Sony (NYSE:SNE) could partner with Activision-Blizzard (NASDAQ:ATVI) for a new initiative that might result in a meaningful increase in digital game sales. According to Baird analyst Colin Sebastian, Sony's PlayStation 4 could soon come with pre-installed digital copies of two of Activision-Blizzard' biggest games: Diablo III and Destiny.
Given that neither game has been released (Diablo III is currently available for PC and other consoles, but not Sony's PlayStation 4) it will be several months at least until this initiative rolls out. Still, it poses a meaningful threat to GameStop (NYSE:GME) and other retailers that depend on the sale of physical game discs.
Getting over the digital hurdles
Both Sony and Activision-Blizzard would like to see more gamers purchase PlayStation games digitally. For Sony, it allows them to serve as the retailer; for Activision, it results in higher margins and a smaller used games market.
That's beneficial for Activision, as used games may compete with its own offerings. An owner of Sony's PlayStation 4 who elects to purchase a used copy of Destiny from GameStop (instead of a new one) gives GameStop revenue that otherwise would've gone to Activision.
But there are some significant hurdles to digital distribution. Most notably, bandwidth speeds and data caps -- gamers with slow Internet connections may be unwilling to wait the several hours it takes a game to download. Those with strict data caps may be unable to download games, as modern game files can be several dozen gigabytes in size.
Preloading the games at Sony's factory solves both problems. Buyers of Sony's console wouldn't get Activision's games for free, but would have to purchase them through Sony's network. Once their credit card information has been entered, the games could unlock, allowing owners to play them -- no waiting or downloading required.
Encouraging a new habit
Even if gamers prefer physical copies, they may find the prospects of instant access too alluring to pass up. And once they become comfortable buying digital games, they may find themselves hooked.
One of the PlayStation 4's unique features is remote streaming -- owners of Sony's handheld console, the PlayStation Vita, and the soon-to-be-released PlayStation TV, can stream their PlayStation 4 games over the Internet. This allows them to play their PlayStation 4 games remotely, even outside the house. Physical discs can still be played in this way, but without access to the PlayStation 4's disc tray, cannot be switched -- any gamer looking to take advantage of this feature is heavily incentivized to purchase digitally.
There's some evidence to suggest that this is starting to happen. Last month, according to research firm NPD, sales of Sony's PlayStation Vita saw improvement. As the PlayStation 4 has been the best-selling video game console in the U.S. for five months running, new owners of Sony's console may be pairing a Vita with their PlayStation 4.
If Sony and Activision succeed, it could take a toll on GameStop's business. Although the retailer sells video game hardware and other products, it remains overwhelmingly dependent on physical game discs. Last quarter, video game discs accounted for about 58% of GameStop's revenue and more than 70% of its gross profit.
If Sony partners with Activision to preload its digital games, it could benefit both firms to a great extent. In time, it could encourage gamers to make digital downloads their preferred method of purchase, moving away from physical game discs. GameStop, with a business largely dependent on physical game discs, could suffer.