Analyst: GameStop Has '10 to 20 Years' Before Digital Sales Eclipse

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GameStop's days as a peddler of physical goods are numbered. The writing's on the wall. [Insert your favorite aphorism here.] If someone can demo a game at home, then switch to the full version at the press of a button, they will.

And it's already happening.

Game sales tracker NPD noted in late September that for the first half of 2010, digital full-game PC downloads trumped physical units purchased at retail by 3 million. That's a first, as in the the first time digital downloads "comprised the majority of total PC game unit sales."

Digital sales mitigate piracy, eliminate wasteful packaging, and oust price-additive middlemen. They put gamers directly in touch with publishers and streamline the buying process with pre-purchases and "ready at launch" pre-downloads.

You'd think the demise of retail gaming was just a few years away.

Don't tell Michael Pachter. The Wedbush Morgan analyst thinks GameStop's retail shelf life reaches forward another decade--even two.

"While we don't expect investors to abandon the view that a migration of software sales to digital downloads is inevitable, we think that GameStop is likely to continue to gain market share over the next several years, as its core customer values the option of trading in physical goods for store credit," said Pachter according to Industry Gamers. "We think that this customer will be among the last to embrace digital downloads, and think that the company has anywhere from 10 to 20 years of healthy earnings and cash flow generation ahead of it."

Translation: PC gamers are fleeing a sinking ship (don't be surprised if GameStop pulls its dwindling PC games section altogether--or converts it to an "all Blizzard, all the time" shrine) but console gamers will probably hang around until the secondary market dries up, a market Pachter thinks has at least one and possibly two decades before the coffin's sealed.

Will used games save GameStop? They've already kept the retailer off life support, but I wonder if Pachter isn't overlooking the sort of "compound interest" that builds when digital libraries begin to supplant physical ones.

If you buy a game online, you can't trade it in for store credit. As "core customer" libraries fill with digital purchases--purchases they're making today--they'll have less to trade in.

Publishers currently prop up stores like GameStop by selling pricey "collector's editions" of major releases and holding back downloadable full-versions for months--in some cases years--after their retail launch dates.

But imagine what might happen were a publisher like Activision to make a game like Call of Duty Black Ops available to console owners digitally day one (a luxury already enjoyed by PC gamers).

You can buy hundreds of older full-version games through Microsoft and Sony's digital download services for $10 to $20. That's impulse buy range--store credit at the local GameStop or no. As my games library fills with digital versions, I have fewer games to wield as credit toward new ones. My inclination to use a store like GameStop for its brick-and-mortar services dwindles proportionate to my secondary currency reserves. And that's discounting publishers who opt to sell new releases online, day one.

When--not if--that happens, expect the landscape to shift tectonically. All publishers have to do is throw the switch.

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