GameStop Stock: Game Over?

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Microsoft has cleared up some details on the way that the Xbox One will work, and it doesn't look good for GameStop .

Yesterday afternoon's official update includes two particular items that will probably not sit well with owners of GameStop stock.

  • Access your entire games library from any Xbox One—no discs required: After signing in and installing, you can play any of your games from any Xbox One because a digital copy of your game is stored on your console and in the cloud. So, for example, while you are logged in at your friend's house, you can play your games.
  • Buy the way you want—disc or digital—on the same day: You'll be able to buy disc-based games at traditional retailers or online through Xbox Live, on day of release.

Let's weigh the gravity of these two literal bullet points.

Every game release will be available online. Sure, Microsoft is throwing retailers the courtesy of a bone. You can head out to the store, deal with inventory issues unless you pre-order, and generally delay your eventual gaming experience. You can also just play the game right away through Xbox Live.

Let's put this in terms where you can see how damaging this is to GameStop. The Xbox One is a Kindle, and the instructions say you can head out to your local Books Be Here for a hardbound best-seller or you can take advantage of the digital depth of the device you just bought and start reading the ebook you want right away.

If that's not clear enough, consider this in terms of the iOS App Store. Every game is online. You buy it once. You own it forever on the cloud. How popular do you think the App Store would be if it offered you the option -- instead -- of trekking out to buy a physical copy? It's just not necessary.

Now, fast-thinking owners of GameStop stock won't see this as problematic. They will smell an opportunity. If you don't need the discs beyond the initial registration process, diehard gamers can just sell them back to GameStop the next day or share them with friends. Isn't this the way that music fans would buy CDs, rip them, and then resell them?

Really? Do you really think Microsoft is that stupid? Do you think Activision Blizzard would've shared the stage with Mr. Softy for last month's Xbox One unveiling of Call of Duty: Ghosts -- Activision's first announced game for the new console -- if it was just going to sell one copy that would then be passed around?

Let's assume that this would be true. GameStop would be toast in that scenario, too. See, the original buyer wouldn't trade in the game at GameStop the next day. He would share it with dozens of his buddies who would've bought it at GameStop, and then maybe consider reselling the game.

Microsoft's smarter than that. Activision is a smarter cheerleader than that. Xbox One games will come with unique registration codes so only one person can own that actual copy. This would seem to validate GameStop's resale model, and shares of the retailer opened nicely higher this morning on Microsoft specifically describing the ability to trade in games or pass them along. However, what's missing here is that Xbox One still makes it more convenient to buy digital games directly through the Xbox Live marketplace, cutting out GameStop as the clunky middleman that has been siphoning off sales for itself over the years with its once-lucrative resale business.

Activision has always had a beef with GameStop's resale business. Developers don't profit from the resale of games. Microsoft needs developers more than it needs retailers, especially now that every game made for the Xbox One will be available on Xbox Live's cloud. This is why gamers will continue to migrate from physical discs, just as media consumption has moved away from actual books, DVDs, and CDs.

Where does GameStop fit in that digital scenario?

If you thought this past quarter was bad for GameStop with global sales falling 8% and net income plunging 25%, just wait until the holiday quarter. Sales may hold up as folks buy the initial hardware, but that was always GameStop's lowest margin business.

Once it sells a gamer the Xbox One system, the retailer may never see him or her again. There won't be a need to pre-order a hot release, because digital inventory is infinite, and the growing popularity of digital downloads will mean less games to trade in.

Bulls will argue that physical games will become even more popular in this scenario. Discs won't get scratched up, and the value of used games will increase since there won't be a distinction between new and used after the initial insertion. That may all be true, but what if this is paving the way for a digital marketplace of resales where Microsoft and developers actually profit from the secondhand exchanges? It makes evolutionary sense. 

Why did GameStop stock hit a four-year high last month? Did investors not see that the name on the store is about to change to Games Be Here at a time when the gamers won't be?

It's not looking good for GameStop stock.

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The article GameStop Stock: Game Over? originally appeared on

Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard, GameStop, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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