Matthew Ganucheau, CFA

Gamestop: Priced to Play

I agree with the author. There are a number of reasons that the digital download issue is overblown, in my opinion. Here are just a few:

Digital Downloading- Not a Threat Without MassiveTechnological Innovation:

Reasons that digital downloading is not yet a practical alternative to having a physical copy of a game:
 
 1) No instruction manual; reduced Christmas/Birthday gift excitement/capability; loaning and swapping of games, portability, and renting all are impossible with digital downloads.
 
2) Downloading times, charges. ISPs are getting concerned about bandwidth use, and are now limiting the speeds and total bandwidth a user has, charging 'per gigabyte' fees. Also, many games are around 50 gigabytes, which would take a very long time to download.
 
3) The majority of the world cannot even obtain high-speed broadband internet, let alone broadband fast enough to download 50gb games within minutes. At current speeds, it would take days to weeks to download games, so people would buy a game, and then have to wait for days to weeks for it to download. This eliminates the instant gratification that many gamers want when buying a video game.
 
4) Physical back-up issues. Consumers like having games in a case, not on a hard drive. They don't trust the reliability of hard drives. For example, many consumers would rather buy a cd instead of downloading an album from iTunes. When a drive fails they are afraid of losing everything. If that happens, not only would it be a pain to get a new hard drive, but then consumers would have to download gigs and gigs of data again, which would be a very time consuming and potentially costly effort.5) Hard drives get fragmented, they slow down, they produce an awful lot of heat, and in the end a download system would result in a limited amount of games you could have (to around 20 for a 1 terabyte drive). Serious gamers who buy a lot of games would run out of hard drive space fairly quickly. 
6) Digital downloads with no hard copy game eliminate the trade-in value that games currently have. For a digital download model to work, game makers would have to drasticly reduce prices to compensate consumers for the lack of trade-in value and also for the other shortcomings mentioned above. Given that fact, it may not make sense for game producers to pursue a full game digital download model.

 Conslusion: For digital downloads to be desirable, technology will have to evolve to the point where downloading a video game will take less time than going to a store and purchasing it and ISPs do not charge for or restrict heavy downloading access. This may happen eventually, but near to medium term it is hard to see how digital downloads could replace the current physical game copy delivery model. However, another approach of cloud-based gaming systems where the controlls are sent to the server and the compressed video is sent to a tv is more of an issue. One such company is coming to the market place in 2010 called OnLive.


Also, it can be argued that the downloads of additional content for video games are extending the useful lives of used games, which makes them more valuable in the secondary market and actually helps GameStop's business. The console cycle being longer is an issue, but there are several new things coming out that could excite the marketplace like XBox's Project Natal that could help drive sales.

The digital delivery of the gaming content through services like OnLive will no doubt run into issues with gamers, especially not wanting to pay for a monthly service, not wanting their gaming to hog all of their household's bandwidth, and last but not least, not wanting their games to be lower quality looking then they are currently. OnLive only sends content in 720 HD resolution, which for gamers currently getting their games in 1080p is not an exciting prospect.

It will be interesting to see how this plays out, but in a market where gamers tend to have multiple consoles and want the fastest and best graphics, I believe that the market share estimates that OnLive will receive will not effect GameStop's business as much as is currently being priced into the stock. After considering all of these factors, it seems to me that GME could provide great returns as the market realizes that the competitive pressures are not as great as the market had anticipated.

Amazon Shares Showing Resilience as Analysts Defend Stock

I would think that people shop Amazon when their prices are lower, and that the company has no pricing power. I don't believe that they can both achieve their projected revenue growth and improve margins. The stock is extremely expensive, and I think that this bubble too will burst.