Clearly digital content sales are growing and physical sales are declining. This shouldn't be news to anyone. Yet in this environment GME has continued to grow, posting same store sales growth of 3.4% (from memory) this last holiday quarter.
The question is, does the trend continue forever? Hidef console market is actually growing.. Wii and handhelds are in decline. We have two new handhelds coming out on the market this year that could well invigorate the market. Kinect and Move may well do the same for hte casual market that has been hit so hard. Then there is the inevitable consumer recovery as unemployment slides.
A lot of pain is priced into GME right now.. if the trend in retail growth moves from negative to flat you would expect GME will do very nicely. We don't need a return to astronomical growth at this point to see share price appreciate. GME's best days are probably behind them in terms of growth, but that doesn't mean that don't still have a long and profitable future.
Just because digital sales are growing, doesn't mean it comes at the price of in-store game sales, and it offers no value proposition for the consumer looking for cheap used games--GME's bread and butter. There's no other retail shop positioned to pick up the used market like Gamestop can.
IMO the 3DS, NGP (Sony handheld), Kinect and macroeconomic recovery with associated drop in unemployment are all potential catalysts that could see GME trading at a much higher valuation this year.
Gamestop are also intending to start reporting on their digital / online sales more meaningfully this year, which certainly worked well for ERTS yesterday (despite a decline for them in physical sales as well)