Many people have this belief that online distribution of game titles via downloads will kill the retail store model business of selling games. The truth is that it will take decades for technology to come to this point in where downloading games kill retail business. Please read the following article here as a reference:
Furthermore I would like to point out that there is competition out there using the technology of cloud computing to allow subscribers to purchase games online and play them over an internet connection. Even then, again these services are relatively new in terms of technology and will also take years to even remotely dent the retail store model. I seriously doubt sony, nintendo, and microsoft will be converting their systems over to a cloud computing model anytime within the near term. The fundamentals are here, the demand is here, and the dollars will follow. Enjoy!
See www.onlive.com for reference to cloud gaming.
"The majority of trade credit given for pre-owned trades goes towards the purchase of a new title at GameStop."
We don't know how much of the credit goes towards other used games or hardware, or as cash it could be spent on groceries or drugs or whatever. We don't know.
"If pre-owned was eliminated from the equation, new game sales would drop dramatically."
I estimate sales would drop by low single digits %, that's all. The major pubs have GME at around 14% of their sales. From GME's 10K, new game sales is 3.73BN and used game product, including hardware and accessories, is 2.39BN. I don't know how much of that 2.39BN is software, so I'll just guess at 75% = 1.8BN. So if all that credit disappeared, conceivably GME's new game sales could drop by about half, meaning GME would become 7% of new game sales for those pubs instead of 14%, i.e. total sales dropping by 7%. That's the worst case. If half of that credit goes towards other used product or non-games items, then total new game sales would drop by 3.5%. And that's also assuming 0% of the used game buyers buy any new games instead. More than likely, most would do so. Therefore that low single digits number drop could become 2% or lower.
I'm not interested in picking sides, but here's a thought regarding the long, many-years debate re: pre-owned games.
If pre-owned was eliminated from the equation, new game sales would drop dramatically. The majority of trade credit given for pre-owned trades goes towards the purchase of a new title at GameStop.
Does this mean it shouldn't or won't happen, re: the removal of pre-owned from the equation altogether? That it will destroy new games sales forever? I doubt it, but the effect would be felt heavily. Just something to think about.
In fact, a good example to help understand this effect would be the automobile industry. Even though the product is very different, the effect of taking away pre-owned trade vehicles from the equation, would have an immediate & terrible impact on the sale of new vehicles. Very few could afford to buy without a trade-in. To a lesser degree because of price point, the same thing would happen to sales of new video games. So in a way, developers/publishers ARE getting a net benefit from the existence of the pre-owned game business.
Again, not taking sides. But certainly something to think about. DLC/full downloads would similarly be affected even at a lower price point, as many would no longer be able to afford as many game purchases w/out the trade dollar.
Again, not taking sides. The point of DLC-only w/no retail at all would force the adoption of it quickly for those in the population who could afford it. But would developers make enough profit from the reduced fan base to continue making the games they do today? Who knows, I certainly can't predict the future, just raising an interesting point to consider.
Somewhat agreed in that they need them today, but certainly would not be opposed to phasing them out over a few years. 360 already sells older titles on line and adds to that library all the time. Again, slowly but surely.
If the retailers disappeared tomorrow, sales for titles would certainly drop initially especially due to jester's point that not everyone is online yet, but I think they would rebound rather quickly as people just more quickly migrated to downloading the games, especially if the prices dropped due to elimination of retail markup.
"So because something is possible, it will inevitably happen? Why hasn't it happend already then? Weird logic."
We've already discussed the power balance, and the trend. What you're saying is that because a knock-out punch in an MMA fight is possible, why doesn't it happen immediately? Because the other guy is generally softened up for a while over several rounds before the winner emerges.
"IMO - GME does not need to return to previous growth rates in order to command a higher valuation."
That's good, because it never will return to previous growth rates, not even including the eps boost from buybacks.
So because something is possible, it will inevitably happen? Why hasn't it happend already then? Weird logic.
GME is extremely conservatively valued. The share price will adjust as GME's future prospects become clearler and as it adapts to the changing market.
Right now the valuation of GME is very close to a worst case assumption IMO - GME does not need to return to previous growth rates in order to command a higher valuation.
"Again, they could easily take these kind of step now and offer full digital releases alongside retail tomorrow if they wanted to. The technology has existed for some time."
And it will happen.
"If retailers en mass decided to not support a title because of parallel digital distribution, what do you think would happen to that title's sale?"
Can retailers afford to? You're right there's a power balance. GME's position is strengthened by the closure of other retailers like CC and BBI, but it's weakened by continuing digital growth. Over time, the retailers will get weaker IMO, not stronger. That trend is clear. Look at how aggressive pubs have gotten already, with those $10 passes for "free" DLC for first time buyers, etc. They will get more aggressive over time, not less.
I really doubt there's much monetizing of the used market for the pubs. They want to encourage new first time sales. I doubt the kind of person buying a $20 used game is going home to buy $10 DLC for it, even assuming they are online to begin with.
You acknowledge yes that these are negative trends for GME and they will continue? That in turn puts off potential investors.
Again, they could easily take these kind of step now and offer full digital releases alongside retail tomorrow if they wanted to. The technology has existed for some time.
Clearly they are very reluctant to damage their relationships with their retail partners. I think you are underestimating the importance of that partnership. Gamestop in particularly is heavily promotional for game releases - it is a symbiotic relationship. If retailers en mass decided to not support a title because of parallel digital distribution, what do you think would happen to that title's sale?
Initiatives like the Online Pass are clearly aimed at participating in the sales of used games, not trying to eliminate it completely. Publishers clearly realise the danger of a wholesale attack on the secondary market both from consumer backlash and retailer retaliation. It's far more likely we will see incremental steps towards monetarising the secondary market. To what extent this will be successful remains to be seen.
"There is absolutely nothing stopping platform holders TODAY from putting single use codes in their products. Why do you think they aren't doing it then?"
They can't yet, because such a code would require an online connection and only around 70% of console owners are online. This is why the content which publishers have locked for non-first buyers is MP content. It's only a matter of time before they start including locked SP content though. Imagine if a big game like Modern Warfare 3 were to have locked MP and a "free SP level" (for first time buyers), *and* it were sold on the MS and PSN digital stores for $50. Sales volume would be higher for the platform holders and publisher, margins would be higher on the digital sales than retail sales, used sales would be down which would be another positive for them, and GME's best chance to compete would be price cuts at the expense of their own margins.
It's just another negative trend for GME which is only likely to get worse for them, not reverse course.