What Does Microsoft's Move Today Mean for GameStop?

GameStop will be one of the main benefactors from Microsoft's decision to unbundle its Kinect, but is that enough to offset the growth of digital distribution?

May 14, 2014 at 6:00PM

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Transcript follows:

The big news in the gaming world is Microsoft's (NASDAQ:MSFT) debundling of its Kinect with the Xbox One. This effectively reduces the cost of an Xbox One by $100, meaning that the Xbox will cost as much as a Sony (NYSE:SNE) PS4. That should even the playing field dramatically between the two console titans, but what does it mean for the middleman that sells those consoles? In other words, what does today's announcement mean for GameStop (NYSE:GME)?

There's been a lot of fear over the last few months about the longevity of GameStop's business model, which revolves largely around selling used video games. But the announcement of a Kinect-less Xbox One should bring about a nice boost to GameStop's sales. A lot of analysts believe that price is the most important factor behind a gamer's decision to buy a console this early in the cycle -- after all, there aren't enough games out there to judge a console on its library, and most developers are still figuring out how best to use the hardware. That's why sales of the Sony PS4 have outstripped those of the Xbox One by about 2 million as of mid-April, but a cheaper Xbox will help close that gap. That means more people buying Xbox Ones at GameStop, pushing sales up.

Of course, there are still digital downloads to worry about. Last week Electronic Arts made it clear during its earnings call that digital distribution is going to be a big focus for the company going forward. However, according to a recent NPD report, about three-fourths of core gamers (which is a group of about 34 million people in the U.S.) still prefer to buy a physical copy of a game over a digital copy as long as the price is the same. These mixed signals and uncertainty about the future of digital versus physical means that GameStop will be looking to console sales to provide some stability to its top line. The decreasing price of an Xbox One will help in that regard, as will the eventual stand-alone sale of Kinects. Overall, this is good news for GameStop, and while it won't affect this quarter's results, investors should keep an eye out for better-than-expected sales next quarter. 

Mark Reeth has no position in any stocks mentioned. The Motley Fool owns shares of GameStop and Microsoft. 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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