GameStop Continues to Walk in Blockbuster's Footsteps

GameStop's attempts at reinventing its business bear a striking resemblance to the actions of Blockbuster.

Apr 24, 2014 at 6:15PM

GameStop's (NYSE:GME) core business, the sale of video game software, is under assault. The retailer's primary suppliers are aggressively pushing their own digital businesses at the expense of GameStop's brick-and-mortar storefronts, calling into question the long-term relevancy of its business model.

Perhaps in an effort to hedge its bets, GameStop is investing in alternative businesses. At GameStop's investor day on Tuesday, it played up its new Simply Mac, Aio and Cricket wireless stores, projecting that each could eventually become a billion-dollar business. In other words, if physical video games are going away, GameStop isn't giving up without a fight.

But it's not a unique situation. Blockbuster, too, tried to diversify its business, but ultimately succumbed to bankruptcy. If the parallels to Blockbuster weren't already overwhelming enough, GameStop's attempts to reinvent itself only further validate the comparison.

Blockbuster fought back -- and lost
Blockbuster filed for bankruptcy protection in 2010, and finally closed the last of its retail stores earlier this year. A combination of instant video streaming, DVDs-by-mail, and rental kiosks proved too much to overcome. Yet Blockbuster didn't just go quietly into the night -- it fought hard to stave off the inevitable, working to reinvent itself repeatedly until the very end.

It launched its own alternative DVD-by-mail business in 2004. That failed. It rolled out its own movie rental kiosk chain. That failed, too. It offered a unique online/in-store combo program its competitors couldn't match. It didn't matter. It signed deals giving it exclusive rights to rent certain movies. It tried to sell electronic devices, soda, and popcorn. In the end, none of it mattered. Blockbuster was fundamentally a business about renting movies, and when that business dried up, Blockbuster went away.

GameStop's old new ventures
Will the same happen to GameStop? Nothing is guaranteed, but investors should approach GameStop's new businesses with a heavy bout of skepticism. Simply Mac, Aio and Cricket Wireless are just the latest in a series of failed attempts to get away from physical game sales.

In 2012, GameStop announced a new store concept: GameStop Kids. These stores, converted from standard GameStops, would focus on the sale of toys, dolls, and other trinkets aimed at young children. GameStop tested the concept during the 2012 holiday shopping season, then retired it and didn't bring it back. When asked about it in a conference call, management downplayed it, saying that it wouldn't disclose its future plans.

In 2011, GameStop purchased Spawn Labs, a streaming video game start-up. Management was overly promotional, promising to deliver a service by the summer of 2013 that would allow gamers to stream video games to any Internet-connected device. It never materialized, and GameStop shuttered Spawn Labs earlier this year.

Simply Mac, Cricket and Aio
GameStop's three new ventures are a bit different, less gaming-focused, and won't be branded under the GameStop brand. Simply Mac will sell iPhones, iPads, and iMacs; Aio and Cricket stores will serve as retail arms for those respective prepaid wireless providers.

Ultimately, they could prove to be successful, but they aren't operating in ideal business segments. RadioShack, for instance, has lost more than 94% of its value in the last four years, all the while trying to reinvent itself as the go-to place for wireless shoppers. Best Buy also sells wireless contracts, along with many mobile devices, including iPhones and iMacs -- its shares have shed nearly 50% since 2010. There's talk of an impending RadioShack bankruptcy, and Best Buy is struggling to remain profitable.

In that context, I'm not sure why any investor would be bullish on GameStop's new prospects. Sure, GameStop isn't those companies, and GameStop's new stores won't be precisely the same. But if those retailers -- focused solely on electronics and phones -- are in dire straits, how can GameStop's new businesses be expected to succeed?

The odds are against a pivot
GameStop's dominance in the sale of new and used video game software is unmatched and unquestioned. When it comes to selling video games, no single company comes close to GameStop.

The problem is that, to date, GameStop hasn't been very good at selling anything else, and though management would have you believe its new initiatives will be successful, a reinvention of the business -- if it happens -- would be historic, a break from a trend that other businesses in similar predicaments have been unable to avoid.

GameStop isn't the only company that should be afraid of a living room revolution
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. Hint: They're not Netflix, Google, and Apple. 

 

Sam Mattera is short shares of GameStop. The Motley Fool owns shares of GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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