Video Games: Software Wins, Retailers Lose

This week's E3 could hasten GameStop's doom.

Rick Munarriz
Rick Munarriz
Jun 6, 2011 at 12:00AM
Other

The next few days will be ripe with video game industry headlines. The annual E3 powwow kicks off tomorrow, displaying the latest advances in hardware, software -- and new, market-shifting ways to get games to players.

Electronic Arts (Nasdaq: ERTS) didn't wait until this week's conference to play its latest digital distribution card. EA introduced Origin on Friday, offering gamers the ability to buy downloadable PC games directly from the company the same day they hit stores.

If you're sensing that your local GameStop (NYSE: GME) feels a little emptier than usual, it's because the retail chain just got Blockbuster'd.

"Wait a minute," bulls will argue. "You're talking about PC games. GameStop's bread-and-butter is the sale -- and especially the resale -- of console games."

I hear you. Unfortunately, so does Activision Blizzard (Nasdaq: ATVI). When Call of Duty: Modern Warfare 3 launches in November, the gaming giant will also roll out Call of Duty Elite, a community-based platform that enhances gameplay across all of the franchise's most recent installments. A lot of the gaming features will be available for free, though Elite will reserve its best treats for those who pay up for a premium subscription.

As the maker of World of Warcraft, Activision Blizzard is no stranger to snaring repeat customers with premium gaming hubs. The Call of Duty games' free multiplayer action has helped Activision amass 30 million online gamers through that combat franchise alone.

Add it up, GameStop longs. As EA cuts out the middleman, Activision Blizzard extends the playable life of its hottest franchise (and profits in the process). In the end, gamers buy fewer physical titles, and thus make fewer trade-ins and used game sales -- the transactions in which GameStop scores its chunkiest profit margins.

Gamers still rally around "tentpole" releases. Take-Two's (Nasdaq: TTWO) Grand Theft Auto IV and the past couple of Call of Duty releases have set new initial sales records. However, sales outside of these hits have been surprisingly dry. Casual gamers have moved on to free or nearly free diversions available through smartphones and social networks. Die-hard gamers are simply devoting more time to fewer purchases.

GameStop has held up surprisingly well through all of this. Sales, comps, and earnings inched slightly higher in its latest quarter. The retailer hit a fresh 52-week high two weeks ago. It survived the success of online game distributor Steam and the initial hype of "virtual game console" OnLive, a subscription service that lets you remotely play a vast library of games through a terminal connected to your TV.


Related Articles

GameStop has also been making cautious acquisitions in digital delivery, hoping to escape the same fate that squashed CDs and is now demolishing DVDs, Blu-rays, and even books. All the same, you don't necessarily want to buy GameStop near its highs.

The next few days will show how publishers and console makers aim to make direct connections with hard-core gamers. Even if GameStop can steer through these challenges, it probably won't be as relevant in the future as it has been in the past.

Your move, GameStop.

Would you buy or sell GameStop at present? Share your thoughts in the comment box below.