gratification and the lack of shipping fees. Moreover, when gamers purchase a console at the store, they will likely pick up a few boxed titles as well to reinforce a sense of physical ownership. Gamers also love to trade in their software and hardware every console cycle, and as long as they do so, there will be a market for brick-and-mortar retailers like GameStop.

Hardware and bandwidth limitations
Both the PS4 and Xbox One are equipped with 500GB hard drives. That might seem like plenty of space, but consider the installation sizes of some upcoming titles:

Game

Platform

Hard disk space needed

Titanfall

Xbox One, Xbox 360, Windows

48GB

Infamous: Second Son

PlayStation 4

24GB

Call of Duty: Ghosts

Xbox 360/One, Playstation 3/4, Windows

50GB

Sources: Rock Paper Shotgun, Push Square, Geek.

Although those requirements don't look too overwhelming, gamers should remember that each game will require big updates (often over 1GB in size), and DLCs (downloadable content) will gobble up several more gigs of space per title. These games will only get bigger as the PS4 and Xbox One mature graphically.

Considering the fact that Net Neutrality was recently nixed in the United States, the average download speed per customer could be throttled, especially for gamers regularly downloading 50GB games onto their hard drives. Therefore, we could reach a breaking point when it would simply be faster to drive to GameStop and buy a physical copy of the game instead, as long as the majority of the game data is on the disk.

Netflix, which streams HD video at a rate of roughly 1 to 3 GB per hour, has already cut a deal with Comcast (NASDAQ: CMCSA  ) for faster speeds. Apple, which also sells full-length TV shows and films via iTunes, could be next. That punches a huge hole in the idea that cloud-based gaming will destroy physical games and render GameStop obsolete.

If anything, the end of Net Neutrality and the start of metered Internet connections will directly boost sales of physical games.

Game over for GameStop? Hardly.
A lot of people are buying into the broad and uninformed argument that cloud-based games will leave GameStop in the dust. Short interest in the stock has more than doubled since the end of September.

However, these bears are neglecting the hardware and bandwidth limitations for distributing eighth generation games, as well as the market preference for boxed games -- which could help GameStop avoid Blockbuster's fate.

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Read/Post Comments (10) | Recommend This Article (2)

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 March 10, 2014, at 12:49 PM, speculawyer wrote:

    Gamestop is not doomed. But their growth has probably stopped. And although that survey shows people liking discs, attitudes can change. Look at the way PC gamers have nearly fully adopted digital distribution. Change can happen fast . . . look at gay marriage acceptance.

  • Report this Comment On March 11, 2014, at 1:49 AM, Njancek wrote:

    Is this seriously a surprise? Did anyone not see this coming?

    It doesn't take a survey to know that a vast majority of gamers, especially console ones, prefer physical media opposed to downloading it digitally.

    But hey, props on this not being a Nintendo Bashing article!

  • Report this Comment On March 11, 2014, at 6:40 AM, JJ82 wrote:

    The entire idea that box games were a thing of the past was based on Microsofts "vision" of the future.

    But all of you have forgotten that Microsoft has been blind for the last 7 years and cant even see the present let alone the future.

    They believe the cloud is the thing for gaming because people prefer streaming a movie, its not the same thing, not even close. They then point to "steam" being popular on the PC, but that isn't the same thing either because you are downloading the entire game onto the PC, a thing that can have a massive size hard drive, and that is still not cloud gaming.

    Stop trying to follow what MS says is the future and you wont make investment mistakes like "gamestop is dead".

  • Report this Comment On March 11, 2014, at 8:06 AM, mobrocket wrote:

    @speculawyer

    the difference thou is PC games didnt have a resale value when they were non digital

    that is a huge reason why gamestop will be fine, i only buy physical so i can trade in my games later

    Only way i could see physical dying is if Sony/MSFT offered a subscription service like netflix to play games

  • Report this Comment On March 11, 2014, at 10:49 AM, TMFMattera wrote:

    Hey Leo,

    Your data on game installation sizes is a bit off. While Titanfall is 48GB on the PC, it's only 20GB on the Xbox One, for example.

    Some gamers' preference for physical is well-known, but assumes the current status quo, which is unsustainable. Valve's Steam was widely criticized for its restrictive DRM when it first launched many years ago, but ultimately won over gamers by offering steep discounts. Microsoft is already starting to follow in Valve's footsteps, with recent, digitally-only discounts on Ryse and Assassin's Creed 4.

  • Report this Comment On March 11, 2014, at 11:30 AM, scruffymatt wrote:

    Thank god game companies finally started listening to gamers and offering the big collector's editions. I remember about 15-20 years ago game companies like Capcom would offer these huge collector's editions in Japan, but here in the states we'd get the game and that was it, no extras. It took a while before these game companies started to realize or hear from state-side gamers that we wanted these things too.

  • Report this Comment On March 11, 2014, at 2:55 PM, Vitabrits wrote:

    What you will see is Microsoft and Sony discounting digital game downloads which effectively cuts into Gamestop's business. It is a model that they stole from Valve's Steam. It's there is basically no PC section in Gamestop.

  • Report this Comment On March 12, 2014, at 12:34 AM, ShadowOfTheVoid wrote:

    This is a survey of less than 3500 owners of either system, and currently the PS4 and XBO have a combined global install base between 9 to 10 million, so you're dealing with small sample sizes here. Also, it's worth pointing out that the earliest adopters are going to be hardest of hardcore gamers and the most likely to be connected to the internet, not to mention that the survey was an online one, so the vast majority of those surveyed are likely to be connected. In reality, the portion of people who will "definitely" be buying physical games is going to be much higher than 50%. In fact, that half of the most connected gamers are "definitely" sticking with discs while only 10% are "definitely" or "probably" buying digital shows how digital is still a small minority of console game sales. Given the generally poor state of online infrastructure in some developed countries, particular the U.S., it's no surprise that the vast majority of consumers will not bother downloading their games and will instead keep buying the actual discs.

    Long point short: Packaged media is going nowhere. A digital-only future, if it ever happens, is decades away. Therefore, Gamestop is here to stay for the foreseeable future.

  • Report this Comment On March 13, 2014, at 5:53 AM, TMFSunLion wrote:

    TMFMattera: Thanks for pointing that out, I should have provided a range of installation sizes instead. However, I think the thesis stands -- that hard drive spaces and throttled Internet speeds could put a bottleneck on the growth of digital distribution. But you're right, steep discounts could boost demand.

    freejazz38: We're all entitled to our different opinions about the stock, it's up to you to decide who to agree with.

  • Report this Comment On March 25, 2014, at 6:12 AM, yjprc wrote:

    But it is the MSFT and Sonny to decide how long physical disc will be around rather than the players. When Adobe forces its subscription model, no one likes but end up accepting it. The same thing will happen to the games.

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