GameStop Corp. (GME), Microsoft Corporation (MSFT), Sony Corporation (ADR) (SNE): Questioning Long-Term Sustainability

Amazon.com started selling books in ’95, and since then it’s grown into one of the largest e-commerce companies in the world. The online retailer wreaked havoc on the brick-and-mortar book business throughout the early 2000s, eventually helping put one of the largest book stores, Borders, out of business in 2011.

The remaining book retailers, Books-A-Million and Barnes and Noble, are struggling to stay relevant in an industry that is rapidly becoming digitalized. The introduction of e-readers and tablets have all but sealed their fates. Both companies have lost around half of their market capitalization over the last five years.

In thinking about just how disruptive Amazon has been to the book industry, I’m struck by the notion: How long can GameStop Corp. (NYSE:GME) fend off the transition to digital?

The video game retailer has enjoyed impressive performance over the last nine months , up more than 160%. Microsoft Corporation (NASDAQ:MSFT) did, however, give GameStop Corp. (NYSE:GME) quite a scare earlier this year by announcing that it would not allow game-sharing with its soon to be released Xbox One game console. GameStop Corp. (NYSE:GME) tanked 20% the week following Microsoft Corporation (NASDAQ:MSFT)’s announcement.

The outrage and backlash by gamers was astounding. And when the other major game console maker, Sony Corporation (ADR) (NYSE:SNE), announced that it would allow game sharing (the opposite of Microsoft Corporation (NASDAQ:MSFT)), Microsoft had no choice but to reverse its policy and apologize to its loyal following. Soon after, the market completely forgot about the incident, and GameStop Corp. (NYSE:GME) was back in investor’s good graces. I think they were too quick to forgive and forget.

For a company that derives half of its gross profits from pre-owned games, GameStop’s retracement to $50 per share seems rather irrational. This is especially true when you think about what the digitizing of video games could ultimately do to GameStop Corp. (NYSE:GME)’s business model — it could effectively render its model nonexistent.

New consoles
The big news that’s overshadowing GameStop’s major headwinds is the upcoming launch of new consoles, Sony Corporation (ADR) (NYSE:SNE)’s Play Station 4 and Microsoft Corporation (NASDAQ:MSFT)’s Xbox One. The coming to market of these consoles should give GameStop’s top line a boost, and so investors are choosing to focus on the near term, rather than the long-term.

The game change for GameStop Corp. (NYSE:GME)? A move to digital. Currently, gamers can only download a few games directly off of the Internet. But if the digital transformation in the book industry is any indicator, I think the rise of digital and downloaded games is just on the horizon. Especially when you throw in the convenience that downloaded games offers.