Microsoft Corp. (NASDAQ: MSFT) is turning a gun on the retail video game model, and this will crush GameStop Corp. (NYSE: GME), if the preliminary news about specs on the new Xbox turn out to be gospel, and if the implications of the news are taken to an extreme.
Edge is showing that the new Xbox will block second-hand (used) video game use on the new Xbox. This would be a serious blow as GameStop is effectively the big retail market for video games. Another report shows more about that but shows that the new Xbox must be online and have an Internet connection to work.
If either or both of these efforts turn out to be true, this is just one more nail (or is it two?) in the coffin for video game retailers. This is also a total slap in the face to the retail segment for video games that allowed this industry to flourish from the 1980s to the 1990s into the past decade. It is yet one more instance where the supply side of the equation does not just turn a gun on its key distributors of the past. This is called a summary execution.
Whether or not the broad sweeping implications come true, GameStop investors literally have had years to know that this is coming down the pipe. If video game publishers can simply stream a video game straight to your video game box and avoid paying a retailer and their physical distribution networks, what do you think is the logical step that will be taken? It is a slap in the face, and about like relieving yourself on your neighbor’s front doorstep, but sometimes that is just how business works.
GameStop shares are down almost 7%, at $24.98 against a 52-week range of $15.32 to $28.35. The company’s market cap is $3 billion and its current year sales are expected to be down more than 7% but still close to $8.8 billion.
Video game publishers of the premium games and “freemium” games have been moving more toward a download model as well. GameStop has moved to accommodate more of the trend, but the writing has been on the wall for quite some time.
You have probably seen movies about drug dealers cutting out more and more of the middle-man process. That is a polite way of saying they bump them off. We will not call this the same effort, but we are not exactly going to praise the efforts taken to snuff out the big video game retailers either.