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Pay Attention, GameStop

By Rick Munarriz - Updated Apr 5, 2017 at 8:04PM

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Even Atari is moving away from physical distribution.

You know things are getting hairy for GameStop (NYSE:GME) when even a fading pioneer like Atari is calling you out.

Speaking at the Atari Live event in London this week, CEO David Gardner -- not our David Gardner -- pointed out how secondhand sales of video game software have been "extremely painful for the industry" economically because "the publishers don't benefit" from the resale of the titles.

Selling used games and gear are a big part of the GameStop retail model. The chain scores chunkier margins there than in selling new hardware and software. Unfortunately for developers, they don't profit from GameStop encouraging the hand-me-downs.

Sure, one can argue that gamers who trade in their tired games and gear typically use the credit to buy new titles, but just the very presence of marked down consoles and games on the shelves disrupts the value proposition.

As it turns out, the publishers know just how to fight back.

"As games change and they become more and more network centric, the disc in the box becomes only one part of the experience," Gardner says, as recounted by GamesIndustry.biz.

In other words, as publishers emphasize digitally-delivered add-ons and enhanced game features, the physical disc becomes just the introduction. Real world retailers like GameStop are the ones who get shut out when Activision (NASDAQ:ATVI) is selling Guitar Hero music tracks directly to the axe-strumming gamers.

Take-Two Interactive (NASDAQ:TTWO) scored a $50 million deal from Microsoft (NASDAQ:MSFT) for a pair of episodic installments to the popular Grand Theft Auto IV franchise. The two stipulations are that the episodes will be Xbox exclusive and that they will be delivered digitally through Xbox Live's marketplace. You won't find this at GameStop.

This isn't just about cutting out the middleman. It's a tactically brilliant way to keep secondhand sales in check. Digitally-delivered titles can't be resold through GameStop. One would also think that someone who invests in Web-delivered add-ons and game enhancements is unlikely to simply flip the original game at the local video game reseller.

Sony (NYSE:SNE), Nintendo (OTC BB: NTDOY.PK), and Microsoft aren't making it any easier on chains like GameStop. They keep enhancing their consoles with fatter storage and easier connectivity.

What will GameStop do to be more relevant in a digitally-delivered future? Your move, GameStop.

Other cheat codes to investing:

Microsoft is a Motley Fool Inside Value pick. Take-Two Interactive Software is a Motley Fool Rule Breakers recommendation. Nintendo, GameStop, and Activision Blizzard are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz loves playing video games but he doesn't own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
GME
$40.02 (4.33%) $1.66
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$282.91 (-0.26%) $0.74
Sony Corporation Stock Quote
Sony Corporation
SONY
$86.32 (0.43%) $0.37
Take-Two Interactive Software, Inc. Stock Quote
Take-Two Interactive Software, Inc.
TTWO
$127.16 (-0.18%) $0.23
Activision Blizzard, Inc. Stock Quote
Activision Blizzard, Inc.
ATVI
$80.49 (-0.21%) $0.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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