Micro-Consoles Chipping Away At GameStop - OUYA, M.O.J.O., And Shield

| About: GameStop Corp. (GME)

GameStop (NYSE:GME) is in an increasingly competitive space preceding the launches of the remaining two eighth generation consoles. So far, anticipation of the new console refresh cycle has treated GameStop shareholders well. The stock trades up 97% year to date and 227% off of August 2012 lows. GameStop has been attempting to prove to shareholders and skeptics that it can continue to stay relevant through the transformations of the electronic game industry.

Current company initiatives include expanding customer awareness of company owned digital distribution channels. These channels include Kongregate.com and GameStop.com. The digital download experience currently features a set of instructions detailing how the download process works. Full Games, Add-ons (Expansion Packs, Map Packs, Avatar Clothing, Themes, Extras), and Free Trials are available for download on the Xbox 360, PS3, PSP, and PC. From experience, the sales process is convoluted and step intensive. Importantly, since GameStop is not a game publisher or console manufacturer it has an inherent disadvantage as it attempts to sell digital games cross platform to its wide audience.

Competitors can be categorized into four categories: Micro-consoles (Ouya, Mad Catz Interactive's (NYSEMKT:MCZ) M.O.J.O., and Nvidia's (NASDAQ:NVDA) Shield), Console Manufacturers (Nintendo, Sony (NYSE:SNE), Microsoft (NASDAQ:MSFT)), Video Game Publishers (Electronic Arts (NASDAQ:EA), Activision Blizzard (NASDAQ:ATVI), and Digital Distribution Platforms (Steam and Green Man Gaming). While direct downloads from Nintendo, Sony, and Microsoft, direct from publisher downloads, and Steam downloads represent competition, every one of them are well discussed. The challenges from micro-consoles are not and I will choose to address them in this article.

The Android based Ouya launched in retail and online stores in late June and promised to "upend console gaming." However, first impressions have been mixed. A string of articles published focus on criticizing Ouya's "free to play" model and its difficulty to convince system owners to pay for games. Despite criticism, Ouya has positioned itself as the most successful Android micro-console to date. The console's game library boasts 392 titles but is littered with "free to test" titles that frustrate gamers with unexpected in game paywalls. Furthermore, Ouya only sells its games using in app purchases.

Mad Catz is seeking to one up Ouya with its M.O.J.O., which is expected to ship for the 2013 Holiday shopping season. A June 11th press release states M.O.J.O. enables:

…a direct link to digital storefronts like Google Play and the Amazon Appstore. Courtesy of its open-source nature, M.O.J.O. provides access to a library of thousands of titles, effectively removing the need to repurchase the games and apps you already use on your Android device.

It is clear that MCZ intends to develop a more customer friendly console by foregoing its cut of game sales for those that are instead accessed through external libraries. As a peripheral manufacturer, Mad Catz is seeking to bolster the sales of its GameSmart controllers, mice, keyboards, and headsets.

Nvidia's Shield is a handheld micro-console showcasing an Nvidia Tegra 4, multi-touch display, Wi-Fi connectivity, and attached console quality controller. Most notably, Shield features page states:

PC game streaming capability available in BETA…gives you the power to wirelessly access your GeForce GTX-powered computer from the comfort of your couch. Play your favorite PC games on a full-size controller with ultra-low latency thanks to SHIELD's game-speed Wi-Fi and the fast performance of GeForce GTX GPUs.

Shield is built on a Tegra 4 platform and is proving to hardcore PC and mobile gamers alike that PC game streaming has finally gone from concept to consumer.

GameStop will most likely continue to retail these micro-consoles, but let it be recognized, it is like Barnes & Noble (NYSE:BKS) selling Amazon (NASDAQ:AMZN) gift cards. As a product category, new video game hardware sales have always accounted for GME's lowest gross profit percentages. For the 13 weeks ended May 4, 2013, new video game hardware gross profit percentage was only 8.4% compared with 47.3% for pre-owned video game products. Not only do micro-consoles represent cheaper hardware sales per unit, they eliminate GameStop's ability to capitalize on title resales. Ouya, M.O.J.O. and Shield are notable new entrants challenging GameStop this upcoming console refresh. Those considering either holding or entering into a long position here should be well aware of the competitive landscape GameStop now operates within.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.