A friend of mine had asked me about investing in GameStop a while ago, and I advised him against it, because I felt that GameStop’s primary business model, namely buying used games low and reselling them high, was not viable in the long term. Well, I really wish I had made that prediction public back then, because over the last month, a ton of news release have poured in confirming my prediction. The exact wording of my original prediction was:

In the long term, I think GameStop is going to lose out. The video game industry doesn’t like this “secondary market” of used videogames (they’d much rather everyone buy stuff new every time). And I think they will win. They are doing this by moving games to an all digital platform. WiiWare, XboxLive, PlaystationNetwork, DSWare, Steam, iTunes, etc. The online digital-only stores are getting better and better every day. I don’t think GameStop can survive in the long term.

Also, this was recently announced at E3: http://en.wikipedia.org/wiki/Onlive

My friend asked for more details (partly in the form of a rebuttal). One of the specific points he gave (which I repeat here, because I refer to it in my response) was that most companies would not likely be willing to digitally sell Street Fighter 4 for more than $10 beneath retail price, and if a consumer was given the choice of the digital download for $59.99 versus the retail copy for $69.99, he’d probably opt for the retail copy, both for the packaging art and other physical materials, and for the possibility to resell the game used. He also mentions large downloads times as a deterrent. My response:

1. Don’t neglect casual games, which many people predict is going to be huge, possibly even dwarfing “traditional-core” games likes SF4. In the last month alone, I’ve bought 6 games for about $5 each. 3 of which I played once and will probably never play again, 1 of which I’ve owned for maybe 2 weeks and haven’t even played yet (and don’t plan on playing any time soon). And I don’t have buyer’s remorse at all. At the $5 price point, I am extremely open to taking risks and splurging. In contrast, SF4 at $70, I would more likely pirate it.
2. I don’t know about other people, but I find selling used games to be a huge hassle, and don’t even bother with it anymore.
3. Steam actually lets you sell digital games. Basically, you can transfer ownership of a digital title from one account to another for $2 or something like that. The seller of the game has to pay Steam $2, and then Steam will transfer ownership to any other account. You’re on your own for actually handling transfer of funds from the buyer to the seller.
4. Downloads times are actually pretty reasonable: buy a 1GB game, usually it’s ready within 1 hour. Consider the time between deciding to buy a physical game, driving to the store, buying it, and driving back home. They’re comparable times, and not having to leave your house is very convenient.
5. Online stores are 24/7, more easily searchable, never run out of stock. I find them more pleasant to browse as well, as many of them integrate social media stuff, like linking to reviews, etc. If I see an unknown game at a store, it’s a hassle to try to look it up on my iPhone to find out if it’s any good.
6. The only game that’s even rumoured to come anywhere near 50GB is the next Final Fantasy. The DVDs that Xbox360 uses have a capacity limit of 8GB, and most game images on torrent sites are 4GB to 6GB.

I think GameStop may start failing financially even within 1 to 3 years, depending on how aggressively Microsoft, Sony, Nintendo, Valve and Amazon push their online offerings.

The 50GB is in reference to my friend’s balking at the idea of digitally downloading a 50GB game. I guess he got that 50GB figure from the fact that the maximum capacity of a Dual Layer BluRay disc is 50GB.

A couple of weeks later, I’m vindicated by this Ars Technica article and then Sony drops the bombshell, announcing that their next PSP console will not accept physical media at all, forcing all future games for that platform to be in the form of digital downloads. Finally, Microsoft announces (apparently to the great surprise of many) that they are making full Xbox360 games available as digital downloads.