Please ensure Javascript is enabled for purposes of website accessibility

3 More Reasons GameStop Corp. Is Doomed

By Sam Mattera - Feb 12, 2014 at 6:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

GameStop continues to be challenged, with Amazon and Microsoft putting pressure on the company.

GameStop's (GME -3.96%) critics have long argued that the retailer's days are numbered. Video games, like other forms of media, are going digital, and the future of the industry is unlikely to include physical game discs. Still, GameStop has persevered -- for nearly a decade, console gamers have been able to download their titles over the Internet, and yet GameStop's business remains as viable as ever before.

But the tide has begun to turn, and the move toward digital distribution is accelerating rapidly. Things just keep getting worse for GameStop, with (AMZN -1.85%) and Microsoft (MSFT -0.26%) looking to pressure the company.

Microsoft said to be considering disc-drive-less Xbox One
Microsoft's Xbox One isn't selling as well as Sony's PlayStation 4. According to vgchartz, a website that tracks third-party sales data, Microsoft has sold 1.7 million fewer next-generation consoles than Sony. There are a number of reasons to explain the discrepancy, but one factor overwhelmingly trumps all the others: The Xbox One is $100 more expensive than Sony's console.

Late last month, a rumor emerged that Microsoft was testing a modified version of the Xbox One that it would sell for just $400. This version, in contrast to the $500 model, would ship without a disc drive.

Responding to the rumor, a Microsoft official said that "you can't believe everything you read on the Internet." Yet The Verge confirmed with its sources that Microsoft has been testing a disc-drive-less Xbox One console.

If a $400 disc-drive-less Xbox One is ever released, it would be a massive blow to GameStop's business. Any consumer who purchased the console would be unable to play physical discs -- in effect, they would no longer be GameStop customers.

Amazon hints at forthcoming game console
Amazon, as a retailer of video games, has long been a competitor to GameStop. But the competition could intensify significantly in the near future if the widely rumored Amazon video game console finally comes to fruition.

Earlier this month, TechCrunch reported that Amazon has acquired Double Helix games, a studio known for the well-received Xbox One launch title Killer Instinct. While Amazon could be planning to use Double Helix to produce games for its Kindle Fire tablets, Double Helix's development history would suggest a more living room-focused effort.

It's possible that Amazon's console could use physical games, but it seems highly unlikely. Given Amazon's extensive cloud assets, and its digital app store, the more likely scenario is a completely Internet-dependent console. Like a disc-drive-less Xbox One, a disc-drive-less Amazon console would pose similar problems for GameStop -- owners of the console would not be GameStop customers.

Capcom admits digital distribution is the future
Capcom, one of the world's largest game creators (known for franchises like Resident Evil, MegaMan, and Devil May Cry), admitted last month that the video games of the future would be digitally distributed. In an open letter, Capcom's chief operating officer wrote:

[Capcom's recent] performance reflected the momentous shifts in the composition of the entire game market caused by changes of an unprecedented magnitude...Advances in networks are causing software sales to move from packaged goods to digital distribution. This is why Capcom must concentrate on both the quality of our content as well as our services.

Capcom sees a bright future for the industry but not for GameStop. If digital distribution is the future, it's difficult to see how GameStop -- a company centered around physical game sales -- survives.

How much longer can GameStop survive?
Last month, I laid out the case against GameStop, touching on the myriad of challenges the retailer faces. Since then, things have only gotten worse -- the rumors of a disc-drive-less Xbox One, combined with a forthcoming Amazon console and Capcom's comments suggest that GameStop's future is indeed bleak.

I'm not sure how anyone who follows the industry could make the case for owning GameStop's shares. The company is committed to returning cash to shareholders, and if the chain survives long enough, it could return enough capital to justify owning it. But GameStop's days are clearly numbered -- video game distribution is shifting from physical discs to digital files, and GameStop's business model is rapidly becoming obsolete.

Sam Mattera is short GameStop. The Motley Fool recommends and owns shares of It also owns shares of GameStop and Microsoft. Try any of our Foolish newsletter services free for 30 days. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
$40.52 (-3.96%) $-1.67
Microsoft Corporation Stock Quote
Microsoft Corporation
$291.32 (-0.26%) $0.77, Inc. Stock Quote, Inc.
$142.10 (-1.85%) $-2.68

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.