GameStop (GME 6.20%) has been on a roller coaster over the past year. Rumors that the Microsoft (MSFT 1.05%) Xbox One and Sony (SONY -0.84%) PlayStation 4 would include system-level features to block the playing of used games caused fears that the retailer's business model would soon crumble. Microsoft later reversed its plans to follow through on that vision after consumer backlash and pressure from GameStop itself. In February of this year, Sony unveiled its PlayStation Now platform, which will allow consumers to stream game rentals or pay a subscription fee for unlimited access.
The latest attack on GameStop comes courtesy of Wal-Mart (WMT 0.82%). The world's largest retailer is moving into the used-game space and could put a serious dent in the most profitable part of GameStop's business. Is this the beginning of the end for GameStop?
A company most would prefer not to compete with
Upon Wal-Mart's recently announcement that it will be seeking to claim part of the $2 billion annual used-games sales market, GameStop's valuation took an immediate hit. The news drove GameStop's share price down approximately 4% as of closing on the first day following the official details. Most Wal-Mart stores already offered the option to trade in smartphones and tablets for store credit; however, the expansion into games represents a direct attack on GameStop's business.
Making matters worse for the world's biggest games retailer, the credit that consumers get from trading in their games at Wal-Mart will be usable on any item in Wal-Marts, Sam's Clubs, and their respective online stores. This means that if the Walton house offers the same trade-in amount as GameStop, most consumers will receive greater value and versatility from the trade-in newcomer. The fact that those participating in Wal-Mart's new offering will have the opportunity to use credit on a wide array of items with no trade-in potential makes it unlikely that the company will offer the same credit amount as GameStop, but the superstore chain is in position to make such an aggressive move if it thinks the outcome would be worthwhile.
How big of a threat is Wal-Mart?
The new program will go into effect at more than 3,100 Wal-Mart stores on March 26, but Wal-Mart isn't the first big-box retailer to get in on the trade-in game. Best Buy and Target already have similar systems in place. Best Buy moved into used electronics and games in 2009. Company spokespeople have stated that smartphones and tablets represent a much bigger portion of their trade-in business than games, however. Target has offered an electronics trade-in program that's very similar to what Wal-Mart is rolling out since 2010.
The fact that comparable programs have been in effect for years without seriously hampering GameStop's used-games business may be an indication that Wal-Mart's potential impact is being exaggerated. Even if that's the case, GameStop faces attacks on multiple fronts and an uphill battle in preserving its business model.
Pining for a bygone generation
GameStop has already seen sharper-than-expected declines for used and new PlayStation 3 and Xbox 360 software. The drop-off could be attributed to the fact that the last console hardware generation were perceived to have went on too long. So far, the industry reinvigoration is happening primarily on the hardware front. Much of the available holiday gaming spend pool (including credit from trade-ins) likely went toward pre-ordering and purchasing PlayStation 4s and Xbox Ones -- products that generate very slim margins for GameStop. Furthermore, both consoles have a greater digital-download focus than their predecessors, a fact that certainly does the retailer no favors.
Everyone is gunning for GameStop
It seems almost every company in the gaming industry is looking to cut into GameStop's sizable used-game sales. Platform holders would rather consumers do business through their online ecosystems and are increasingly encouraging digital purchases by offering cheaper prices than would typically be found at retail. Publishers don't want to lose revenue from being cut out of sales of their games and currently implement ways of limiting certain features to the first owner of a game unless a fee is paid. Then, you've got other game retailers coming for a piece of the used-games pie. GameStop has shown remarkable resilience amid these rising challenges, but there are simply too many threats to the model for it to be indefinitely preservable.
Depending on the used-games model is like playing solo Russian roulette
News portending the demise of GameStop has become an almost monthly affair. Declarations that the company is done for may be overwrought and premature, but sooner or later, the company is going to take a big hit if it doesn't find a way to reinvent itself. It's too early to say that Wal-Mart's used-games program will be the market factor that brings GameStop to its knees, but it's one more threat in a long line that could seriously destabilize the world's biggest gaming retailer.