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Sony's PlayStation 4 Could Signal the End of GameStop

The viability of GameStop's (NYSE: GME  ) business model depends almost entirely on its ability to sell video game software. Last quarter, more than half of GameStop's revenue and about two-thirds of its profits came from the sale of video game software, both new and used.

This is a major existential problem for the retailer, as the digital distribution of video games continues to build momentum. Sony (NYSE: SNE  ) , in particular, continues to push digital distribution through a myriad of initiatives. A recent update to its PlayStation 4 console makes purchasing digital games even more enticing, further challenging GameStop's business model.

PlayStation 4 gets preloading
Gamers, by nature, are an impatient group. Drive by your local GameStop on the eve of a major video game release, and you're likely to see a line stretching halfway down the block. Major games are anticipated months in advance, and often see the majority of their sales occur shortly after release -- last year's Grand Theft Auto 5, for example, generated $1 billion in sales in its first three days alone.

That gives retailers like GameStop that specialize in physical discs a big advantage over digital distribution. Every game released for Sony's PlayStation 4 is available for purchase digitally, but those with slow Internet connections must often wait several hours for the games to download. If you're an early adopter who's eager to begin playing the latest game at the first possible moment, it's often faster to head over to your local GameStop rather than wait for the game to finish downloading.

But a recently released patch to Sony's PlayStation 4 levels the playing field. Now, gamers will be able to preload their games. They can begin downloading digital copies of new games days in advance. When the clock strikes midnight on the day of release, the digital copy will unlock, becoming playable in an instant.

Sony's commitment to digital distribution goes beyond preloading
Prior to its release, GameStop shares faced heavy selling pressure on fears that the forthcoming Xbox One would not ship with a disc drive. Ultimately, that proved not to be the case and the draconian digital restrictions built into the Xbox One were later removed. But Sony's PlayStation 4 is far and away a bigger threat to GameStop than the Xbox One.

Besides preloading, Sony has built many other features into the PlayStation 4 that encourage gamers to purchase their games digitally. One example is remote streaming: Gamers who also own a Sony PlayStation Vita can play their PlayStation 4 games remotely, either in another room in their house or on the road as long as they have a stable Internet connection. Disc-based games can be played as long as they're in the PlayStation 4 at the time, but they can't be swapped remotely -- any gamer who makes heavy use of this feature is incentivized to purchase digitally.

Then there's PlayStation Now, its forthcoming streaming video game service. Set to launch sometime this year, the service is currently in testing. Beta testers are contractually obligated not to divulge any specifics on Sony's service, but that hasn't stopped a few from leaking details online. So far, the chatter has been largely positive, with those claiming to be testers reporting a solid playing experience. When it launches, it will give PlayStation 4 owners access to a wide variety of older PlayStation games -- subscribers to the service will have no incentive to purchase physical copies of these games.

GameStop's PlayStation Plus sales are surging
Finally, there's PlayStation Plus, Sony's other subscription service that's basically mandatory for PlayStation 4 owners. Strictly speaking, PlayStation Plus is optional, but in order to take advantage of online multiplayer -- a key component in most of today's best-selling games -- PlayStation 4 owners need a PlayStation Plus subscription. PlayStation Plus can be purchased directly through Sony, but gamers can also buy the service by purchasing a card from GameStop.

Unsurprisingly, sales of PlayStation Plus have been going like gangbusters. On its last earnings call, GameStop's management noted that it had sold "3.4 times more PlayStation Plus dollars since the PS4 launch than the entire amount of PlayStation Plus we had ever sold prior." Sounds great for GameStop, right? Not exactly.

In addition to accessing online multiplayer, PlayStation Plus subscribers also receive a free digital copy of a select PS4 game every month. That's one fewer physical game a PS4 owner needs to buy and one fewer game that can be traded to GameStop.

This time it's different
GameStop has received support from a number of bullish sell-side analysts. Most recently, analysts at Merrill Lynch upgraded GameStop to buy, arguing that the maturation of the current console cycle would benefit GameStop's earnings in the future. In recent years, that's been a reliable trend for GameStop -- new consoles have driven an upgrade and purchase cycle, benefiting GameStop's earnings.

But it's important for investors to understand that this time it really is different. Sony has built in, and continues to add, features to its PlayStation 4 that make digital distribution far more enticing. With the PlayStation 4 having sold 7 million units worldwide -- becoming the most popular next-generation living room console in the process -- GameStop's core business model is under assault. With an aggressive push toward digital distribution, this generation could be GameStop's last.

GameStop isn't the only company that's challenged by the PlayStation 4's popularity
In addition to streaming games, Sony is also planning to add original content to its PlayStation 4, making it a more attractive option for cord cutters. You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. 

Read/Post Comments (14) | Recommend This Article (12)

Comments from our Foolish Readers

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  • Report this Comment On April 21, 2014, at 8:36 PM, JJ82 wrote:

    Jesus Christ cut the crap already. Game console players have already CHOSEN that they want to OWN a copy of the games.

    And no matter what MS and Sony offers, the hard drives are TOO DAMN SMALL to digitally own all your games. Those drives could be 10x the size they are now and it will still not hold the vast majority of gamers game collections.

    And now toss in the FACT that a great many ISPs have data caps and suddenly downloading a 50GB game isn't exactly appealing...even a little.

  • Report this Comment On April 21, 2014, at 8:55 PM, lokilasher wrote:

    PS 4 and Xbox One only have about 20 games, while the 360 and PS 3 catalog continues to grow-Gamestop is safe for a while I guarantee!

  • Report this Comment On April 21, 2014, at 9:53 PM, josh995 wrote:

    GameStops own policies will be the end of them. I had a gift card to GameStop, and they had a new game for $60, Best Buy (RIGHT NEXT DOOR) had the same game on sale for $40.

    I got to the counter and had the sale in my hand and showed it to the woman at the counter and said "Hi! Best Buy has this for $40), and she literally said "Ok? We don't price match."

    1) What's with the attitude? I was nice as can be.

    2) What large company doesn't price match these days?

    I walked out, and even though I had a gift card to GameStop, I paid out of my pocket for the game at Best Buy.

  • Report this Comment On April 21, 2014, at 10:13 PM, StevenSaysWhat wrote:

    I think it's a bit premature/incorrect to call the PS4 as the signal to the end of Gamestop given the reasons stated. If anyone, Steam should be credited for these innovations. Steam offers deep price cuts on games during its seasonal sales that unlike PS+ don't require a perpetual subscription and are far more lucrative to the end user with games being discounted into the 2-3$ range. Whereas PS+ doesn't discount games nearly as much during it's sales, and it's PS+ free games require a perpetual subscription. And Steam has had preloading for a while, has shown huge support for indie developers, and has found ways to capitalize on the free to play model - things that Sony/MS are chasing. Simply stated, Steam did this all first, problem is we can't invest in them.

    In regard to Gamestop going away, I don't think this will happen anytime soon. Yes, PS+ memberships are rising because 7 million PS4s were sold and people want to play online. The free PS+ games, for me, tend to be games if I hadn't already bought on day 1 or on discount, are either games I don't want or aren't willing to pay for - so no money would have exchanged hands if it existed or not. I don't believe that there exists this huge audience of people sitting there with their PS+ subscriptions under the assumption that they will never buy a new game again. They will, and if anything, they will probably buy it from Amazon.

    I agree, Gamestop won't be the profitable powerhouse in the future though. It has probably reached it's zenith with used/new games, and once the secondary market for used games becomes consumed with digital distribution, Gamestop will need to evolve beyond that - perhaps into a gaming boutique for gaming related items (cosplay, collectibles, retro, repairs, free2play gift codes, and the likes).

    In short, Gamestop is not going anywhere in the next 3-4 years, but after that, unless they can evolve their business model, they will be the next Blockbuster.

  • Report this Comment On April 21, 2014, at 10:48 PM, mjm800 wrote:

    I've let my Gamestop power up card expire because I am now digital games only. It saves me time and I don't play a ton of games anyway so HD space is really not an issue. I get most games through my Play Station Plus membership and just download everything else.

    Gamestop may or may not be going anywhere, but I have not even walked into one since going digital.

  • Report this Comment On April 21, 2014, at 11:41 PM, GoGoAtEm wrote:

    Read all about it -- get your doom predictions here. First Xb1, now gamestop? Does motley fool ever predict anything other than the end?

  • Report this Comment On April 22, 2014, at 12:47 AM, brainsaber wrote:

    Gamestop, the company that breaks the seal and opens games, removes the disc from the case, puts the case back on the shelf, and then sells the game to the consumer as "new."

    Gamestop, the company that has a de facto practice of allowing its employees to do the above and "rent" the games for free, and then sell them at full new retail price.

    This is not a conspiracy theory, this is not propaganda. It's the truth. And while the second paragraph may not happen at every store, the first paragraph occurs at every... single... store. Confront the employee about it, and they become defensive and evasive. Why? Because it's corporate policy to remove the disc from the case.

  • Report this Comment On April 22, 2014, at 4:47 AM, malefactore wrote:

    Alright, let's do some educating! :)

    #1. Gamestop will be around for a long LONG time. Even when games go completely digital (which they will, eventually) Gamestop will still be selling hardware as well as codes to download those digital games since ALOT of people don't feel comfortable putting their credit card info into systems that have been proven to be 'hack-able'.

    Plus, the gaming community at large doesn't want digital. Microsoft announced at E3 all the DRM restrictions the system would have (which is what will be the norm when games go digital) and the populace kicked and screamed and complained until Microsoft took those restricitons away.

    #2. This is for you Josh995.

    If you walk up to an employee, pull out a sale ad, and say "Hi. Best Buy has this for $40."

    Maybe it would've been more polite to say "Hi. Best Buy has a sale on this game for $40. Does Gamestop price match?"

    Plus, you're clearly inquiring to see if Gamestop would price match. What you see as an attitude, I see as a straight-forward answer.

    Gamestop doesn't price match because they don't HAVE to. Pure and simple. Best Buy on the otherhand NEEDS to sell stuff cheaper cuz if you read the news on most sites, they're steadily heading towards going out of business.

    #3 This is for you Brainsaber.

    It's true the first paragraph is right on the money.

    The second paragraph, like you stated, may not happen at every store.

    However, do you know WHY they open a copy and put the case on the shelf? Probably not.

    They do that because there are people out there that don't read up on games or do research on specific titles. Gamers, parents, grandparents, even someone just buying a gift for someone else-these people want to know what's in a game before they buy it. Being able to pick up the case, read the back, look inside and read the instruction book (if there is one) helps educate these people on what to expect from a game they're spending their hard earned money on.

    The only time one of those new games gets put back into the case, re-sealed, and sold to someone is when it's the very LAST COPY in the store. Plus, you don't HAVE to buy that one. It's that easy. If you feel even the tiniest bit wary of that particular disc, ask to look at it. See if it's damaged or used in any way.

    I know all of this because I simply asked politely why they did it. The employee was not 'evasive' or 'defensive' in any way..and ya know what?

    I bought that copy and it still works perfectly to this day.

    So please stop acting like it's the worst possible thing in the world people, seriously. Just don't buy it if you have a problem with it. It's not like it's a crime.

    Now I don't know everything about Gamestop but I know enough to not blame an entire company for maybe one or two stores out there that have rude employees. I've shopped at a couple of bad Gamestops but I love the one I shop at now. The people are helpful and honest and it beats going to a Walmart, Target, or Best Buy where the person behind the counter is just there to take your money and knows nothing about games, systems, or DLC.

  • Report this Comment On April 22, 2014, at 9:36 AM, fullerjason wrote:

    "Toilet Bowl Filled with Feces Could Signal the End of the Motley Fool."

    In what is a surprise discovery by most people that "write" for the Motley Fool they have found that most people when asked get more useful information from a crap filled toilet bowl.

    "I was shocked." said one Ohio man. "The crap I took this morning said the XBox One would fail, Nintendo is doomed, the PS4 is terrible, consoles in general will fail, and that I eat too much corn."

    "Writers" at the Fool were heard stating "Oh crap our secret is out."

  • Report this Comment On April 22, 2014, at 9:51 AM, ssj4fp75 wrote:

    Ok !!!! truth is this people. No matter hwat if the game is something I really wanna keep then I download b ut if it's just something I wanna beat, then I "GAMEFLY" the better choice then u r not paying 60$ for every game. GF only cost 39 for 4 games a month. so in the last 8 months I have beaten and played over 30 some odd 50$+ games. Also the PS network is bS!! if u DL a game on ps3 and buy a ps4 then u have to re by game cuz the network is diff. and ps4 isn't backwords comp, so Im doing neither. Im keeping ps3 and dling all games I wanna keep on ps3 and just Gamefly the games I wanna beat on ps4/. That's the real we=hether u wanna agree or not!!!!!

  • Report this Comment On April 22, 2014, at 11:20 AM, dang3389 wrote:

    Game Stop will need no help in determining the end. They are doing a great job of that all by them self. I use to go to Game Stop with my kids all the time until the DAY!

    My kids received a game for xmas from their uncle along with a gift receipt in the event it needed to be returned or exchanged.

    Well because they already had the game we went to game stop to exchange and the person at the store asked for the original receipt. He said although the gift receipt shows $60.00 was paid we can only allow $40,00 credit because we do not have the original receipt. I argued the issue with no success.

    I emailed the corporate office and they just flat out told me that it was a store problem and they could not do anything about it. As I continued to return emails arguing my issue they sent me emails addressed to someone else. Stupid! They do not even have competent employees that can do their job with a slight bit of intelligence.

    There demise will be their own fault. We shop elsewhere now and never again Game Stop.


  • Report this Comment On April 22, 2014, at 12:20 PM, AnthonyLucynski wrote:

    YAWN. Another Gamestop is doomed article by Sam "I'm the Motley Fool Gaming Expert" Mattera. This time it's Sony doing the destroying (believe it or not, Sam has also stated that Nintendo is hurting Gamestop...and then goes onto say how Nintendo itself is doomed).

    Well, one good thing, comments are low on this one. Maybe people are finally realizing Sam is a fool, and that reading his gaming articles is time you will never get back, with zero added value to your life.

    Me? I read them because I enjoy trainwrecks. And I'm a former journalist, and I use Sam as a poster child on what not to do.....

  • Report this Comment On April 22, 2014, at 12:39 PM, jordanlund wrote:

    I own a PS4 and not once have I been notified of pre-loading.

    Quite the opposite. I've been told pre-loading is not available.

    So I'm not sure what games you're talking about. Certainly none of the big releases like Infamous: Second Son.

  • Report this Comment On April 22, 2014, at 12:52 PM, carla01j wrote:

    Sam, when I'm finished playing my $59.95 game in digital download format, how do I trade it in to partially offset the cost of my next game? Oh, I can't? Until I can, I'll stick with the hard copy version.

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Sam has a love of all things finance. He writes about tech stocks and consumer goods.

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