Used-Game-Blocking-Technology or Not, Game Stop (GME) Could Still Get Clobbered

February 8, 2013 9:37 AM EST
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Both Sony (NYSE: SNE) and Microsoft (Nasdaq: MSFT) are expected to launch new consoles in 2013. This is probably good news for Game Stop (NYSE: GME), and could lead to improved sales. However, there were reports this week that the new counsels might include 'blocking technology' that prevents gamers from playing used games. These reports were later dismissed, since most analysts don't see Microsoft and Sony rushing to be called pariahs, but it did created volatility in Game Stop, highlighting not yet totally resolved issues with regard to its used game business.

While blocking technology is not expected, the used game business could be pressured by increasing rates of digital downloads, accorded to analysts at Needham and Company.

"The portion of the interactive gaming market that is conducted through digital distribution is rising rapidly, and we believe this will continue to be the case for many years," said analyst Sean McGowan.

McGowan pointed out consumers are becoming increasingly comfortable buying content in a digital form, and with the rise of mobile gaming, consumers expect to access their games anywhere.

Used video games account for 25 to 30 percent of Game Stop's total revenue, and approximately 45 percent of its total gross profit. Needless to say, if McGowan is correct, the effect on Game Stop's bottom line could be significant.

"Obviously, when consumers buy digital content, they can’t resell it," said McGowan. "Just as obviously, consumers won't get the cash or credits they used to get from trading in used games, and their ability to buy other used games will be reduced."

Needham & Company has a Hold rating on GameStop.

For an analyst ratings summary and ratings history on GameStop (NYSE: GME) click here. For more ratings news on GameStop click here.

Shares of GameStop closed at $25.41 yesterday.

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