If you're in the market for a PlayStation 4 or Xbox One console, and you prefer physical discs, you may want to shop at GameStop (NYSE:GME).
The video game specialty retailer will no longer carry console bundles that offer digital copies of games. Buyers may still get their games, but only in the form of physical discs.
Since the Xbox One and PlayStation debuted nearly two years ago, Microsoft and Sony have periodically offered free games to entice console buyers. Most of these games have come in the form of digital download codes rather than discs. GameStop has sold many of these bundles, but will no longer do so going forward.
GameStop declines the Madden bundle
Last month, Microsoft partnered with Electronic Arts torelease a special Madden 16 Xbox One bundle. This bundle, which retails for $399, includes a 1TB version of the Xbox One game console, a free year of EA Access, and a digital download code for Electronic Art's hit football game Madden 16.
Well, it does if you purchase it from a retailer like Best Buy. If you buy it from GameStop, however, it's quite different.
It's still $399, but the digital download code is gone, replaced by a physical disc version of Madden 16. And it doesn't include the free 12-month subscription to EA Access, Electronic Arts' digital subscription service. Similar to a subscription music service like Spotify, EA Access grants Xbox One owners a collection of about a dozen digital games.
GameStop's chief operating officer, Tony Bartel, highlighted this modified bundle during the company's earnings call last month. GameStop's CEO, Paul Raines, explained that GameStop would take a similar stance on any future bundles.
If ... the platform holders ... continue to put in free games as promotional items, we anticipate that at GameStop you'll see more physical bundles from third parties as opposed to digital bundles. ... We choose not to participate in the digital bundles.
Delaying the digital shift is in GameStop's best interest
This might turn some consumers away, but GameStop insists that its customers prefer physical discs and value bundles that include them.
Perhaps more importantly, it's clearly in GameStop's best interests to impede the digital transformation of the industry. Consumers with capable Internet connections can now download any PlayStation 4 or Xbox One game directly to their system without ever leaving the house. Like dedicated record stores and movie rental shops, GameStop is at risk of being disrupted by a digital shift. Digital bundles introduce new console owners to the convenience of digital distribution -- something GameStop's management probably wants to avoid.
It's also not possible to trade in or resell digital games, which poses a big challenge to GameStop's used games business. Last quarter, used games generated about one-third of GameStop's revenue and nearly 45% of its gross profit. Digital bundles reduce the number of available game discs in circulation, limiting GameStop's ability to resell them.
The major publishers, including EA, claim that about one-fifth of the games they sell on consoles are now digital copies, up from virtually none just a few years ago. This statistic paints a grim future for GameStop's business, as it suggests that digital distribution will only grow in popularity.
GameStop executives have disputed this claim, arguing that it's misleading -- that digital games included in bundles artificially inflate the real demand for digital games, skewing the numbers. Other retailers will still sell them, but with GameStop no longer participating, the relative popularity of digital could decline.
A sign of desperation?
Following GameStop's earnings report, analysts at The Benchmark Company downgraded GameStop shares to "sell," arguing that, within five years, almost all video games would be downloaded -- effectively rendering GameStop's business model obsolete.
GameStop's refusal to carry digital bundles may be interpreted as a desperate move -- a fleeting ploy to head off an inevitable transition.