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Sony's PlayStation Now Service Is the Latest Attack on GameStop

By Keith Noonan – Jan 14, 2014 at 3:19PM

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After ending 2013 on a positive note with two successful console launches, the beginning of 2014 looks to remind GameStop of darker days. Is Sony's new game streaming service about to shake up the industry?

Sony's (SONY 0.95%) plans to debut a streaming gaming service have been in the works for a while now. The company's 2012 purchase of Internet gaming pioneer Gaikai saw it take a shortcut to its desired goals and acquire the resources of a company that had already established a cloud framework. But announcements at this year's CES expo show that Sony's vision for its streaming service is broader than most had anticipated. Not only will the service be available on PlayStation 3, PlayStation 4, and PS Vita, it will also be accessible on mobile platforms, tablets, and smart TVs as well.

The company's recently-unveiled PlayStation Now service has the potential to be huge and is one of the first signs that Sony is testing the waters outside of the traditional console gaming models. It's also the latest in a series of signs that are worrying for GameStop (GME -5.40%). Is the gaming retailer stuck promoting a product that is ultimately contributing to the company's inevitable decline?

Thanks for the launch parties, GameStop
The successful launches of the PlayStation 4 and Microsoft's (MSFT 1.97%) Xbox One gave reason for optimistic takes on GameStop's outlook. News that the PS4 sold 4.2 million units in 2013 shows that there is substantial enthusiasm for a new line of consoles. Microsoft's 3 million Xbox One consoles in 2013 is also nothing to sneeze at. GameStop is undoubtedly thrilled to be a major channel for the sale of these new consoles, but its livelihood is actually tied to the sale of software and its used game model. Now, console manufacturers like Sony and Microsoft and software publishers like Electronic Arts (EA 2.54%) and Activision Blizzard are diverting money away from GameStop.

Microsoft was this close to going rogue
For years, used game sales have been a hot-button issue in developer and publishing communities. Companies like Electronic Arts have cited lost revenue resulting from used games as a motivating factor for efforts to derive more income from online titles. The Xbox One's original product vision saw anti-used-game mechanisms implemented and online connectivity requirements that represented a serious threat to GameStop. Confronted with a swell of negative pushback from online communities and GameStop itself, Microsoft's reaction was almost to go entirely digital with the device and ditch physical media entirely. Mr. Softy wisely backed down, but the paramount success of its Xbox Live platform has demonstrated the green pastures that exist outside of traditional retail channels.

They used to be so good to each other
One of the few constants in the otherwise topsy-turvy gaming industry has been the relationship between console manufacturers and retailer outlets. Both need hardware to succeed so that software can be sold, and a mutually understood symbiotic relationship has guided past console cycles. Now, companies like Sony and Microsoft look to pull the rug out from underneath their convenient ally GameStop. The company's model for at least the next five years is closely tied to the success of these consoles. But for Sony and Microsoft, growth will largely be found in services and online sales that circumvent GameStop.

The modern quest for a quality stream
The quality of Sony's PlayStation Now streaming service is going to play a huge part in how adoption shakes out. One of the issues that may complicate the draw of streamed games is latency. Even assuming a perfect connection, games will be slightly less responsive. Connectivity and server issues have already proven to be issues with comparable online networks as well. If Sony gets the service right, PlayStation Now has the potential to be revolutionary.

Players will have the option to pay a comprehensive subscription fee that allows them to try many games, which makes it the closest thing to a Netflix-like model in modern video games. There will also be the option to rent individual games. The gaming industry is experimenting with new revenue models out of necessity. Microsoft is working on a cloud-based gaming service of its own, and the company will undoubtedly release more details early in the new year. That Sony's PlayStation Now service goes into beta testing this month is impressive; that a full release is planned for summer has to be irritating to GameStop. Its price fell 8.37% on the day of the news.

Now and later
The gaming industry still needs retail, but the relationship is changing. GameStop will be coming to the table with an increasingly weakened position, but the console manufacturers still have an interest in preserving a balance. With the PlayStation 4 posting impressive numbers and the upcoming expansion of the broader PlayStation ecosystem, the PlayStation Now service becomes one to watch as a sign of things to come.

Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of GameStop and Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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