I won’t lie, I’m one of those hardcore gamers that seem to be a dying breed. I’ve been enamored with video games since the Atari 2600 days. Some of the choices being made by Microsoft Corporation (NASDAQ:MSFT) and Sony Corporation (ADR) (NYSE:SNE) for their next generation consoles will cause significant changes in the industry, and some of these changes have the potential to seriously harm certain retailers.
These Two Companies Want Two Different Sets Of Customers
Without getting into the technical aspects, both the Xbox One and the PlayStation 4 will be based on PC-like architecture. In addition, both consoles will be Blu-ray capable, and both have similar amounts of RAM.
This is great news for game developers, because what they produce for the Xbox One won’t have to be changed very much to work on the PS4 or on a PC. Companies like Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ:EA) would seem to be the main beneficiaries of this. These two companies already have huge titles, and now they will be able to spend more time on the games themselves, rather than trying to figure out how to make them work on different systems.
What is not the same about these consoles is the customers that each company hopes to attract. Microsoft Corporation (NASDAQ:MSFT) is clearly going after a broader audience. The company is touting the ability to watch live TV, run apps, and play games. Sony Corporation (ADR) (NYSE:SNE) is targeting gamers, and wants as many of them as possible. While the PS4 will certainly run apps like Netflix, Inc. (NASDAQ:NFLX), Hulu, and more, that’s not the point of the system.
Cloud Gaming
One significant difference between Microsoft Corporation (NASDAQ:MSFT) and Sony Corporation (ADR) (NYSE:SNE)’s machines is how they hope to utilize the cloud. Microsoft will store customer’s games and entertainment in the cloud, and they will be available from any Xbox One. Sony Corporation (ADR) (NYSE:SNE) will stick closer to disc-based gameplay, but their cloud service Gaikai has the potential to steal gamers from across the platform universe.
Not surprisingly, both the Xbox One and the PS4 will not be backward compatible when it comes to older game discs. However, while Microsoft Corporation (NASDAQ:MSFT) has not mentioned any plans for older games to be supported through emulators, Sony’s Gaikai service hopes to bring not only PS3 gamers onboard, but also gamers from PS2 and even PS1.
Gaikai offers the ability to stream essentially any game from the PlayStation universe directly to supported consoles, televisions, and even tablets and smartphones. Since Gaikai uses the cloud to serve up the games, the device the user plays the game on just has to have a fast streaming connection. Think of Gaikai like Netflix but for games.
Some Retailers Are Going To Hate This Future
While all of this sounds great for gamers, there are a few issues. First, Microsoft Corporation (NASDAQ:MSFT) has stated that though users will be able to sell their used games, the game is tied to one XBox Live account. This means if a customer wants to sell their game to GameStop Corp. (NYSE:GME), there is a fee to “unlock” the game. This news could be potentially devastating for GameStop Corp. (NYSE:GME), as 47.8% of the company’s gross profit comes from used games.
It seems likely that the potential high price of both systems (rumored at $399 or more), could also hurt both GameStop and Best Buy Co., Inc. (NYSE:BBY). GameStop gets about 17% of its sales from new video game hardware, and as much as 45% of sales from new video game software. Best Buy reported their Consumer Electronics comparable sales dropped by 5.4% domestically, and Entertainment comps. were down nearly 28%.
To be blunt, Best Buy Co., Inc. (NYSE:BBY) can’t afford for Microsoft and Sony Corporation (ADR) (NYSE:SNE) to not push gamers to upgrade their hardware and software. GameStop needs gamers to get excited about new hardware and software to drive sales. If gamers are put off by the idea of spending $399, having to deal with unlock fees, and the lack of backward compatibility, the upgrade cycle may take longer.
In addition, GameStop and Best Buy live and breathe physical sales. Both companies are working hard to push into digital and online sales, but the majority of their business is still in-person. If gamers know they have to pay an unlock fee to sell a game, it seems likely they may choose to just download it directly to their console. If this occurs, again GameStop and Best Buy likely suffer.
Imagine that Activision Blizzard, Inc. (NASDAQ:ATVI) releases its newest Call of Duty: Ghosts, and it costs $59.99 at GameStop, Best Buy, or online for download. Why exactly would a gamer choose to go buy the physical copy at a retail store? In addition, if Sony’s Gaikai service offers streaming of many games for a fee, are customers as likely to buy physical discs to own? Since GameStop lives and breathes games and consoles, and Best Buy dedicates a large portion of their stores to video games, I think you can see the potential consequences.
Conclusion
The new consoles offers some great features that gamers like myself might enjoy. However, the lack of backward compatibility, and any fees for selling used games, are major roadblocks to a fast upgrade cycle. It’s possible some of this could change by the time the consoles hit store shelves, but if not, investors in GameStop and Best Buy should be very concerned.
Best Buy might weather the storm because of their sales of computers and mobile phones make up more than 47% of sales. However, GameStop’s reliance on profits from used games, and the potential for more online sales of new games, puts the company on thin ice. If the Xbox One and PS4 ship as they are described, this might be the final nail in the coffin for this beleaguered retailer.
The article What The New Game Consoles Mean For Gamers And Retailers originally appeared on Fool.com and is written by Chad Henage.
Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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