You knew this was coming. Electronic Arts (NASDAQ:ERTS) announced Monday morning that it's launching a digital distribution service that will deliver complete games, demos, and updates to wired PC gamers through the users' online connections.
It's a logical move for the world's leading video game maker. In theory, delivering games to users with high-speed broadband access is a beautiful thing. Margins run wide, since there is no inventory to stock and no physical product to press, package, and distribute. The only roadblock would likely be angry retailers like GameStop (NYSE:GME), which clearly would have plenty at stake if gamers could cut out the middleman. Will they retaliate? Will retailers yield more shelf space and in-store promotions to EA's rivals?
That's unlikely. EA is just too powerful. But that doesn't mean it's time to short GameStop, either. The video game chains aren't going away. For starters, video game consoles and accessories will never be delivered digitally. However, it bears pointing out that companies like GameStop derive higher margins on the sale of software titles than on the hardware side.
EA is taking a cautious start to its digital revolution. The first title to be available, Battlefield 2: Special Forces, will be out next week, but it can't be played unless the owner has previously purchased a physical copy of Battlefield 2. However, I expect this situation to change rather quickly once EA starts releasing standalone titles. They are likely to be sold at both the virtual and retail level. With EA likely to keep prices constant with suggested retail prices on both formats, the company's margins on the digitally delivered games will be huge.
Look around you. The digital delivery of media, from music to movies to books to -- now -- video games, is here to nibble away at the market share of their original platforms.
The next generation of gaming consoles from Microsoft (NASDAQ:MSFT), Nintendo, and Sony (NYSE:SNE) are geared toward digital distribution thanks to fat hard drives and Wi-Fi connectivity. So expect EA and popular competitors such as Activision (NASDAQ:ATVI) and THQ (NASDAQ:THQI) to start cashing in on the benefits of broadband delivery for their video game system titles, too.
Digital delivery is also what Massive is all about. It's using online computer gamers' background bandwidth to serve up timely in-game ads. With all these new possibilities brewing, it's only logical that the video game industry has been fertile soil for our Motley Fool Stock Advisor newsletter service. I have mentioned three stocks -- Activision, EA, and GameStop -- that Stock Advisor has recommended over the years, and all three are well ahead of the market since they were singled out.
Digital distribution is going to create even more opportunities in this space. Whatever you do, don't put down the controller. The game is just getting started.
Longtime Fool contributor Rick Munarriz loves playing video games, but he doesn't own shares in any of the companies mentioned in this story. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
