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Armchair Analysis: GameStop and the case of coincidence

Peter Skerritt's picture

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GameStop stock values are in the midst of a four-day losing streak, as shares have fallen from $25.00 on January 25th to $23.36 at the closing bell today. It's likely that any number of factors could be attributed to the slump. Maybe there's a fear that sales are weak after the holidays. Maybe there's some basic profit-taking going on. It's hard to really pinpoint anything.

Here's an interesting coincidence:

At about midday on January 25th, rumors began to circulate about Microsoft enabling some sort of used game lockout or restriction for its next-generation platform. Locking out used games would be a worst-case scenario for GameStop, which relies on profits from used game sales to be successful. Take used game sales out of the equation, and there's suddenly a much shorter shelf life for GameStop in its current form. More general retailers, like Walmart and Target, have other retail lines that they can rely on for sales... so abolishing or limiting used games wouldn't affect these chains adversely and they would likely still carry hardware and software for the next Microsoft console.

On the morning of January 26th, GameStop shares shed $2.00 (-8%) within the first 15 minutes of trading. Prices did recover most of those losses, but this began the trend that we've seen since:

  • January 25, 2011: Closed at $25.00 (-0.00, -0.0%)
  • January 26, 2011: Closed at $24.70 (-0.30, -1.2%)
  • January 27, 2011: Closed at $24.32 (-0.38, -1.5%)
  • January 30, 2011: Closed at $23.74 (-0.58, -2.4%)
  • January 31, 2011: Closed at $23.36 (-0.38, -1.6%)

It's probable that the timing of this slump and the used game lockout rumor is nothing but coincidental. After all, Microsoft doesn't appear to be on track to release its next console in 2012, and the used game lockout rumor has not been confirmed. As I wrote last week, I don't see a strong chance of Microsoft taking such action without other hardware companies doing the same thing. I do believe that Microsoft has talked about implementing such measures, and I believe that it's a possibility that the rumor may verify, but I certainly don't consider it likely.

Having said that, there are a couple of things which raise an eyebrow. For starters, Microsoft has been dead silent on the rumor. The company won't even address it. It's standard procedure not to comment on rumors and speculation, but silence becomes more deafening as it lasts. Looking back at the THQ rumors a couple of weeks ago, not commenting on rumors can begin a firestorm of controversy and speculation and can ultimately require some sort of comment to undo any potential harm or damage. The situation was different because THQ was the focus of the rumor and was feeling adverse effects from it. Here, Microsoft owes GameStop no explanation. GameStop must now deal with growing concern and speculation and has no way to limit the damage until Microsoft decides to end its silence.

One last bit of coincidence is that Netflix decided not to pursue its game rental strategy, and the news broke at around the same time that the rumor of the used game lockout hit. The Netflix decision isn't necessarily related to the rumor. Digital distribution is gaining strength and the industry is actively combating used game sales and rentals with online passes and additional DLC. It's not a slam dunk decision to jump into a line of business that already has two prominent players (in GameFly and Redbox), especially when the risk is high and the industry just doesn't want it. Despite these explanations, the timing of the news is conveniently coincidental. Does Netflix know something that we don't know? That question is very hard to answer.

Bear in mind that I'm not predicting that GameStop is in any imminent danger of that anyone should start frantically selling off their shares in the chain. I can see a scenario where GameStop may close a few stores in saturated areas to decrease overhead and that expansion is likely at a full stop, but the chain isn't folding any time soon. I do, however, think that the coincidence at play here is interesting and that the stock should be watched just a little bit more closely for the short term.

We'll see if GameStop can break the streak over the remainder of this week.

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