Microsoft and Sony Continue to Target GameStop

Microsoft and Sony are pushing digital distribution heavily, much to the chagrin of GameStop.

Jun 4, 2014 at 11:46AM

Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) continue to aggressively push digital game downloads. In June, both companies will roll out a number of updates and announcements, all of which could make digital game purchases far more attractive to console owners.

Those moves could threaten GameStop (NYSE:GME), as the speciality retailer continues to rely on disc-based games for the majority of its revenue and profit.

Microsoft adds external storage and games with Gold
Microsoft's latest update to its Xbox One video game console includes support for external hard drives, a much needed step to facilitate the expansion of digital game purchases. Microsoft's Xbox One ships with a 500GB internal hard drive. That may seem large, but given that individual games can take up as much as 20GB (or more) of space, support for external hard drives was a much-needed improvement.

Once the latest update is installed, owners of Microsoft's Xbox One will be able to connect two external hard drives simultaneously, potentially adding several terabytes of storage space. More than that, owners of Microsoft's console will be better able to manage their digital game libraries. They can, for instance, move all of their digital games to an external drive, which they can then disconnect and bring to a friend's house. If that friend owns an Xbox One, they can plug their hard drive into their friend's console, and begin playing all of their digital games.

Given that GameStop bulls have frequently cited storage concerns as a key reason to doubt the inevitability of an all-digital future, Microsoft's move to add external storage support cannot be discounted.

At the same time, Microsoft is also getting more aggressive with digital game sales. Starting this month, Microsoft will give Xbox Live Gold subscribers two free digital games. As long as they keep their subscription active, they will be able to access these games, and will receive new ones on a monthly basis. At the same time, Microsoft is also offering up aggressive digital discounts. Currently, Crimson Dragon is being offered for just $10 -- a 50% discount.

Watch Sony at E3
Sony, too, could soon get far more aggressive with digital games. PlayStation Now, Sony's cloud-based gaming service, has been in beta testing since it was announced earlier this year. Initially, Sony had promised to launch the service this summer.

If it's going to keep to that schedule, investors should expect the Japanese gaming giant to shed further light on PlayStation Now during its presentation at the Electronics Entertainment Expo (E3) next week. Sony has invested hundreds of millions of dollars into PlayStation Now, and Sony executives have billed it as the future of the PlayStation brand.

That poses an immense risk to GameStop's business, as PlayStation Now exists entirely in the cloud. Rather than physical game discs which can be purchased at GameStop and resold at a steep markup, PlayStation Now games live on a distant server, streamed directly to a PlayStation console over the Internet. Eventually, Sony could even cut the PlayStation out of the equation, streaming games to its TVs and Blu-ray players and weighing on GameStop's hardware sales.

The digital revolution has only begun
Microsoft's Xbox One and Sony's PlayStation 4 are far more digitally focused consoles than their predecessors, and they continue to get more digitally oriented as new updates and services are unveiled over time. That leaves GameStop, a company that largely depends on the sale of disc-based video games, in a difficult situation.

GameStop shares rose last month in the wake of a better-than-expected quarter. Some investors may have believed that GameStop was effectively out of the woods -- that the threat posed by digital distribution was overblown.

Nothing could be further from the truth. The digital distribution of console games remains in its infancy, but with the aggressive backing of both Sony and Microsoft, is poised to emerge as a major threat to GameStop's underlying business in the coming quarters.

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Sam Mattera is short shares of GameStop. 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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