I'm not sure how Gamestop (NYSE:GME) can avoid becoming "the next Blockbuster" over a period of 5 to 10 years (granted, that's a bit long-term in today's frantic stock investing time horizons).
Assuming broadband adoption and download speeds continues to grow (it's needed anyway for multiplayer gaming) to an assumed average of 50-100 mbit/s or even higher I don't see many people buying games in a store long-term.
In digital distribution there is no way to get games on most platforms (Android being the lone exception) other than through the "official" app stores controlled by the hardware manufacturer - they will become the new gatekeepers, not just for game software, but all software titles.
Selling used electronics and trade-ins outside of game software may be venues for GME - but I fail to see how this model can work with their 7000 stores, GME may become a much smaller company over time.
There will always be some people who prefer to buy physical game copies (for example, collector editions with additional merchandise such as T-shirts, figurines or art books), but the number will get smaller and smaller over 5 to 10 years.
Look at the music (CD on its last legs) and movie (DVD, Blu-Ray) sales, the end of the line signs are on the wall for most optical media distribution.
The long anticipated console releases (PS4 and Xbox One) in late 2013 may skew the numbers for a few months and make GME look like a growth stock into 2014 and maybe even 2015, but this valuation will not hold up in 5+ years in my opinion.
But what about the convenience of re-reselling used games and/or sharing games with friends?
(We have to remember the used market is especially important for GME thanks to higher margins compared to new game or hardware sales)
The argument about reselling and sharing physical games (optical media or cartridges) is certainly valid, its future may come down to pricing in my opinion:
Once/if app stores from Sony and Microsoft follow the Steam model for PC game sales* and allow for aggressive incentives (30-50% off on sales, maybe even 70+% discounts for older catalogue titles), many more people may go digital on consoles.
At the moment, digital console sales are more of a convenience on consoles (instant gratification and download), physical copies are often cheaper and offer small perks (exclusive DLC, trade-in bonus, loyalty points...).
GME and other large resellers like Amazon are still powerful, publishers can't risk to alienate them yet - but there may be a tipping point soon.
I think the tipping point is already here for PC games (thanks to pricing on Steam with frequent sales for end-users coupled with higher gross margins for vendors).
Maybe the Blockbuster analogy (a complete shutdown, bankruptcy) is much too strong/negative for GME long-term:
- Gamestop could re-invent itself and slowly move to more hardware trade-ins over time (tablets, notebooks, smartphones...) and slowly reduce the number of stores.
- In some regions/countries lacking broadband penetration or imposing strict download band-with quota GME could keep its current business model a few years longer. But that's just extending the inevitable a bit.
After that the name "Gamestop" could become outlived by a new business model like RadioShack (NYSE:RSH) today. I guess few people shop for a radio at RSH nowadays.
In summary, GME is in a race against time to reinvent itself outside of software/used games within 5-10 years in my opinion.
Since much of the share price is about future growth and cash-flow expectations, GME stock may be hurt sooner than that.
I liked GME around $20 a few months ago, now it looks overvalued in my opinion.
The last time GME shares ran up to $60 was shortly after the last console generation launched, so the recent run-up to the same price levels may be more than a coincidence.
PS: This blog entry is just a summary of my recent comments made on SA articles about GME.
* In early 2011, Forbes already reported that Steam sales constituted 50-70% of the $4 billion market for downloaded PC games and that Steam offered game producers gross margins of 70% of purchase price, compared with 30% at retail. (quoted from Wikipedia)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.