Can GameStop’s Microsoft Partnership Help It Survive?

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Oct. 27, 2020

GameStop (NYSE: GME) is a company that sells physical video games, consoles, and related merchandise and has been struggling in recent years due to the transition to digital copies. Microsoft (NASDAQ: MSFT) is now partnering with the company, but will this be enough to save it?

Details of the deal

GameStop shares jumped 44% following the announcement of its multi-year deal with Microsoft in early-October. As a result of this relationship, GameStop will be utilizing the portfolio of Dynamics 365 cloud apps for its in-store and back-end operations. 

Dynamics will be used to provide insights to GameStop about customer preferences, with employees utilizing Microsoft tablets when engaging with potential customers, while Microsoft Teams will be the go-to form of workplace communication. 

GameStop will also be including Xbox All Access to relevant offerings. This means that for people buying an Xbox console, they will get up to 24 months of Xbox Game Pass Ultimate without any additional cost. 

What it means for both companies

GameStop naturally will benefit even just from being associated with a company like Microsoft. The various tools its employees will be utilizing from the tech giants will be useful in improving operational efficiency and the tech infrastructure at the company. Microsoft will also be helping to develop the e-commerce platform of GameStop going forward. 

In terms of benefits to Microsoft, the lure of the bundle deal with Xbox All Access will help with customer acquisition and the lifetime revenue value of a video gamer that is directed to the Xbox ecosystem.

GameStop’s poor performance

Digital game marketplaces such as Steam, Playstation Network, and Xbox Live have gradually eaten away at the levels of physical game sales over the past five years. The number of physical GameStop stores has fallen to 5,500 locations across ten different countries. In 2015, there were over 6,600 stores in 14 countries.

The company managed to gradually build its revenue from $1.84 billion in 2005 to $9 billion just five years later. It stayed above the $9 billion mark for a few years until a drop to $7.97 billion in 2017, $8.5 billion in 2018, and $8.3 billion in 2019. A large reason for these recent struggles is GameStop’s inability to evolve with the times, staying stagnant. 

Another reason for the company’s poor performance was a number of ill-fated acquisitions. This included trying to get into the smartphone space through Spring Mobile. After opening up 1,500 stores that saw underwhelming success, Spring Mobile was sold for $700 million in 2018. 

At this stage, the company went from having plenty of cash in the bank and no debt before this acquisition to having a lot of debt on board. About $1.5 billion was spent buying the stores, with approximately $800 billion in debt used.

Can the deal help GameStop?

The deal with Microsoft certainly won’t harm GameStop. Its share price has increased by more than 60% since the deal was announced and it could provide a short-term shot in the arm for the company. With the COVID-19 pandemic, GameStop has seen an uptick in its online sales of physical games. 

It is also slowly looking to get into the digital marketplace, currently selling in-game currency for many leading titles. However, if GameStop moves into selling digital games, this would not really make a dent, with the major digital marketplaces already well-integrated directly into consoles. 

Any hope for GameStop?

While Sony (TYO: 6758) and Microsoft announced that upcoming consoles will have a disc drive for games, this does not look like something that will be around when the next set of consoles roll around. GameStop is seeing some stronger results in its online sales, but it cannot compete with the digital sales of the big marketplaces. 

There will still likely be some ongoing demand for physical games, but in the long-term, it looks like GameStop may go the way of the likes of BlockBuster and gradually fade into irrelevance.

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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.