Five Reasons GameStop Will Close in 10 Years

Loading...
Loading...
The world's largest video game retailer won't survive the next decade.
It's not because of iOS, though media headlines will tell you otherwise. In fact, GameStop
GME
is doing everything it can to profit from the growth of tablets and other iOS/Android devices, even if it
can't sell them new
. GameStop sells Facebook game cards and has become one of the largest distributors of pre-paid Zynga
ZNGA
cards. So if that company manages to find a sustainable business model (not likely, but the FarmVille maker can dream, right?), GameStop will be ready. Even iTunes cards can be purchased at the video retailer. In short, if there is a video game-related product being sold somewhere in the world, chances are GameStop will try to cash in. This is a smart move for the retailer to take, especially at a time when the game industry is facing new challenges and the inevitable console sale declines. Console sales always drop when the machines reach the end of their lifespan, hence the reason why Sony
SNE
and Microsoft
MSFT
shouldn't wait to release
PlayStation 4 and Xbox 720
. Unfortunately for GameStop, the retailer can't force a console manufacturer to do anything. Thus, it must wait out this difficult period and look for alternative business ventures – for today and for the future. That's why the company is investing in downloadable games and other online-only options. Whether digital games take over or remain a secondary part of the market, they are still a prominent force that cannot be ignored. None of these things will be the direct cause of GameStop's demise. But in 10 years, the company will fall. Here's why:
5. One Game Per System and Other Dirty Tricks
One of the biggest rumors surrounding the next Xbox isn't the fact that it will play Blu-ray discs (unlikely), the impressive graphics chip, or the games that will be available at launch. The biggest rumor, oddly, claims that Xbox 720
won't play used games
. The assumption is that, if Microsoft was able to pull this off, it would do so with a registration system or some other feature that prevents games from loading on more than one Xbox. Over the past couple of years, Ubisoft and Capcom caused quite a stir with their attempts at reducing used games. These attempts included online connectivity (Ubisoft expected consumers to be connected to the company's servers at all times in order to play a single-player game) and a save file that couldn't be deleted (GameStop won't take Capcom games with save files that can't be erased because players can't restart the game from the beginning). In both cases, the publishers were hurt more than consumers and retailers. This was especially true for Ubisoft, which endured countless complaints. But game publishers have not stopped vilifying the used games business, which they are determined to eliminate or reduce in any way they can. The closer they get, the more likely that GameStop will take a hit.
Loading...
Loading...
4. Publishers Are Trying to Cut Out the Middleman
Sony learned the hard way that it can't force consumers to abandon traditional video game mediums like cartridges and DVDs. But just because we won't download games by force does not mean we won't buy them at all. Right now, Sony and Microsoft don't really know how to get us to download $60 games. We'll buy $15 titles online, for certain. But when looking for a shiny new copy of Halo or Call of Duty, consumers prefer to shop in store. Part of this is due to game durability (your Xbox 360's hard drive is likely to die long before your copy of Fable 2). But the hard drive, download speeds, and other technical issues are also a factor. Now that the average Xbox 360 comes with a 250 gigabyte hard drive, consumers have one less thing to worry about. Chances are the next generation of consoles will ship with 1TB hard drives (Wii U excluded). If publishers get really smart, they'll start charging less than $60 for online downloads, and offer sales or bonuses (such as free downloadable content) to those who download the game within the first couple weeks of release. None of these things will make the industry shift entirely to downloads. But it could make consumers more comfortable with the idea of buying games online, which could slowly hinder GameStop's bottom line. And not just for used games, but for new games as well.
3. Accessories May Disappear
Right now, gaming is all about accessories: controllers, controller attachments, cameras, joysticks, the occasional toy gun, and a plethora of other goodies that add value to GameStop's bottom line. For the time being, that isn't going to change. But as console manufacturers cram additional features into their consoles (ex: Wii U has a touch screen controller; the original Xbox 360 needed an adaptor for Wi-Fi, now it's built-in; etc.), consumers won't need to buy as many extras. Tablets could make this worse. Right now, traditional gaming sucks on a tablet. Without a controller, the experience just isn't the same. But if Apple or anyone else comes up with a way to remedy this (with a pliable screen, perhaps), tablets would no longer need a cornucopia of silly video game attachments. GameStop could try to counter this by selling cases, keyboards, and other generic accessories, but those can be found at any retailer. They aren't likely to add much to GameStop's bottom line.
2. No Used Game Alternative…Yet
There's a reason why GameStop loves used games: the profit margins are higher. The retailer typically makes $12 selling a $60 game, leaving $48 for the publisher. On the other hand, GameStop is likely to earn $25+ on every two-month old copy of Madden 13 that it will sell for $55 this October. Slated for release in August, Madden 13 will retail for $60 new. Those who trade the game in early will likely receive about $25 to $35 in credit for the game, leaving GameStop with a sizeable profit on each resell. Granted, this math does not take into consideration the risk that GameStop faces. What if no one wants a used copy of Madden 13? Then GameStop would be stuck with the game – and incur a considerable loss. Thus far, GameStop's gains have outweighed the company's losses. For two decades, its used games business has been huge. And when that business goes away, GameStop won't know what to do. Right now, there aren't any viable alternatives. GameStop admits (brags) that used games make up the majority of its profits – not necessarily because it sells more used items, but because used games are more profitable. To replace the used market, GameStop has to find some potent alternatives or convince game publishers to increase the margins on the sale of new games. While there is hope for the former, the latter will never happen.
1. The Industry Doesn't Understand GameStop's Value
Contrary to what publishers will tell you, GameStop is an important part of the video game industry's ecosystem. The company does for video games what Apple Stores do for Apple products: it reinforces their existence and their desirability. Without GameStop, we wouldn't have midnight video game launches, a concept that was popularized by the retailer. When a new console launches, no one sells more units than GameStop. No one takes more game and console pre-orders than GameStop. And no one attracts attention like GameStop. If game publishers had to pay for GameStop's existence by allowing used game sales to continue, it should be happy to do so. But there's another factor to consider, one I have been stating for years: GameStop store credit is vital to the success of the game industry. When we trade in our old, tiresome games, we turn around and buy new ones. GameStop has not released any statistics in this regard. But I can tell you that in the 10+ years I've been shopping at GameStop, I have never seen a consumer trade in a stack of games to buy a used game. Used games are relatively inexpensive, so there wouldn't be any reason to do that. Plus, used games are often sold to an entirely different kind of consumer. But even people who buy used games can (and will) bring value to the game industry, as I
explained last month
. If publishers don't realize this before it's too late, GameStop won't be the only one facing certain doom. The entire game industry will be in danger as well.
Follow me @LouisBedigian
Loading...
Loading...
Posted In: TechApplegamestopMicrosoftPlayStation 4Xbox 360Xbox 720
We simplify the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!

Loading...