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GameStop Hybrid Store Attempts to Redefine Digital Retail

Will people download content from a brick and mortar store?


GameStop (NYSE: GME) opened a new retail outlet in Palo Alto, California yesterday that company brass is calling the “store of the future.” That’s good timing for GameStop, since the video game retail stock is in dire need of something positive in its future. After missing their second quarter earnings projections by one cent per share, GME stock plummeted down to $18 a share last week, a nearly 34% drop from the $28.52 high in the past year. Another -5% and GameStop will set a new 52 week low.

But enough about the troubles of GME stock for now. Here’s the GameStop vision of the future: The new GameStop retail store is a 2700-square-foot store littered with kiosks boasting HD televisions. Through these, kiosks shoppers can purchase purely digital content for the Nintendo (PINK: NTDOY) Wii, Microsoft (NASDAQ: MSFT) Xbox and Sony (NYSE: SNE) PlayStation home consoles — as well as home computer content. The system works via GameStop’s PowerUp Rewards Pro Card (a remodeled version of the company’s current rewards program) that will be scanned by these kiosks and allow access to customized personal profiles, synched up to home gaming consoles.

So why in the world would a gamer walk into GameStop to download a title they can easily download from their couch? Because GME gives new discounts, store credits and other rewards for the purchase. The idea is that rather than fighting downloadable content distribution, GameStop will simply give video game players an incentive to go through its stores for the inevitable digital purchase.

Whatever you think about the likelihood of success for this model, there’s no doubt those digital purchases in their current form are really hurting GME stock. A PiperJaffray analyst saw the company’s recent poor earnings report as the beginning of the end for GameStop, whose reliance on the sale of used video games is crumbling.

But is the strategy sound or is this new store GameStop’s next step into a grave beside Blockbuster as an entertainment stock that didn’t get with the times fast enough?

Only time will tell. The store will also act as a public demo location for GameStop’s own digital games outlets. The company’s recent acquisition, independent games web portal Kongregate, will also be accessible via game demo kiosks throughout the stores. Kongregate has an audience of 10 million unique visitors every month, an online presence GME desperately needs to foster and grow if they hope to survive the inevitable dissolution of physical game distribution. Jolt Online Gaming, a developer of free, browser-based games and another recent GME acquisition, will also have their products spotlighted in the new GameStop stores.

With the massive dip in share price after their second quarter earnings report, the growing digital game market, and grim predictions for the game industry’s profits in the coming holiday season, GameStop’s efforts to evolve are a necessity rather than shrewd business. Unless the company can come up with a business plan that offers more than just interactive kiosks and a personalized customer experience, amenities customers can already enjoy online at home, the king of video game retail will join the king of home video rentals as little more than a memory.

As of this writing, Anthony Agnello did not own a position in any of the stocks named here.

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