Electronic Arts Declares War on GameStop

Electronic Arts is dreaming of a day when all games are downloaded -- if it succeeds, it could make life for GameStop quite difficult.

May 11, 2014 at 5:05PM

If Electronic Arts (NASDAQ:EA) succeeds, GameStop (NYSE:GME) could fail. On its earnings call last week, Electronic Arts' CFO, Blake Jorgensen, set a target for the company -- one that should make GameStop executives very nervous.

"We're excited that we're reaching the 50% mark in digital business and what we're really focused on is how do we get closer to 100%. We believe that there is a huge opportunity and that the business is indeed changing."

Electronic Arts is betting big on digital distribution
Last quarter, Electronic Arts' digital revenue accounted for 45% of its total revenue -- more than the company had anticipated. This revenue is coming from a variety of sources, including mobile games and add-on digital content (DLC).

But it's also coming from full game downloads. In fact, Electronic Arts' singled out full game downloads as helping to drive its better-than-expected digital revenue. In total, they brought in $112 million last quarter, up 13% from the prior year. In terms of the newest consoles -- the Xbox One and PlayStation 4 -- Electronic Arts said it saw two to three times more full game downloads compared to the prior generation.

The Xbox One and PlayStation 4 are terrible for GameStop
These results are not surprising in the slightest -- the PlayStation 4 and Xbox One are far more friendly to digital purchases than the Xbox 360 and PlayStation 3 that preceded them.

Any game released for either platform can be purchased the same day it's available at GameStop -- PlayStation 4 owners can even buy in advance, and download it to their console (though they won't be able to play it until midnight on the day of release). Downloading a full game can take hours depending on one's Internet connection, but both consoles allow for gamers to start playing before the game has completely finished. Occasional digital sales have even led GameStop to reduce its prices.

The more gamers choose to buy games digitally, the worse it is for GameStop. Last quarter, about half of GameStop's revenue and more than 70% of its profit came from the sale of video game discs -- the more full game downloads Electronic Arts' sells, the fewer game discs GameStop should move.

Electronic Arts could be planning something even bigger
Electronic Arts' ambitions could be bigger than full game downloads. According to Reuters, the company has been working with Comcast in secret on a radical new platform that could revolutionize the video game space.

If all goes according to plan, Electronic Arts' games could soon be available to cable subscribers in a manner roughly similar to on-demand movies. Much remains unknown, one thing is for certain -- games sold this way would be fully digital, removing GameStop from the equation.

In the long-run
Of course, to be completely fair, 55% of Electronic Arts' revenue didn't come from digital -- game discs are still a popular form of distribution. But as Electronic Arts' Jorgensen declared, the company's explicit, long-term goal is the complete elimination of game discs.

From Electronic Arts' perspective, it's the smart thing to do: With GameStop (and other retailers) out of the picture, there would be more room for Electronic Arts to profit -- its digital business is higher margin. Moreover, when GameStop sells a used game, it keeps all of the profit. In the absence of a used-games market, Electronic Arts could see more game sales and higher revenue.

If Electronic Arts' succeeds, and I believe it will eventually, GameStop's core business would no longer be viable.

Electronic Arts' games aren't the only form of living room entertainment
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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