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Take-Two’s Irrational Games Closes Its Doors, Threatening GameStop's Future

By Sam Mattera – Feb 22, 2014 at 10:30AM

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One of Take-Two's biggest studios is closing its doors to focus on digital-only content, threatening GameStop's business.

The shift toward digital distribution is well under way. At some point (likely in the near future), physical video game discs will simply cease to exist, rendering the business model of video game retailers like GameStop (GME 2.38%) completely obsolete.

I've already highlighted the myriad of forces threatening GameStop's business model, but more threats keep emerging: game creators themselves have started to come out against physical media. Both Take-Two's (TTWO 4.28%) Kevin Levine and Cliff Bleszinski, two legendary game creators, have thrown their support behind digital distribution in recent days.

Irrational Games closes down; Levine promises to work on smaller, digital-only games
Last week, the video game industry was stunned by the announcement that Irrational Games will cease operations. While Take-Two's Rockstar Games may be its most famous studio, Irrational Games was well-regarded, and had created a number of hit games for Take-Two, most recently BioShock Infinite -- widely considered one of 2013's best releases.

In an open letter explaining Irrational Games' closure, Levine, the studio's founder and leader, explained that it was time for a change. Gone were the days of massive games worked on by hundreds of employees -- Levin would turn his attention toward smaller, digitally only titles:

In time we will announce a new endeavor with a new goal: to make narrative-driven games for the core gamer that are highly replayable. To foster the most direct relationship with our fans possible, we will focus exclusively on content delivered digitally.

Bleszinski says he'll never to make another disc-based game again
Bleszinski, meanwhile, has been out of the industry since his 2012 departure from Epic Games. Still, he's widely regarded for his work on the popular Gears of War and Unreal franchises.

Like Take-Two's Levin, Bleszinski has promised to focus exclusively on digital games going forward. In an interview with Gamasutra, Bleszinski swore off physical media entirely, admitting point blank that he would "never make another disc-based game for the rest of my career."

Can't sell what isn't available
While GameStop can resist the shift toward digital distribution by cutting the price of its used games or offering customers incentives, it ultimately cannot sell what isn't available.

Other gaming platforms (PC and mobile) have long embraced digital distribution, but the vast majority of games released for current consoles -- the Xbox One, PlayStation 4, and Wii U -- continue to get physical releases. Still, even on these consoles, a growing number of games never get physical releases.

Killer Instinct, for example, is an Xbox One-exclusive that cannot be purchased at any GameStop location -- it can only be downloaded through the Xbox Arcade. PlayStation 4 has its own digital-only exclusives, including Resogun and Flower.

While digital alternatives of physical games is an obvious threat to GameStop, in the long-run, the bigger threat could be creators shifting their focus to digital-only games. Take-Two's Levine and Bleszinski are just two examples, but given their importance within the industry, their decision to focus on digital releases should not be taken lightly.

Sam Mattera is short GameStop. The Motley Fool recommends Take-Two Interactive and owns shares of GameStop. We Fools don't 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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