Game Stop: The Next Tower Records

In five years, Game Stop will not exist. Remember Tower Records, that huge behometh of a record distribution service?  Neither do I, I read about it in an ancient history book.  Game Stop is headed to a parallel fate.

The company is a favorite amongst short sellers, being the number one shorted stock in the S&P 500 earlier this year. I'll describe why, but I'll add a cherry on top. 

Here's the cherry; according to an article at appy-geek.com, Sony’s Worldwide Studios VP Scott Rohde, speaking on the future of gaming suggested that disc-free gaming will “be a part of what everyone does” by the middle of the decade.

"It just makes sense. And so, over the next five years, you're going to see everything evolve to that state because people want access to their data anywhere," Rohde said, describing cloud gaming as “absolutely inevitable.”

Well before the IPhone came out, Bill Gates predicted we'd be walking around using our cell phones would store our entire library of music, we'd walk around with headphones listening to our favorite songs, and we'd use our phones for video chat, etc etc. This was at a time when many people were still using CD's.

I didn't necessarily know enough about technology of the time, but my imagination ran wild as I tried to digest his prediction. Sure enough, everything that Gates stated has come to pass, and then some.

When someone who spends 24 hours a day, in a position of power make such a bold prediction, especially when he is churning out the hardware to make it possible, I’m inclined to listen. Really, the only thing standing in the way of this taking place right now are the ubiquity of high speed Internet connections. Microsoft, Sony, Nintendo, video game creators like Electronic Arts, and Activision certainly are not inclined to lose revenue from frustrated players with twenty hour downloads of games.

Microsoft has already announced they would not be including DVD decoding software with Windows 8, and they will likely do the same for the future Xbox as well. 

As a side note, this tells me that these behemoths believe that the web will become faster, more secure, and high speed connections will reach most of the planet so be on the lookout for investments in this area as well.

Yes, I'm aware that some of you Game Stop proponents will point out that it does have a web presence; however, they are still selling a physical product. When new physical product ceases to exist, what do they have left to sell?  If you say the hardware, I can buy that at Walmart, or Amazon (likely more cheaply too.) I might have bought it at Game Stop previously if I wanted to purchase some used games, or try something new, or just chew the fat with fellow gamers.
As part of my research my friend Jeff, who is a game developer, stated his opinion to me this way:  "Think all the game companies will produce physical copies with cloud based games until cloud based or downloaded games out sell the physical copies. If and when that happens you will see the shift Sony is taking about. From the developer and publisher standpoint direct downlands mean more money in their pockets directly and cloud based gaming makes it easier to control their content, so it's a win to them. I just don't feel it is for the consumer. Plus it ends the video game stores and rental places as we know them, even Red Box and Game Fly."

With the price to earnings ratio of 7.5, and a 3.4% dividend yield, the company might attract some sucker value hunters.  The key to investing is seeing a trend before the masses, and Scott Rohde but has just stated it loud and clear from his view in the crow's nest. You really want to pay 7.5 times earnings for a company that will have nothing to sell five years from now? 

Game Stop is just a middle man, just like Tower Records.  And who wants to pay the middle man, when you can get consumers your product directly?