GameStop May Have Just Saved Its Future

GameStop

By James Brightman

GameStop took a big step forward with its digital plans last week, as the retailer purchased a games streaming company called Spawn Labs as well as a digital downloads service called Impulse. Digital has become a huge force in the games industry and will continue to grow at a rapid clip to the point where brick-and-mortar could be severely impacted. But were GameStop’s moves enough to prevent obsolescence? IndustryGamers chatted with several games analysts about GameStop’s future.

Sterne Agee’s Arvind Bhatia was optimistic, saying, “I think GameStop has made its strongest case yet for its future viability. These acquisitions should provide them with the initial platform to grow their digital revenue and compete with the likes of OnLive, Gaikai, Steam, Direct2Drive etc.”

David Cole of DFC Intelligence believes GameStop’s taking the right approach as well. “I have always thought if brick and mortar retailers played their cards right they could be very effective in a move to digital distribution. The idea is people still use discs but you can sell a digital distribution or streaming copy as a backup. I think that is a potentially compelling proposition. I don’t see a cloud streaming service alone replacing a full on client copy,” he said.

Cole continued, “You see reports that Microsoft is trying to figure out how to squeeze more data onto Xbox 360 discs. You see Xbox 360 games coming on 3 discs. So even with digital distribution you have 50 GB games which are 1) a pain to download and 2) expensive to store (try pricing 50 GB of flash memory or hard drive space) once you do download them. So a company like GameStop has a play with being able to distribute the fat client and then sell the services on top of that client.”

Lazard Capital Markets’ Colin Sebastian said the situation is somewhat analogous to Netflix, which still mails out physical movie discs but is moving more and more in the direction of digital with its streaming catalogue. 

“Overall, management effectively defined a strategy for digital growth, in our view, although not through radical transformation, but through defined steps that over time could transition the retailers into a legitimate digital gaming aggregator. Essentially, GameStop is in the process of redefining itself as a distributor of both online and disk-based games, a loose analogue to Netflix, but with a much more challenging technology hurdle in the form of interactive entertainment,” he said. “GameStop is creating a new platform for online games, leveraging the company’s retail stores, core gamer customer base, recent acquisitions, and websites. More specifically, GameStop expects within the intermediate timeframe to engage casual gamers through its Kongregate website (13M monthly unique visitors), branded Apps on smartphones, tablets and TVs, while simultaneously increasing engagement with core gamers, for example by offering streaming console games, and leveraging the PowerUp Rewards (PUR) program.”

Wedbush Securities’ Michael Pachter was quite bullish on GameStop, commenting that management is “doing everything right.” That said, “The company still must convince investors that its core business is not dying, and must execute on its digital plans.” 

Perhaps the most sceptical of the bunch was M2 Research’s Billy Pidgeon, who cautioned that GameStop’s acquisitions hardly promise success in the digital arena. “It’s about time GameStop made a serious move into digital, but it will take much more than these acquisitions for the specialist retailer of packaged goods to become a leader in digital,” he said. “Stardock’s Impulse Inc. isn’t the leading PC digital distribution systems in the industry, Steam is, and Spawn Labs’s ‘Slingbox’ approach is far more limited than OnLive and Gaikai’s business model.  Success with a traditional distribution limited resource process such as packaged goods does not presuppose success with a disruptive infinitely reproducible distribution process such as digital.  In fact it’s more likely a barrier to entrance.  Still, GameStop must try to bridge this transition or approach obsolescence.”

What do you think? Will GameStop be around for many years to come, and in fact transform itself into a digital leader?

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