You can't blame GameStop (NYSE:GME) CEO Dan DeMatteo for trying. The video game retailer's helmsman appeared on CNBC yesterday, calling for video game console makers to cut prices.
DeMatteo took a shot at Sony's (NYSE:SNE) PlayStation 3, suggesting that its $399 price tag is "clearly an issue in this economy." He also criticized the market leader, warning that even Nintendo's (OTC BB: NTDOY.PK) Wii may be in for a rough ride if it doesn't reduce its original $250 sticker.
"Nintendo has it within its arsenal to do that," he says. "The component costs have come down considerably. They used to break even on the Wii, but now they're making a considerable margin."
He held off on chastising Microsoft's (NASDAQ:MSFT) Xbox 360, which last year cut the retail price of its entry-level console below $200.
However, there are a few points missing from DeMatteo's call for lower hardware prices.
- Both Sony and Microsoft have already slashed roughly $200 off the original prices of their systems.
- Unlike Nintendo, it is widely believed that Sony and Microsoft are selling their consoles at a loss. They do so hoping that they'll make up the deficit by selling their own games and collecting license fees on games others sell for their systems.
- Why is DeMatteo asking for lower hardware prices, when a call for lower software prices would probably provide more relief, given that most GameStop shoppers already have consoles?
The answer to the last question is obvious. GameStop has fatter markups on software than it does on hardware, and it reaps even wider margins on its used software sales. Lower prices on games wouldn't necessarily lead diehard gamers to snap up more titles. An industrywide move to slash new software prices would also devalue the company's inventory of pre-played games.
These are challenging times for GameStop. It's failed to top Wall Street profit targets in its two most recent quarters, after beating analysts in the seven previous periods. Comps are holding up nicely, but the future may get bumpy. Retailers such as Amazon.com (NASDAQ:AMZN) and Toys "R" Us have been dipping their toes into the used game trade-in market, where GameStop makes a killing.
The actual role of a real-world video retailer is also debatable. All three console makers are now selling downloads directly to gamers. And a whole host of competing smartphones are moving games through their own online app stores. OnLive, which lets users play server-hosted console games remotely through their computers or TVs, is also cranking out hype as the future of gaming -- one that doesn't involve GameStop.
Good luck orchestrating a hardware price cut, GameStop. Just don't forget to protect your meatier software turf, which is being attacked from all sides.
Other cheat codes to investing:
- Toys "R" Us and Amazon.com are toying with trade-ins these days.
- I have three similar stocks that I think will beat out GameStop.
- Want to play? Here's your shot to score big.
