Why GameStop Is Doomed, Part 3: The Coming Wave of Digital-Only Consoles

In my first two articles in this series, I covered the challenges GameStop is facing in its dealings with its own suppliers: The traditional video-game console manufacturers are increasingly embracing digital distribution.

But the bigger threat to GameStop's business could come from new businesses entering the space. New consoles, powered by NVIDIA's chips and running Google's Android, could put pressure on GameStop, while Valve's entrance into the living room stands as a more concrete threat.

Why GameStop should fear NVIDIA and Google
At the recent Consumer Electronics Expo, NVIDIA unveiled a new mobile chip that should deeply concern GameStop shareholders. NVIDIA's Tegra K1 is the most powerful mobile processor ever -- based on some early benchmarks, it even outperforms some of Intel's chips meant for traditional PCs.

While NVIDIA's Tegra K1 could be used in everything from tablets to cars, its most intriguing use could be in video consoles. Based on reporting from The Information and The Wall Street Journal, Google is currently working on an Android-powered set-top box that would be capable of playing Android games. Paired with NVIDIA's Tegra K1, Google's device could offer gamers graphics on par with modern video game consoles.

That could be an issue for Sony and Microsoft, but it's an even bigger problem for GameStop. The Android platform exists in a world beyond discs -- the entire ecosystem is based around a digital app store. If Google's Android console catches on, there would be no room for GameStop in any part of the equation.

Moreover, Google isn't the only company rumored to be working on an Android-powered console: reports have long indicated that Amazon.com has something similar in the works. Android-based consoles were somewhat of a trend last year, but have continued to gain steam: Chinese firm Huawei announced that it will begin selling an Android-based console later this year.

PC gaming enters the living room
But the Tegra K1 isn't the only NVIDIA product GameStop should be worried about: Many of NVIDIA's graphics cards will make their way into the Steam Machines that will go on sale later this year. Steam Machines are PC gaming giant Valve's attempt at expanding its business to the living room. Valve, in addition to making several well-regarded video games, is known mostly for its digital storefront, Steam.

Through Steam, Valve sells thousands of PC games. While it has several competitors (including GameStop -- more on that in Part 4), Valve has been wildly successful, capturing a huge portion of the PC gaming market: by some estimates, more than seven out of every 10 PC games sold are purchased through Steam.

Valve's success has likely been due to its legendary sales. Once in July, and again in November and December, Valve holds week-long flash sales, offering games at discounts of as much as 90%. Valve is able to do this because its market is completely digital -- there are no used-game retailers like GameStop to get in the way. Every time GameStop sells a used-game, it keeps all the money it makes -- video game publishers don't get a cut. In contrast, because there are no used Steam games, every time a game is purchased through Steam, the company that made it collects at least some of the revenue.

During its recent December sale, Valve was offering a copy of Tomb Raider for $9.99. In contrast, GameStop currently charges $29.99 for a copy of the same game on the Xbox 360.

The allure of less-expensive games could entice some console owners to purchase a Steam Machine instead of a traditional console. PC gaming, while offering cheaper games, is still challenging -- buying or building a gaming-class PC is often difficult and expensive. Valve's Steam Box initiative, if successful, could turn former GameStop customers into Steam converts.

Of course, GameStop's management would tell you it has a place in Valve's ecosystem, but investors should be skeptical. In the last part of this series, I'll cover that, and GameStop's other new business initiatives.

The $2.2 trillion war begins right now
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

The article Why GameStop Is Doomed, Part 3: The Coming Wave of Digital-Only Consoles originally appeared on Fool.com.

Fool contributor Sam Mattera owns put options on GameStop. The Motley Fool recommends Amazon.com, Apple, Google, Netflix, and NVIDIA and owns shares of Amazon.com, Apple, GameStop, Google, Microsoft, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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