The last few months have been super exciting for gamers across the globe with the announcement of the much awaited Microsoft's (MSFT, Financial) Xbox One, as well as the announcement for the launch of the PlayStation 4. Even though Xbox One has been caught in a privacy issue, its functionality and other aspects have been lauded by gaming experts across the board. This could well be the break the gaming industry had been looking for and a window of new opportunities for GameStop (GME, Financial), the world’s largest multi-channel video games retailer.
The Beginning of New Challenges
It’s definitely soothing to see some good things happening, but sadly the challenges are far from over for the company. One of the biggest challenges GameStop faces is around the used games business, which accounts for almost a third of the company's revenues. The buying and selling of used games is a big component of GameStop’s business, whereas console manufacturers like Microsoft are inclined towards the sale of new games more than used games. As per reports, Microsoft is expected to charge a fee for used games with the launch of Xbox One, and this will put GameStop in a tight spot as to the pricing of used games, as well its distribution.
However, I am not really confident about Microsoft's pricing strategy for Xbox One at $499, as the high price can easily discourage gamers from buying a new console. Microsoft has packed in a host of new features, including watching TV, into the new console, but since its main audience is gamers, such a high price might not be sustainable.
Best Buy Vs. GameStop
Being the world’s largest video gaming retailer, GameStop does not face huge competition in the industry--it mainly competes with Best Buy (BBY, Financial). Lately, GameStop has been eating into Best Buy’s market share as the latter has failed to provide a diverse collection of new and used games at competitive prices. Best Buy has been struggling for quite some time to meet investor expectations as a result of fierce competition, high costs, and a limited selection of products.
Even though it reported better than expected results in the first quarter with non-GAAP EPS of $0.32, Best Buy is far from having a positive trajectory. CEO Hubert Joly has done a good job on managing spending and discontinuing unfavorable operations as a move to sustain profitability. Like GameStop, Best Buy is also expecting to ramp up its gaming sales with the launch of new gaming consoles. If Best Buy can capitalize well on these newfound opportunities in the gaming industry, it would provide a fresh breeze during a rough patch.
The Final Words
Coming back to the point of used games and new gaming consoles, let me first brief you about the entire scenario and then talk about how it affects GameStop. After the launch of Xbox One, Microsoft announced that if a gamer wants to play a used game, he will have to pay a charge for installing it on his console. This means that a particular game can be attached to only one Xbox Live account. There is not enough clarity around this now, but if this is confirmed then it poses a serious concern to GameStop. It will then have to take decisions regarding the pricing of such used games because gamers might want to actually get the new game instead of paying a fee plus the cost of the used game. This is going to be a big challenge for GameStop, which has established a strong foothold in the market for used games.
Another big question for GameStop to handle is the fast-paced transition to digital games. Most gamers prefer to download game files directly to their consoles instead of buying game discs. I can see GameStop trying to enter the territory of digital games, but as of now it does not have a large share in this market. This quarter digital receipts grew by an impressive 47.3%, but the key is to maintain this growth over time as more and more gamers are moving towards a digital format. I would not suggest taking a new position in the stock until we get more clarity around used games from Microsoft and Sony (anticipated to follow the same course as Microsoft).