Can GameStop Weather More Changes With Xbox One?

NEW YORK (TheStreet) -- Video-game players got some good news when Microsoft (MSFT) announced this month that games that were purchased for Microsoft's Xbox 360 can now be played on Xbox One.

Microsoft is launching the program in the fall and expects to have 100 titles available by the holidays. The move eliminates the need for gamers who upgrade to an Xbox One console from having to buy all new games.

But for GameStop (GME), so-called "backward integration" could choke off a rich source of revenue that had already been stifled by downloadable games. Can GameStop adapt to the new marketplace, or have gamers already moved onto the next best thing?

When Xbox One was announced in 2013, the details sent shock waves through GameStop's business plan, because gamers no longer had to buy a disk from a brick-and-mortar store and could instead download games from Microsoft online.

The convenience, however, came at a cost. No longer could gamers play used games on the Xbox One, a major drawback for the new console and a big stumbling block for GameStop, which made 38% of total sales from used games prior to the Xbox One launch.

Though GameStop had already developed customer-loyalty programs and invested in cloud gaming and digital distribution, the implications of Microsoft's announcement sent shares of GameStop 22% lower in one week.

Within two weeks of announcing the launch of Xbox One, the backlash from gamers made Microsoft reconsider its policy on games that are lent, resold and rented which Xbox 360 had allowed. Not surprisingly, sales of used games snapped back to 30% of total sales at GameStop the following quarter. They have leveled off at 20-28% since.

Although the stock hasn't returned to its pre-Xbox One price of $58, it has risen 25% in the months since Microsoft reversed its policy on used games.

And with used-video sales recovering, GameStop was still able to make up the difference with sales of new video games which increased to more than 50% of total sales after Xbox One from 31% before, while sales of video-game consoles have doubled since 2013.

In addition, GameStop controls as much as 50% of the market for new games designed for the Xbox One within the first month of its release, according to Wedbush Securities research analyst Michael Pachter -- no small feat for a company competing with Amazon (AMZN), Best Buy (BBY) and Wal-Mart (WMT). The key is GameStop's policy of buying back old games and consoles and then offering credit on new ones.

Although Amazon and Best Buy also offer to buy back used games, the process is less efficient than at GameStop. And GameStop has the advantage of often being staffed by fellow gamers who are happy to chat about their favorite games and share their knowledge of upcoming releases and products. "Getting people to buy used games is easy...getting people to trade in games requires a relationship," Pachter said.

A relationship with gamers is something that GameStop has nurtured and both Microsoft and Sony (SNE) use to their advantage. Sales associates can offer recommendations and push sales of new videos. Sony marketing executive John Koller calls it "wrapping its arms around gamers in a way that someone else hasn't done yet."

As Microsoft gives gamers their Xbox 360 titles back, Pachter sees it as "marginally positive" for GameStop. "Anyone who was holding off buying an Xbox One because of the compatibility issue will buy a new console" while Xbox 360 games "now have more value because they can be played on both consoles," Pachter said.

GameStop spokeswoman Jackie Smith said Microsoft's move will be good for the industry as a whole by bringing in more new gamers.

So while GameStop has had some challenges in the fast-changing word of video games, the company enjoys a unique appeal among its key demographic that other retailers haven't mastered, insulating the company from the advances of technology.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

More from Technology

Elon Musk's Latest Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Latest Twitter Tirade Is the Dumbest Thing on Wall Street

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Some Companies Are Already Feeling the Effect of GDPR

Some Companies Are Already Feeling the Effect of GDPR

Experts Break Down GDPR Risks for Investors

Experts Break Down GDPR Risks for Investors

Netflix Ready to Surpass Disney as America's Most Valuable Media Company

Netflix Ready to Surpass Disney as America's Most Valuable Media Company