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Disk-less console options may be GameStop’s last death knell

Sounds like an extreme reaction to buying a console without a disk drive, but OK ...
Zoom in / Sounds like an extreme reaction to buying a console without a disk drive, but OK …

GameStop’s latest quarterly earnings report doesn̵

7;t show many signs of a turnaround for the long-struggling game retailer. Sales decreased 26.7% yoy for the quarter from April to June. Even taking into account the permanent closures of stores and reduced operating hours linked to COVID, sales of so-called “identical stores” were still down 12.7% year-over-year. The already depressed GameStop stock dropped nearly 8% on the news, at the time of this writing.

GameStop still publicly sees “an opportunity to capitalize” on the upcoming release of the new Sony and Microsoft consoles, which could help transform its business in the short term. But there is some reason to believe that the next generation of consoles could actually worsen GameStop’s long-term prospects, thanks to the console’s options that do away with disk drives entirely.

Putting a brave face

In an earnings call, GameStop CEO George Sherman acknowledged that “there has been a growth in digitally downloaded games” and said that GameStop “is not discussing the growth of digital games”. But it also sought to put a positive spin on the fate of GameStop’s physical game sales in the next generation of consoles.

“First, the new consoles have a hard drive,” Sherman said. “So, for the next seven years, consoles will reproduce both the physical and digital software we sell.”

This is only partially true, however. Both the Xbox Series S and the PlayStation 5 Digital Edition actually I will not do that have a hard drive. And while GameStop sells some digital software, most of its business comes from selling new physical games and high-margin used games.

We don’t know what percentage of consumers will opt for these discless consoles, of course. A 2013 GameStop survey suggested that 60% of consumers wouldn’t even consider a console that doesn’t play used games. Attitudes may have changed over the past seven years, but it’s hard to know how much.

However, the lower hardware costs could certainly make popular consoles an attractive option for many potential customers of this generation. The Xbox Series S costs $ 200 less than the more powerful, disc-equipped Series X, a sum that could go towards many digital game purchases.

Ah, for the carefree days when you could wander into a GameStop and not worry about being two meters from other shoppers ...
Zoom in / Ah, for the carefree days when you could wander into a GameStop and not worry about being six feet away from other buyers …

Regardless, any console gamer who gives up on a hard drive in the next generation is a consumer who will need much less of a retailer like GameStop in the future. And while some of those players may already be ignoring disc games, right now they have at least the option of purchase some titles on disc (especially if a particularly interesting collector’s edition is available).

Starting in November, a significant chunk of the console market won’t even be able to take GameStop’s disc sales into account.

Is the Internet Really Great?

Sherman confirmed in the earnings call that GameStop will sell these hard drive-less consoles in its stores, a move similar to a world where Tower Records has decided to sell iPods as physical album sales crumble. But Sherman also tried to maintain a healthy skepticism that buyers of next-gen consoles would want to give up their hard drives.

“Consumers like the physical aspects of games,” he said. “They collect them and add value as a trade-in. So as the software continues to evolve with significantly better graphics, it doesn’t take up valuable space and the disks are available for those without broadband internet.”

There is certainly a segment of the market that continues to value physical games, and Sherman is right that “the life of physical play is here to stay for the foreseeable future”. At the same time, however, the size of that market is already shrinking, even as hard drives are ubiquitous on home consoles.

In the quarter ending June, Sony said 74% of its full game sales came in the form of digital purchases. While that number is temporarily inflated by coronavirus-related home orders, Sony’s full 53% digital game sales report last year was not.

It’s not hard to find other evidence that spending on purely digital games is increasing while spending on physical discs is decreasing. And while the rise of mobile gaming has something to do with it, the console market isn’t immune to the same trend towards discs.

Sherman has tried to boldly take a stand against this overwhelming trend, arguing that game downloads aren’t all they want to be. “In most regions of the United States and the world, there remains higher taxation on broadband,” he said. “With a significant increase in work-from-home activities, many are forced to compromise on broadband usage, a natural advantage for physical gaming.

“With our current capabilities and the addition of same-day delivery, we believe most consumers can get a physical copy of the game faster than they need to download,” he added.

To our ear, these sound like the kind of arguments that print magazine editors have made in the face of growing news consumption on the Internet, or that Blockbuster video made as streaming video has risen to prominence. With average download speeds surpassing game file size increases in the US and digital game subscription services providing ever-better value, buying a game on a disc is likely to seem less and less appealing for segments of ever larger market.

Perhaps GameStop will be able to orient itself on a cell phone kiosk model, selling and servicing game hardware and accessories (along with game-related collectibles) from a centralized physical hangout. The company has already outlined an ambitious plan to transform itself into “a social and cultural gaming center within every GameStop store”. But any future GameStop that builds on its current model of selling primarily disc games doesn’t seem like a good long-term bet.

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