Yep, GameStop fell even lower today, wow “real” shocker right? Source: Freestockcharts The company moved down their outlook when pertaining to sales today, and for the most part no one should be surprised by the weakness in fundamentals as the company seems poorly positioned, and the stalwart plays for digital game downloads aren’t even publicly traded, i.e. Valve. I mean sure, people could gain some exposure to digital downloads via Microsoft, Electronic Arts, or Sony. But, what investors would ideally want for a pair trade is long Valve, and short GameStop. Sony has been dead money for decades, and its recent success in gaming doesn’t fix everything else that’s wrong about the company. And while Microsoft is doing good, its upwards momentum is due to a transition into a subscription business model for software in conjunction with Windows refresh and Azure cloud. The last option is Electronic Arts, but as we all know, they couldn’t deliver with Star Wars Battlefront. In fact, sales fell below expectations based on preliminary reports from various analysts. EA has a strong enough digital library for PC, but its recent failure with Star Wars will carry the stock slightly lower. The real theme behind downloadable gaming content has been the Steam Library, as it basically chugged right past consoles this year as the largest platform for serious gamers. Yeah, PC is the most popular platform and its doing a lot better than console gaming. Console gaming is on its way out the door as Microsoft’s commitment to consoles has waned in the past cycle. Microsoft doesn’t lose if consoles become less relevant because the PC business is way more important to Microsoft. If more people buy up the desktop product stack, the possibility of desktop adoption improves, and the trend in declining tower sales can be reverted. That seems more important to Microsoft, because it needs to have a thriving OEM ecosystem otherwise the Wintel alliance will be under fire as OEMs continue to experiment with alternatives like Chrome OS. So, where does GameStop fit into all of this? Well, GME doesn’t own the most valuable digital content distribution model. Game consoles are getting routed by PCs, and the developer community is re-positioning title launches for PCs. The line-up for PC-only exclusives is a lot better than consoles next year. Basically, GameStop is absent from the fastest growing gaming category. Gen-Y millennials are getting sucked into the eSport culture of PCs as Twitch and YouTube popularized and familiarized the concept of PC gaming. In fact, crowd sourced media was probably the most identifiable turning point for the PC gaming ecosystem. But, sheesh where was GameStop during the PC gaming explosion? Oh yeah, they were opening more stores like idiots. Source: GameStop GameStop narrowed its estimate range, and while the figures weren’t completely horrendous. This is a classic example of bad data being masked by great headline numbers. The company hasn’t transitioned successfully to digital, and it’s not ever going to be the most relevant platform for downloadable game content. Therefore, investors should steer clear as it’s a value trap. Perhaps, the revenue outlook is too aggressive as there aren’t any major title line-ups for January (like usual) and while consoles sales grew by 38%, software sales fell by 9.7% (which was far below expectations), in fact it fell below the -8% y/y estimate from Credit Suisse over the months of November and December. And don’t forget guys, Credit Suisse offered the lowest estimate among the consensus, and GME stumbled further below that. The growth in consoles masked the weakness in the business model. But like usual, the smart money wasn’t really duped. Hardware sales tend to peak in the third or fourth year of a new console cycle. From there, the residual revenue from game software is relied upon for sustained earnings and sales growth on the game studio front. However, because GameStop is poorly positioned in the digital download space, the company can’t offset the eventual erosion of console ASPs/net adds, which will put further pressure on both margins and top line sales in future years. Therefore, if things looked ugly today just give it a couple more years. This day will become a classic Kodak moment. In fact, GameStop is quickly following in the steps of the failed camera maker.