Regular patrons of video game retailer GameStop (GME 7.58%) may soon notice changes for the better. On Oct. 8, the company announced a new partnership with software giant Microsoft (MSFT 0.37%) that will improve the chain's in-store tech. Among the impending upgrades are a better look at systemwide inventory, deeper insights about each customer, and a tablet computer that store associates can carry with them away from the cash register.
It's a solid set of improvements, but they still won't change what's ultimately working against GameStop. The video game business is increasingly moving away from cartridges and discs and moving toward game downloads that make brick-and-mortar retailers an unnecessary middleman.
Image source: Getty Images.
A slow-motion implosion
It's a well-worn debate.
Game publishers can sell titles directly to gamers via a download to most modern consoles or PCs, but GameStop isn't just a game retailer. It also sells collectibles, previously-owned games, gaming consoles, and even somewhat supports the digital approach that's upending its brick-and-mortar business.
For instance, GameStop now sells gamers access to Microsoft's Xbox All Access service that offers cloud-based access to Microsoft-made games. CEO George Sherman also pointed out during last month's quarterly earnings call that "new consoles have a disc drive" in reference to the upcoming releases of the Xbox Series X and Sony PlayStation 5. Ergo, "for the next seven years, the consoles will play both the physical and digital software that we sell."
Except, that's not exactly true -- or at least not a complete idea. The Xbox Series X slated for a Nov. 10 launch will load and play disc-based games, but the Xbox Series S that was teased in early September is essentially a Series X without a disc drive. It will also cost $200 less than the Series X. The "Digital Edition" PlayStation 5 also won't be able to read or play game discs and will cost $100 less than its disc-reading counterpart.
Even without this shift that's now being supported by console makers, the industry has been moving in this direction for some time. S&P Global Market Intelligence noted in March (before the COVID-19 contagion really took hold) that digital downloads' share of the video game market grew from 54% in 2018 to 63% the following year. There's little reason to think the trend has been reversed since the pandemic materialized. If anything, the disparity has widened.
There's also the not-so-small matter of competition from mobile and computer gaming -- where GameStop doesn't really compete -- and growth in the wrong parts of the world.
Video game market researcher Newzoo puts things in perspective. It's modeling 13.3% revenue growth for the mobile market this year and 4.8% growth for the PC market. Its console market outlook calls for 6.8% growth. But the bulk of all of this growth will come from regions like the Middle East, India, and Southeast Asia where GameStop has no presence. Newzoo is also calling for an explosion of cloud-based gaming with worldwide revenue expected to soar from this year's projection of $548 million to $4.8 billion in 2023. That growth also leaves GameStop mostly out of the loop.
Connect the dots. Any one of these headwinds probably isn't fatal. Combine them all though, and it's a deadly concoction.
Bottom line
For GameStop investors, the future is apt to look a lot like the past, and there's the rub.
Sales have been falling steadily since 2011. Ditto for net income. Nothing has been able to slow the decline -- not even GameStop's used game business, which has historically been its breadwinner. The last time the company reported sales figures for pre-owned games in late 2019, year-to-date revenue for this segment was off by 17%, extending a long-standing downtrend. Now, with more downloads reducing the need to produce physical copies in the first place, the sheer waning availability of pre-owned games poses a threat to GameStop's draw.
Perhaps the toughest aspect of the story for current and prospective shareholders is the fact there's still no sweeping death blow on the horizon that will put the company and its investors out of their misery.
The paradigm shift away from physical discs toward digitalization is a slow burn that still looks like it will simply grind away at GameStop's business until there's nothing left.
