GameStop (GME +2.38%) CEO George Sherman wasn't joking when he declared tepid demand for game consoles as the crux of the reason the video gaming retailer's quarterly results were such a disappointment. Neither Microsoft (MSFT +2.64%) nor Sony (SNE +3.26%) have introduced an updated Xbox or PlayStation, respectively, in over a year, and neither company has brought a true next-generation device to the table in many years.
GameStop's woes aren't merely the result of the console market's current down cycle, though. The gaming retailer's numbers are decidedly worse than the industry's as a whole, and were worsening even before the industry hit a headwind. Rather, GameStop's struggle is far more structural. Gamers just don't need to buy consoles and games the way they used to.
Image source: Getty Images.
Rough results
Sherman explained last quarter's 45.8% decline in sales of game consoles thusly: "Our third quarter results continue to reflect the prevailing industry trends, most notably the unprecedented decline in new hardware sales seen across the market as the current generation of gaming consoles reach the end of their lifecycle and consumers delay their spending in anticipation of new hardware releases."
And he's not wrong. Demand for new consoles like the PlayStation 4 or the Xbox One X is slipping, except it's not down nearly 46%. Wedbush analyst Michael Pachter points to NPD data suggesting hardware and software (games) sales are off to the tune of 28%, while numbers from video gaming information portal VGChartz confirm hardware demand is waning, but not plummeting. Adding software to the mix doesn't help, either. GameStop's software sales fell 32.6% for the quarter ending in early November.
All told, GameStop's top line fell 25%, forcing the retailer to dramatically dial back its full-year profit outlook to somewhere between $0.10 and $0.20 per share, versus previous guidance of $1.15 to $1.30. Worse, the numbers extend what's already turned into an ugly trend.
Sherman remains optimistic that entirely new consoles from Sony and Microsoft next year can lift the company out of its doldrums. That may be only wishful thinking, though, for one overarching reason: Gamers don't buy games or consoles like they used to. They don't need to.
Downloads ramping up
It's a tired -- even cliche -- message at this point, though relevant nonetheless. Downloading games rather than buying disc-based or game-based cartridges is increasingly becoming the norm. In Europe, the so-called Triple-A echelon of games (higher-priced titles GameStop depends on) are now more often downloaded than physically purchased. The U.S. is moving in that direction.
That movement isn't happening as quickly as some have expected, to be fair. For a short while, it was believed the next-generation Xbox and the PlayStation 5 would not include a disc drive. That's not turned out to be the case, although that could change in the future. The generation of devices following 2020's new platforms could be the one that finally skips the disc/cartridge readers.
That would be a threat to GameStop for an obvious reason: The shift leaves the retailer out of the loop. Sony, in fact, stopped letting GameStop sell download codes earlier this year. Moreover, if disc-based games are on the way out and not sold in the first place, there's no resale of secondhand games. That's historically been a big (and fairly non-cyclical) deal for GameStop, but pre-owned game revenue fell 13.3% last quarter.
Consoles are so yesteryear
The company isn't just running into a headwind on the software front, however. Hardware remains a problem, albeit for related reasons.
Yes, the coming year's new console releases could provide a measurable bump in hardware sales for GameStop, though the bar is set low. Even then, though, note that GameStop has seen continually shrinking revenue since 2012, as it wasn't rekindled by the arrival of the PlayStation 4 and Xbox One in 2013. Indeed, while both consoles sold well (with the PlayStation 4 become the second-bestselling console ever earlier this year), and Nintendo's Switch is now selling as well as the PlayStation 4 did in its 2015 heyday, the trio of consoles haven't even come close to driving the kind of console sales seen in 2009.
That may not change, either. As Credit Suisse analyst Seth Sigman noted, "Looking out, not only is it difficult to see how results will improve in a new cycle (after all, the last cycle didn't seem to stimulate enough software/pre-owned), but what happens between now and then is more concerning."
Game-streaming sidesteps GameStop
Sigman is right, but didn't fully detail why. Console gaming is no longer the biggest piece of the market. Video gaming research organization NewZoo estimates that mobile gaming will be worth $68.2 billion this year, up 9.7% from last year's tally. Console gaming is only a $45.3 billion business, and is expected to grow a more modest 7.3% in 2019.
PC-based gaming remains the industry's weak point. It's only going to drive an estimated $35.3 billion in revenue this year, which NewZoo says will be just 2.8% higher than last year's figure. Even that growth may accelerate in the near future, however, now that game-streaming is becoming...well, mainstream.
Thank Alphabet (GOOGL +4.58%) (GOOG +4.76%) subsidiary Google for carrying that ball further downfield. The recent launch of its Stadia service may have been a little bit turbulent, but it works. Gamers pay just $10 per month for a rotating selection of gaming titles, and the service only requires the purchase of a $129 game controller that also serves as a console. Some game publishers already have their own streaming offerings that sidestep GameStop as much as they induce console sales. But, should Google prove the model has merit, look for those efforts to expand.
By the way, GameStop isn't selling Stadia controllers.
Putting it all together
Were it just downloads, or just streaming, or just the waning need for dedicated game consoles, GameStop may be able to shrug it off. There's far more to contend with than just a lack of new consoles, though. Advances in technology have changed how people buy and play games. The PlayStation 5 and the next Xbox may provide a short respite next year, but they won't alter the direction the industry is headed when more convenient technology is leading the charge. Just ask Polaroid, or Blockbuster.
