GameStop to Stop Zune Sales

Updated from May 22

SAN FRANCISCO -- Video-game retailer GameStop (GME) has decided to stop selling Microsoft's (MSFT) Zune players at its stores due to what it sees as insufficient demand from customers.

The move is unlikely to affect GameStop, whose sales come almost completely from video games but it puts up another hurdle in Microsoft's attempt to grow Zune sales.

"We have decided to exit the Zune category because it just did not have the appeal we had anticipated," said a GameStop spokesperson. "It (also) did not fit with our product mix." GameStop made the decision about a month ago. GameStop said it will sell Zune players online until it clears out its inventory.

GameStop has hundreds of stores across the country and losing that distribution channel could hurt Zune sales. Many of GameStop's customers are avid users of Microsoft's Xbox 360 console and could have presented a cross-selling opportunity for Microsoft.

Microsoft said Friday that the Zune continues to be carried by other big-box retailers. "We have a set of great partnerships that give Zune a strong presence at retail including Best Buy (BBY), Target (TGT), Wal-Mart (WMT) and others," said Adam Sohn, director of marketing for Zune, in a statement. "We will continue to invest in retail partnerships and have seen good momentum online and at retail over the last few months."

Microsoft has sold about 2 million Zunes since the device's release in Nov. 2006. Zune is estimated to have about 4% of the overall market share for digital media players currently.

Zune's total sales are a fraction of those for rival Apple's (AAPL) iPod. Apple sold 10.6 million iPods in the last quarter alone.

GameStop first offered Zunes to its customers for pre-orders in Oct 2006.

The decision to stop selling Zunes took a toll on the company's margins in the first quarter. Gross margins for the quarter were 26.1%, down from 27.2% the same quarter year before, reported GameStop on Thursday.

Shares of GameStop were down $3.15, or 6.2%, to $47.72 following in-line guidance for the current quarter and fiscal year.