GameStop Saves Itself, Buying Into The Download Model (GME, BBY, ERTS)

Bricks-and-mortar game retailer GameStop Corp. (NYSE: GME) has made a couple of acquisitions that the company expects to help it pick up some business in the online video gaming market. It could work, but there are caveats.

GameStop has acquired privately held Spawn Labs and the Impulse Inc. subsidiary of Stardock Systems, Inc. for undisclosed sums. Each company provides a different piece of the online distribution model that GameStop is trying to develop in an effort to compete for customers of games downloadable to any Internet-connected device. Where the company has historically competed with the likes of Best Buy Co., Inc. (NYSE: BBY), it is now looking at going up against game makers like Electronic Arts Inc. (NASDAQ: ERTS).

In its press release announcing the acquisitions, GameStop’s CEO said that the company “will continue to make appropriate investments related to our multichannel strategy.” Could it be that these guys didn’t get the memo about how the Internet eliminates (in geek-speak, disintermediates) the need for expensive distribution channels. How does providing a platform for a game from EA make any money for GameStop?

In an interview cited in The Wall Street Journal, GameStop’s CEO noted, “We’ve become more and more a technology company.” He didn’t say that GameStop would be developing its own games.

GameStop also didn’t say how the company plans to make money with these acquisitions. A Piper Jaffray analyst has noticed the same thing, in a note maintaining GameStop’s ‘underweight’ rating:

“While we applaud the company’s efforts to re-invent itself on-line; we expect it will be an uphill battle. Launching a streaming games business presents vast technological challenges, is very expensive and the category is already competitive – including Nintendo, Microsoft & Sony. Details remain limited, and we need more information on the technology and content availability before we can form a final opinion. That said, our initial take is that the GameStop brand will be a big advantage; but demand for streaming front line content is limited, on-line games is not a core competency and competition is great.”

To GameStop’s credit, at least the company recognized that growth is in digital sales, not boxed software. What GameStop hasn’t figured out yet is that online distribution, by itself, is not a silver bullet. Undoubtedly the company knows that, but reckoned that it had to start somewhere, so it would start with something it knew — distribution.

Now the problem becomes finding, or creating, something to distribute that will add to its top and bottom lines. That will be a lot more difficult.  As noted, the move was needed but there are caveats.  

Shares are up about 1.5% in at the market open this morning, at $22.89, well within GameStop’s 52-week range of $17.70-$25.75.

Paul Ausick