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Same Old Gamestop Fears Pressure Stock

By Mahyar Hashemi, Published: June 2nd, 2009 12:38 AM CDT

Every year it's the same old fears with Gamestop.  The company is running out of time, they say, facing a new world of downloading and new competition.  They are the next Blockbuster, they say.

They said it last year, they said it the year before, and the year before that and so on.  This latest round of fears is likely why while many other companies are hitting their six month highs, Gamestop is struggling to reach a price-to-earnings ratio of 10.

The truth is Best Buy (BBY) has been trying to capitalize on used game sales for many years and has failed to get any significant traction.  Online auction retailer eBay has been offering used games for over a decade.  Wal Mart and Amazon recently announced used video game programs that are suppose to compete for Gamestop's business, but it's just more of the same.

When it comes to downloading, Steam, a popular service which came out in 2000 and offers online downloads of PC games, hardly put a dent into physical PC game sales as a percentage of that business.

Now, digital downloads on consoles are supposed to significantly cut into growing video game sales, according to the uninformed.  Microsoft may have had that idea in mind when they cut a deal with publisher Take Two (TTWO) Interactive to bring exclusive downloadable content for the top selling title, Grand Theft Auto.  But when Rockstar released the first of two high quality episodes for $19.99 as an exclusive title for Microsoft 360, sales were so mediocre that the company recently announced that it would bring that title as a physical release to retailers, retailers like Gamestop.

The largest third party publishers in the industry consider themselves packaged goods companies for good reason.  Games are sold for $60, and while people may be perfectly willing to download music for $1 or maybe even download movies for a few dollars, consumers still prefer a physical disk and manual for a more expensive property.  In addition, downloading often requires significant hard drive space, which requires extra expense and risk for the consumer.  Downloading also requires time as game code sizes increase every year.

Still, the fears surrounding Gamestop surface every year in one way or another.  That will probably require us to reexamine the issue year after year.  For now, the idea of the average consumer spending $40 or more to download their games to their console seems decades away when many consumers are even willing to spend more to buy special collector edition packaged items of their favorite titles.  Consumers want something physical for those prices, and when the average video game consumer want to trade used games, Gamestop offers by far the most convenient and practical way for them to do that.  The market has not changed for Gamestop and will likely not change for a very long time.  The same old market fears surrounding Gamestop will also probably not go away, presenting a persistent opportunity for the well informed investor of interactive entertainment.

Disclosure: long GME


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