Why a new digital edition of PlayStation 5 could change GameStop as we know it

CNN Business)Founded in 1984, GameStop is one of the oldest cornerstones of video game retail. But in 2020, it’s facing big risks as the industry increasingly turns to digital.

Sony sent ripples through the industry in late September when it announced a digital version of the PlayStation 5 that has the same performance as the standard one, but would be $100 cheaper and do away with a disc player for playing physical games.
It’s a departure for the gaming industry that started off with a heavy reliance on hardware and hard copies, and it signals a shift towards digital and the cloud. The move raised alarm bells for GameStop (GME), which relies on physical games for a significant portion of its income.

In 2002, its parent company at the time, Barnes and Noble, took GameStop public. Through the years, GameStop has differentiated its business by continuing to sell merchandise, such as Funko Pop toys, giving away a Fortnite in-game item as a gift with purchase and even opening up pre-orders to the PlayStation 5 Digital Edition.

But if gamers were to feel compelled by a digital version of the PS5, and switch over, GameStop would face a huge challenge to its business. The company declined to comment on that risk for this story.

But in a September 2019 interview, CEO George Sherman told CNN Business: “Gaming as an industry could not be stronger … it’s us that needs to pivot. It’s GameStop that needs to make some changes.”
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Analysts were split on whether the gaming retailer is in immediate trouble. But Sony’s upcoming launch is the latest signal the retailer needs to adapt.

The company reported a $111.3 million loss in the most recent quarter, compared to a loss of $415.3 million in the same period last year. It said it will close 400 to 450 stores globally this year.

Stephanie Wissink, managing director of consumer equity research at Jefferies believes that digital consoles won’t see mass adoption yet as most gamers across the country will need more bandwidth and external hard drives to hold all those digital games.
Wissink predicts that GameStop will benefit from sales of the upcoming Xbox Series X and the standard PS5, and at least be fine for the next three to four years until 5G and cloud gaming grow more popular. For now, the company will be buoyed by game collectors and those interested in trading in physical games for others. Physical copies can be traded, but digital can’t.

“But then after that, we really need to start talking about some of the threats… the digitization of software, the rise of cloud gaming,” said Wissink, “By the time we get out three or four years, GameStop is going to have to reinvent itself in terms of its positions around physical software.”

A ‘Blockbuster era’
Subscriptions like the Xbox Game Pass, where gamers can try out multiple games per month for a flat monthly fee, and cloud gaming subscriptions like Google Stadia’s $9.99 a month, could all be challenges to GameStop’s business model.

“We’re entering a kind of Blockbuster era,” said Carolina Milanesi, a tech analyst at research firm Creative Strategies, “The same thing we’ve seen for movies and content for Netflix and the like that ended up killing Blockbuster are now starting to impact gaming.”
To survive, GameStop may have to evolve.

“You could become just a merchandise store that is linked to gaming and could be also selling accessories, as an example,” said Milanesi. “You’re changing your DNA, you keep the name and you become somebody else, that’s possible.”

Michael Pachter, an analyst at private financial services firm Wedbush, said GameStop survived the pandemic and closing stores, and it will benefit from new console launches “since there will be a reason for consumers to return to stores.”

The digital PS5 is a first for Sony but not for gaming. Xbox has done it before by launching a digital version of the Xbox One S in 2019, which Pachter said “barely made a ripple.” Xbox’s Series S will follow the same trend, but it has lower resolution graphics and less storage than the mainstay Xbox Series X.

“People who want to trade in games will buy the more expensive PS5 and will continue to buy discs,” said Michael Pachter, an analyst at private financial services firm Wedbush. “So long as there is a version with a disc drive, there will still be discs and GameStop will continue to sell them.”

An unexpected goldmine
GameStop does have one enormously valuable asset, said Wissink, the Jefferies analyst. “GameStop is also sitting on a database of 16 million profiles of core gamers that they have a direct connection with. And they can tell you whether those gamers play more than one game,” said Wissink. “So that’s something that Microsoft (MSFT) doesn’t have. Activision (ATVI) doesn’t have. EA (EA) doesn’t have. Those companies all know their individualized box in the matrix, but they don’t have a view of the matrix.”

It just depends on what GameStop’s able to do with that customer data. The company also owns the gaming magazine, Game Informer, and one of its latest shareholders is the co-founder of pet supplies ecommerce store Chewy, Ryan Cohen. The stock price is $9.45, up 78.30% over the past year, reflecting optimism over the upcoming next-gen consoles.

“We know one thing about Chewy, that it is built with customer data at the center of everything,” said Wissink. That data could be used to push customer loyalty, repeat purchases and subscription services.


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