GameStop Interested In Used Digital Games

-53.70%
Downside
25.04
Market
11.59
Trefis
GME: GameStop logo
GME
GameStop

Video gaming retailer GameStop (NYSE:GME) has recently shown interest in used digital video games. In an interview with video gaming website Gamespot, GameStop’s CEO Paul Raines mentioned that the company is actively looking into the prospects of a ‘used’ digital games market. [1] GameStop is a leading retailer of new and used video-gaming products.

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GameStop showing interest in used digital games

As the video-gaming industry shifts from CDs to digital, brick and mortar retailers such as GameStop are faced with the risk of disintermediation. Since game developers can sell their products directly to customers online, they no longer need a middle man such as GameStop. This shift allows game developers to improve their margins significantly and have a more direct relationship with their customers, helping them sell additional products and extension packs through direct marketing.

Just a few months ago there were rumors that Microsoft (NASDAQ:MSFT) was going to launch a disc-less XBox 720 next year [2]. Additionally, third party developer Electronic Arts (NASDAQ:EA) was in the news recently mentioning that they were shifting their focus to digital gaming going forward. [3] While the near-term impact of such changes will be on GameStop’s new video game software sales, we believe that rapid digitization of video-gaming industry poses a bigger long term threat to GameStop’s used video game division.

Used video game products make up a significant portion of GameStop’s value, contributing nearly 50% of the company’s total profits. Per our estimates, used video games constitute 35% of the Trefis price estimate for GameStop’s stock.

Used video-gaming products have always been a source of conflict between developers and retailers since developers fail to realize any profit from used video games sales. A European court recently ruled that the secondhand sale of software was protected, and hence producers can no longer prevent users from reselling licenses.  This has ignited the interest of retailers such as GameStop who has started looking for ways to profit from this market. While the company does not yet see a meaningful business in used digital games, it is actively in talks with several European start-ups.

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Notes:
  1. GameStop expressing interest in used digital games, Source: Gamespot []
  2. Microsoft Plans to Release Xbox Next in 2013, Remove Optical Disc Drive – New Report, XbitLabs []
  3. EA to go 100% digital in the near future, Source: Game Trailer []