At the Consumer Electronics Show on Tuesday, Sony (SONY -0.46%) unveiled "PlayStation Now," an upcoming, cloud-based video game service that, if successful, could ultimately devastate GameStop's (GME 1.12%) business.

While Sony wisely took advantage of the PR backlash caused by Microsoft's (MSFT -0.32%) embrace of digital gaming in 2013, the Japanese giant has gone further -- its new service takes digital gaming to an entirely new level.

PlayStation Now -- The next evolution of digital game distribution
With PlayStation Now, Sony has essentially created a Netflix for games. Pricing and release details haven't been finalized, but Sony has laid out the basic workings of its upcoming service: PlayStation Now customers will pay a subscription fee to access a catalog of games released for prior PlayStation (1, 2, and 3) consoles.

These games will be cloud-based, streamed over the Internet to subscribers' PCs, mobile devices, Sony HDTVs, or PlayStation 4 video game consoles. Subscribers will not actually own any of the games -- they'll simply get access to them as long as they pay for a subscription. Some video gamers may resist the service, preferring to continue buying games individually, but many others will embrace it -- one low monthly fee will give them access to a vast library of games.

Microsoft envisions a digital future
Sony's vision is, in fact, a more radical version of Microsoft's original plan for the Xbox One. When it first announced the console, Microsoft drew the ire of the gaming community for a number of design decisions. As planned, Microsoft's Xbox One would've required a regular Internet connection to function, and buying or reselling used games would've been difficult, if not impossible. Microsoft later relented on its plans, shipping an Xbox One that was not so restrictive.

But Microsoft, like Sony, obviously sees a gaming future that's built around digital distribution. With its dedicated Azure cloud-computing servers, Microsoft could eventually follow Sony's lead. In fact, Microsoft has been rumored to be working on its own cloud-based gaming service, while it continues to push digital video game sales. One of the Xbox One's launch titles, Killer Instinct, cannot be purchased in any store -- it's only available digitally.

Physical game discs will become ancient relics
The rise of digitally distributed games is nothing short of a deadly trend for GameStop. Shares of the retailer fell more than 8% on Tuesday, and with good reason. GameStop derives nearly all of its revenue and profit from the sale of physical games. If games go digital, GameStop will, quite literally, have almost nothing to sell.

Sony's service is even more detrimental to GameStop because it cuts out hardware sales -- there's no need to buy a video game console from GameStop when your Sony TV is capable of streaming games from the Internet.

I own put options on GameStop stock because I believe, fundamentally, that we're witnessing a trend that's played out in retail many times before: Like iTunes bringing down Tower Records, or Amazon putting Borders Books under, or Netflix sending Blockbuster into bankruptcy; like those retail giants that depended on media sales before it, GameStop is facing a grim future as its product goes digital.