Steven's Investment Advice: Gamestop (GME)

Gamestop is not a good company to be investing in.  It is a company which ties their success to the success of other companies and what other companies decide to do.  I know this statement is true for a lot of companies but this one falls within my realm of interest.  As a disclaimer, I do not own any shares of GME or would I want to.

Background and History

First, lets talk about the evolution of the video game industry.  Since the days of the original 8-bit Nintendo Entertainment System and arguably the Sega Master System came out in the 80s the industry has become a solid addition to the entertainment industry.  Families started considering video game consoles as important as VCRs and TVs.  Before that, with units like the Colecovision and Atari variations, they did not come close to the NES in terms of graphics and fun factor.  Nintendo added household names like Mario Brothers and Duck Hunt that people are still familiar with today, 2014, almost 30 years later.  No wonder Atari and friends went out of business.

Ever since the first generation NES and Sega consoles, there followed Super NES and Sega Genesis leading up to the entry of PC and dedicated electronics companies wanting a slice of the pie. Sony and Microsoft came up with their PlayStation and XBox offerings.  Handhelds have been popular and always will be.  Multi-purpose devices like the Apple Iphone is blurring the lines for what video game systems should and could be in near future.

Fast forward to today, Nintendo is struggling to stay afloat with the Wii U being a bit of a disappointment.  Sony's PS4 and Microsoft's XBox One are the top players in the home console market.  Nintendo is still holding on strong to the portable dedicated gaming consoles lead with the 3DS.  Apple's I-devices have a loyal pack of casual gamers.  Analysts also believe they are in the works of converting them into home consoles via their Airplay wireless streaming technology essentially turning the phone into the console and the video plays wirelessly on the TV and controllers connect wirelessly to the phone via Bluetooth.

Looking into the Future

As the digital age progresses, the Internet is a big part of our lives and business.  As more and more companies are shifting their brick-and-mortar retail to online retail, so is the entertainment industry.  Although Gamestop has an online presence selling physical copies of video games cartridges and optical discs, there is one thing it can not prevent from happening, the inevitable move for the console companies to privatize their online digital video game sales.  We see that currently with the Apple App Store.  You use your phone to purchase digital games online from their central server.  Pay a dollar and then download a file and the game installs and is playable in under a minute.  What a genius idea!  Low prices coupled with instant gratification, what a winning combination.  None of this involves a third-party retailer such as Gamestop.  Sony already has a Playstation Store and Microsoft also has their own similar digital marketplace.  Currently, not all video games are available as digital downloads but that's what we said about Netflix movies a few years ago.  More and more will be available at a quick pace.  This is how Netflix took down Blockbuster and also how the video game makers will take down Gamestop.

Gamestop's business revolves around the video game makers' success.  Last year when Microsoft announced that the upcoming XBox One will no longer support playing used games, GME dropped by about 20% in one day.  A few days later when Microsoft reverted their decision, GME went back up.  This is something that GME cannot do anything about.  Fast forward a few months when the PS4 and XBox One was released, GME stock took off and shot up.  Investors expected a huge influx of customers into their stores to purchase the consoles, games, and accessories.

What will happen if Sony and Microsoft decide to sell their video games purely as digital downloads in the future.  It is just a matter of time because it's cheaper and content arrives to the consumer faster.  Does that mean Gamestop will only sell consoles?  What if those companies decide to sell their consoles directly from their own company-owned stores (i.e. Apple Stores, Microsoft Stores, and Sony Stores) or their own company-owned retail websites?  What will Gamestop be selling at that time?  Knockoff accessories or third-party controllers?

Summary

Again, Gamestop is doing well and was doing well when the video game industry was hot, not because it was doing anything right themselves, but because others were doing the right things and needed them as a means of distribution.  As physical distribution withers and online distribution picks up more steam, Gamestop's success should fade away as well.