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GameStop (GME) Unlikely to Survive the Digital Gaming Apocalypse

Last Updated September 23, 2020 1:23 PM
Kiril Nikolaev
Last Updated September 23, 2020 1:23 PM
  • Gamestop shares plunged Wednesday after a dismal earnings report.
  • Revenues are falling as consumers flock to online games.
  • Free-to-play games are hastening the demise of the retailer.

Blockbuster, Radio Shack, Tower Records – these were once the retail titans that operated stores all over the world. The digitization of music and movies rendered these companies obsolete. Consumers preferred to download content than to buy or rent physical CDs.

We’re seeing the same pattern all over again. This time the arena is gaming.

GameStop (NYSE:GME), the world’s largest gaming retailer with 5,700 stores worldwide, released an abysmal earnings report on Wednesday . The company printed a third-quarter loss of $83.4 million. It also recorded a loss of $0.49 per share. The gaming retailer’s quarterly sales nosedived by almost 26% to $1.4 billion.

GME closed Wednesday’s trading down over 15%.

The company expects the trend to continue until the last quarter of 2020. GameStop would be lucky if they can stop the bleeding by then. Changes in the gaming landscape show that GameStop will likely follow the footsteps of Blockbuster and Radio Shack unless the company adapts.

Digital Gaming Is the Future

GameStop will not survive the digital apocalypse if they continue to rely on the sales from physical CDs. Consumer habits are quickly changing, which leaves the retailer little time to react.

In 2009, 80% of consumers bought physical CDs while only 20% purchased digital games. Fast-forward to 2018, only 17% are buying physical CDs. The remaining 83% are getting their games online.

The slow and steady death of physical CDs
The slow and steady death of physical CDs | Source: Statista 

This trend tells me that it is only a matter of time before physical CDs become totally obsolete. Hatem Dhiab, managing partner at Gerber Kawasaki, agrees. He told CCN.com,

It’s tough to see a brick and mortar retailer surviving in the digital age of video games. Most video games are delivered online these days and the need to go and exchange or buy physical CDs for games in a store is simply a dying act. This will be another Blockbuster killed by Netflix.

Jason Harris of StockHunterTrading.com shares the same view. He also believes that GameStop is en route to bankruptcy. He said,

GameStop is heading down the path of BlockBuster and Radio Shack. This is not a statement against the company but rather just an observation of the macro economy and where consumers are heading into the digital streaming of 2020.

Jason Harris added,

With over 5 billion mobile phones on the planet, Apple, Google, and Microsoft are going to put more games on mobile phones and tech devices, making it easier and faster for downloads along with in-app purchases. There is no longer a need for the actual physical cartridge.

It gets a lot worse for the gaming retailer. How can they compete against online games that allows gamers to play at no cost?

Free-to-Play Online Gaming to Expedite the Death of GameStop

The free-to-play model will be the last nail in GameStop’s coffin. Millions of gamers around the world are signing up on free-to-play games like Fortnite and Apex Legends. Game developers rely on in-app purchases such as game items to boost profits. Industry figures show that free-to-play games generated $88 billion in 2018,  which accounted for 80% of all digital revenue.

Free-to-play games are keeping gamers hooked and enticing them to open their wallets
Free-to-play games are keeping gamers hooked and enticing them to open their wallets. | Source: Games Industry 

The dominance of free-to-play games will likely accelerate the extinction of physical CDs along with its sellers. Jason Harris stressed this argument when he said,

GameStop is simply the middleman being cut out of this picture. A perfect example of this is Fortnite and Apex Legends. Both were free games that went viral in hours.

Mr. Harris continued,

Even game developers like Take-Two, Activision and EA have had to rethink the way they distribute new releases. Regardless of their balance sheet, I think GameStop, like BlockBuster, Radio Shack, Sears, JCPenny and other retailers, are simply being cut out of the direct-to-consumer loop.

It seems that GameStop’s fate is unavoidable. At this point, it’s either buyout or bankruptcy.