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Microsoft, Sony team up to kill GameStop

It's not too often a company conspires to kill off one of its retailers, but that's exactly what's happening.

We live in a world of transition from solid media to digital distribution. There's no mistaking that. From Netflix to Steam to iTunes, physical media is rapidly falling out of favor, at least among the content creators. I suspect they are more anxious for the advent of all-digital content distribution than consumers because it will reduce OPEX.

But that day has not yet arrived. Best Buy still has a sizable section of DVDs, CDs, and videogames. Even the MacBook still comes with a DVD drive, and we all know Apple's penchant for jettisoning something it considers old hat.

But apparently Microsoft and Sony didn't get the memo. They are about to undertake a strategy to blatantly favor digital downloads, which could mean the demise of one of their mutual retailers, GameStop.

If you've never been in a GameStop, just ask your kids. It's wall-to-wall, floor-to-ceiling plastic DVD cases of games for PlayStations 2 through 4, Xbox 360 and One, Nintendo Wii, Wii-U and DS. That's because while PC gaming has shifted quite successfully to digital downloads, consoles have not.

Consoles have had digital downloads for a while, but there was no incentive for gamers to use it. In fact, there was a counter-incentive. GameStop buys back used games, usually for pennies on the dollar, so kids could get rid of games they didn't like to buy new ones, and you can't do that with a digital download. Plus, the digital download costs the same as the physical copy, so at that point you are better off with the DVD.

Well, Microsoft and Sony are about to make them an offer they can't refuse. Microsoft announced plans to offer digital downloads at significant discount over the physical version. "Ryse: Son of Rome," one of the more visually impressive games for Xbox One, is for sale direct from Microsoft's online marketplace for just $40. GameStop sells it new for $59.99 and used for $37.99, plus taxes.

Sony, meanwhile, has come up with its own spin on digital distribution. Last month, it introduced PlayStation Now, an on-demand game-streaming service that promises to deliver old PlayStation games over the Internet to console players, no downloading required.

Then there's Sony's Instant Game Collection, which gives subscribers to Sony's PlayStation+ service a batch of digital games that they can download and play as long as they remain members of the service. This service has been available for years, but Sony continues to beef it up.

Now, Microsoft has said this is only a test to see how gamers respond, but what if it takes off? We're talking one-third off the retail price, after all. PC games are pretty much gone from retail, having moved to digital downloads via Valve Software's Steam service, EA's Origin and UbiSoft's UPlay. The argument that you need to save a hard copy is negated by the fact that Steam knows all of my purchases. If I delete a game that I bought and decide I want to play it again, I can download it for free.

How quickly will GameStop go down? That’s hard to say. It's nearly a $10 billion company now. It sells consoles, peripherals, used hardware and other things gamers need and can't download. They really have no means of retaliation against Microsoft and Sony for doing this. Best Buy would be hurt by this but has other business on which to fall back. GameStop is fully invested in gaming.

All they can do is cut prices to compete, or offer other spiffs, because cutting the price of a game by one-third is going to kill its margins, something it can't afford. In its third quarter of 2013, GameStop recorded sales of $2.1 billion but a net income of just $68 million. Its margins are razor-thin now. Competing with Microsoft and Sony would undoubtedly be fatal.

Way to screw a partner, Microsoft and Sony.

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