Last month, Microsoft (NASDAQ:MSFT) began offering Xbox One owners significant discounts on digitally purchased Xbox One games. Each week, Microsoft has put one or two games on sale, making them available to Xbox Live Gold subscribers at a sharply reduced price.
This week's sale is particularly notable, as Microsoft is offering Electronic Arts' (NASDAQ:EA) Titanfall at 33% off. Priced at just $40, Electronic Arts' best-selling first-person shooter can be purchased for far less than what retailer GameStop (NYSE:GME) charges.
Microsoft launches Deals with Gold on the Xbox One
When designing the Xbox One, Microsoft clearly had a digital future in mind. As originally intended, the Xbox One would've been an (almost) always-online console: Games would've been registered digitally, and Xbox One consoles would've required an Internet connection at least once every 24 hours.
After widespread backlash, Microsoft reversed its policies, and delivered an Xbox One that was more traditional in design. Still, Microsoft hasn't given up on its digital ambitions, swapping its digital restrictions (stick) for digital sales (carrot).
Microsoft hasn't offered amazing deals every week, but it has discounted many of the Xbox One's best-known games, including recently released titles like Ryse, Thief, and Tomb Raider, for as much as 40% off.
Electronic Arts sets a goal: 100% digital
Exactly how many gamers are choosing to purchase these digital games remains unknown -- unfortunately, research firm NPD does not track digital console game sales. Still, the growing popularity of digital game downloads has been reflected in major publishers' recent earnings reports.
In May, Electronic Arts reported a better-than-expected quarter largely on the strength of its digital offerings. Almost half (45%) of Electronic Arts' revenue was derived digitally, with full-game downloads representing about one-fifth of that digital revenue.
The other four-fifths came from alternative digital revenue streams, including add-on content, subscriptions, and mobile games. Thus, the majority of Electronic Arts' console games are still purchased in the traditional disc format, but the company's management is aiming to change that.
On its last earnings call, Electronic Arts' CFO said the company hopes to eventually derive 100% of its revenue digitally, and will lay out a plan to do so in the coming quarters. Digital games offer higher margins and greater recurring revenue, making it advantageous for Electronic Arts to transition its customers away from physical discs.
GameStop's core business could be pressured
Electronic Arts' gain could be GameStop's loss, as the retailer remains dependent on physical game sales. Last quarter, about 58% of GameStop's revenue and more than 70% of its gross profit came from the sale of physical game discs (both new and used).
A recent survey from NPD revealed that 74% of American gamers still prefer to purchase physical game discs, which might incline one to presume that GameStop's core business has a long and fruitful life ahead of it. But NPD's survey was asked under the presumption that the games were priced equally -- Microsoft's Deals with Gold is far different.
GameStop currently sells Electronic Arts' Titanfall for $60 brand new and $55 used -- far more than Microsoft's current sales price of $40. Although a physical copy, unlike a digital copy, can be lent or resold, gamers who want a physical copy of Titanfall will (at least this week) have to shell out an additional $15-$20.
An all-digital future?
That stark price difference could lead many of them to choose a digital copy, which would weigh on GameStop's business both now and in the future. Continued digital sales could lead more gamers to choose digital titles, benefiting publishers like Electronic Arts.
Although it seems likely to take several quarters, the console business appears to be slowly transitioning to a future centered around digital distribution.