GameStop’s Growth Challenged by Rising Digital Downloads

As video gaming industry is changing its landscape from retail to digital, the demarcating line between developers and retailers is fast diminishing. Leading American video-gaming retailer GameStop (NYSE:GME) may have tough times ahead as third party developers such as Activision Blizzard (NYSE:ATVI) and Electronic Arts (NYSE:ERTS) have ventured out in distribution business with their own digital download platforms. Latest in the series is the launch of Call of Duty: Elite by Activision Blizzard, an online service which  provides downloadable content (DLC) for its subscribed XBox 360 and PS3 users.

We believe that the launch of this service may potentially be a big threat to GameStop in the long term, as historically Call of Duty digital map-packs have been a big contributor in GameStop’s digital growth. GameStop competes with other major digital distribution platforms such as Valve Corporation’s Steam, Elecrtonic Arts’  Origin and GameFly’s Direct2Drive.

Check our full analysis for GameStop

Implications of third party digital distribution platforms on GameStop

With the retail sales fast declining, digital gaming is being touted as the gaming future. GameStop also seems to have realized this fact, and since last 1-2 years developing digital business has been on the top spot of company’s strategy. The efforts have also reaped in fruit, with GameStop’s digital business registering astonishing growth rates, sometimes in the range of 40-50%. However, the entry of third-party developers into digital distribution may put abrupt brakes on this growth. Below we try to analyze why:

Digital distribution is a highly alluring market

As video-gaming industry transforms from retail to digital, digital distribution market is alluring developers in a big way. First, digital distribution doesn’t involve complex and expensive procedures such as supply chain management, which ensures that digital distribution doesn’t essentially needs specialists such as GameStop. Second, digital distribution allows developers to directly reach their customers thereby shunting retailers and improving  margins substantially. On top of it digital distribution is a very high growing market, which according to Deals4Downloads has grown by a whopping 220% since April 2010. ^[1]

Third party DLC has been the primary contributor to GameStop’s digital business

Third party downloadable content has been a major contributor in GameStop’s digital growth historically. For instance much of the 2011 console digital growth for  GameStop was due to Call of Duty: Black Ops’ map-packs.

Not to forget that first party developers  already have their full fledged digital distribution platforms such as Microsoft’s XBox Live, Sony’s PlayStation Network etc, which limits retailers like GameStop to only third party digital content. With the companies such as Activision Blizzard and Electronic Arts launching their digital platforms, GameStop faces a challenge of deprivation of third-party downloadable content too. Should that happens, GameStop’s digital growth may come crashing down.

Our price estimate for GameStop stands at $32.51, which is roughly 35% upside to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Digital distribution platforms market analysis, Source: Deals4Downloads [↩]