Ever since Atari's (NASDAQ:ATAR) PONG graced the screen in 1972, video games have entrenched themselves as part of our culture. I grew up attached to Mattel's (NYSE:MAT) Intellivision console. In a prelude to the modern-day platform wars, I remember several heated arguments with friends over whether the Atari 2600, Intellivision, or the ColecoVision system was the best.

Those days of blocky graphics, cheesy sound effects, and simple game play are far behind us now. A new generation of video game titans has emerged to razzle-dazzle us with their lifelike video, live-concert quality sounds, and tremendously varied game play. Mattel, Coleco, and Atari are not the dominant forces they once were, however. The new "big three" are Microsoft (NASDAQ:MSFT) with its Xbox, Sony (NYSE:SNE) with its PlayStation, and Nintendo with its Wii. The console wars are still with us, though, as is the cyclical nature of the industry that knocked the original titans from their perch.

The lessons of history
Those platform wars and their resulting "innovate or die" mentality are two of the major reasons why I've taken the bear side against GameStop (NYSE:GME). While this generation of video game titans is significantly better capitalized than its predecessors were, the basic nature of the industry hasn't really changed much. Each new generation brings with it booming sales, followed by intense competition for market share, and then a severe downturn once plans for the next generation leak out.

With the Wii, PlayStation3, and Xbox 360 still relatively young platforms, the near-term future is certainly looking up for game retailers like GameStop. The problem, however, is what will happen in three to five years when this generation starts looking long in the tooth, yet the next wave of systems remains on the drawing board. Gamers will very likely put off purchasing new hardware and games while waiting for the next big thing. Software developers will start shifting resources to the next-generation consoles, hoping to catch the early launch mania. That means that even those gamers who want to keep buying games for the old platform will likely find fewer new choices.

While a retailer like GameStop is somewhat insulated from the innovation costs associated with the industry in general, it does carry some of the same cyclical risk. After all, once a platform has matured, consoles stop flying off the shelves. Traffic from existing system owners is at risk, too, while they wait for the next big thing to come out. So I wouldn't look at GameStop as an unbridled growth story. Instead, I'd consider it a cyclical firm approaching the strongest part of its cycle. That cyclicality puts specialty game retailers like GameStop at greater risk than general-purpose retailers that also happen to sell video games.

The other big risk
This brings me to my other big concern about GameStop: other retailers. Specifically, Amazon.com (NASDAQ:AMZN) and Wal-Mart (NYSE:WMT) are general retailers who also happen to sell a very decent selection of video games. And both are known for something that GameStop is not: low prices. In fact, quickly glancing through some of the games available at all three companies' websites confirmed that GameStop is rarely the low-cost provider:





Titan Quest:
Immortal Throne




Command & Conquer 3:
Tiberium Wars




Lord of the Rings Online:
Shadows of Angmar




If you're buying a video game, how much does the retailer you bought it from matter? You're after the experience of the game. There's no prestige in paying through the nose for the same game you could have gotten elsewhere more cheaply. Plus, those general retailers have the distinct advantage of having other business lines to help them ride out the inevitable cyclicality in the video game business.

In a nutshell
GameStop is too dependent on an extremely cyclical industry and too much at the mercy of the pricing power of its biggest general retail competition. While it may be worth looking at owning the next time the video game industry cycles through a crash, until that time, my money is staying away.

Go back and read the rest of the arguments. Then vote for the winner.

GameStop, Nintendo, and Amazon.com are all Motley Fool Stock Advisor selections. We'd love for you to learn why Stock Advisor is outperforming the market, so we're offering a free 30-day trial. Microsoft and Wal-Mart are both Inside Value recommendations.

At the time of publication, Fool contributor Chuck Saletta owned shares of Mattel and Microsoft. The Fool has a disclosure policy.