I am often asked if GameStop can buck the trend of physical media transitioning to digital content. Will GameStop go the way of Border's, Barnes & Noble, etc?

Whilst digital downloads on consoles are still quite low, the ability to download full size console content is actually quite new. Given the size of games, the limited access to high bandwidth internet connections and poor marketplace interfaces, downloading console games has never been an enjoyable experience. That is all changing...high bandwidth connections are ubiquitous, games can be booted using a partial download and the publishers are pushing direct to consumer sales much harder. Direct to consumer downloads have better margins for publishers by avoiding the middle man (the retailer) and allow for games to avoid the used market.

Given that GameStop makes the majority of its profit on used games and consoles, I believe they will inevitably see an impact as digital downloads become more prevalent. GameStop feels the sense of community with gamers will keep them relevant but we have seen how that played out for the Borders and Barnes & Nobles of the world. Book reading and sharing moved to locations such as Starbucks while sales moved to Amazon through the Kindle. GameStop realizes this and has been aggressively trying to broker deals with publishers to allow for used game reselling. Allowing for used game reselling would be a tremendous win for GameStop but margins would still be lower than current physical game sales. For these reasons, I believe we will soon see an inflection point in digital console game sales forcing GameStop to evaluate the number of store locations and focus on selling consoles versus actual games. Although the overall market is stronger than ever, I'd argue GameStop has some of its' toughest years ahead.