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GameStop at Risk After Microsoft Announcement

Written by on May 28, 2013

On Friday, various media sources reported that Microsoft privately briefed game retailers, announcing that its next-generation console, titled Xbox One, will enforce measures to restrict the used market. One source claims that the retailer will be able to choose the price but the publisher will receive a percentage cut of the sale, while another source claims that retailers will be restricted from pricing used games more than 10% below the MSRP. Since the reports cited anonymous high-level “retail insiders,” it is difficult to determine how reliable the statements are. Still, these leaks are consistent with Microsoft corporate VP Phil Harrison’s recent commentary regarding how the Xbox One will handle used games.

If true, this development is a clear negative for GameStop, and reinforces the view that the platform holders will implement restrictions on the pre-owned market, which generated roughly half of the company’s total gross profit (off 48% gross margins in 2012). Analysts still anticipate a modest increase to the $19 fair value estimate, due to GameStop’s outsized share gains and progress in digital categories.

The recent surge in GameStop’s share price can largely be attributed to a short squeeze, driven by the firm’s high-short interest and aggressive share buybacks, and does not have an impact on our view on the company’s fundamentals. Bullish investors may have also gained misplaced confidence by comments that customers can trade in used games at physical outlets. The aforementioned system, for instance, enables the resale of used games, but Microsoft and the publishers will replace GameStop as the intermediary that captures the economic profit. Though Sony has provided less information regarding how they will handle used games, the PS4 unveiling spent a great deal of time emphasizing the improvements to its online store, and we expect Sony will follow a similar path.

 

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