GameStop is Next on the Internet Guillotine
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In five years, GameStop (NYSE: GME) will not exist. Remember Tower Records, that huge behemoth of a record distribution service? Neither do I -- I read about it in an ancient history book. GameStop is headed toward a parallel fate.
The company is a favorite amongst short sellers, being the number one shorted stock in the S&P 500 earlier this year. I'll describe why, with a cherry on top.
Here's the cherry: According to an article at appy-geek.com, Sony’s Worldwide Studios VP Scott Rohde, speaking on the future of gaming, suggested that disc-free gaming will “be a part of what everyone does” by the middle of the decade.
"It just makes sense. And so, over the next five years, you're going to see everything evolve to that state because people want access to their data anywhere," Rohde said, describing cloud gaming as “absolutely inevitable.”
Well before the iPhone came out, Bill Gates predicted we'd be walking around using our cell phones, storing our music in libraries, wearing headphones while listening to our favorite songs, and using our phones for video chat, etc etc. This was at a time when many people were still using CD's.
I didn't necessarily know enough about technology of the time, but my imagination ran wild as I tried to digest his prediction. Sure enough, everything that Gates stated has come to pass, and then some.
When someone who spends 24 hours a day in a position of power makes such a bold prediction, especially when he is churning out the hardware to make it possible, I’m inclined to listen. Really, the only thing standing in the way of this taking place right now is the ubiquity of high speed Internet connections. Microsoft, Sony, Nintendo, Electronic Arts, and Activision certainly are not inclined to lose revenue from frustrated players with twenty hours of game downloads.
Microsoft has already announced they would not be including DVD decoding software with Windows 8, and they will likely do the same for the future Xbox as well.
As a side note, this tells me that these behemoths believe that the web will become faster, more secure, and more accessible, so be on the lookout for investments in this area as well.
Yes, I'm aware that some of you GameStop proponents will point out that it does have a web presence; however, they are still selling a physical product. When the physical product ceases to exist, what do they have left to sell? If you say the hardware, I can buy that at Walmart or Amazon (likely at lower prices.) I might have bought it at GameStop previously if I wanted to purchase some used games, or try something new, or just chew the fat with fellow gamers.
As part of my research my friend Jeff, who is a game developer, stated his opinion to me this way: "I think all the game companies will produce physical copies with cloud based games until cloud based or downloaded games outsell the physical copies. If and when that happens you will see the shift Sony is taking about. From the developer and publisher standpoint direct downloads mean more money in their pockets directly and cloud based gaming makes it easier to control their content, so it's a win to them. I just don't feel it is for the consumer. Plus it ends the video game stores and rental places as we know them, even Red Box and Game Fly."
With a price to earnings ratio of 7.5, and a 3.4% dividend yield, the company might attract some sucker value hunters. The key to investing is seeing a trend before the masses do, and Scott Rohde has just stated it loud and clear from his view in the crow's nest. You really want to pay 7.5 times earnings for a company that will have nothing to sell five years from now?
GameStop is a middle man, just like Tower Records. And who wants to pay the middle man, when you can get the product to your consumers directly?
funspirit has no positions in the stocks mentioned above. The Motley Fool owns shares of GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.