Sony (SNE) announced Tuesday that it sold 4.2 million copies of the PS4 during 2013, exceeding estimates for ~3 million sales of Microsoft’s (MSFT) Xbox One units during the year. The PS4’s lower price tag of $399 versus the Xbox One’s $499 sale price coupled with wider distribution (53 countries versus 13) helped drive the better numbers at Sony. Sales levels of each competing console, however, were fantastic, which bodes well for game developers such as Electronic Arts (EA) and Take Two (TTWO). Sony remains firmly on track to surpass its PS4 sales target of 5 million units by March 2014 and will likely turn a nice profit of about $25-$50 per unit (despite the lower price). Microsoft’s XBox sales may be lower than Sony’s, but the software giant continues to do well as it searches for a new CEO.
Image Source: gamesindustry, Sony
Still, that wasn’t the biggest news of the day. The biggest news was that Sony announced the launch of PlayStation Now, a cloud-based service that provides streaming access to PS3/PS4 titles and runs on TVs, consoles, tablets, and phones. Original PS and PS2 games are right around the corner, according to Sony via Twitter (@PlayStationEU). The fact that both old and new games can be streamed is a huge blow to traditional retailer GameStop (GME), which generates a significant amount of profits from used (pre-owned) game sales (about 40%-50% of gross profit). As we had outlined previously, digital distribution represents GameStop’s greatest long-term threat of obsolescence:
The electronic game industry is intensely competitive. In the US, GameStop competes with behemoths Wal-Mart (WMT), Target (TGT), Amazon.com (AMZN), and Best Buy (BBY). However, we think the biggest long-term threat to GameStop will eventually be digital delivery of games. If Sony or Microsoft eventually cut physical game sales out of the supply chain and switch primarily to digital distribution, GameStop will be left holding the bag…The risk of this profit lever eventually going away or being substantially reduced over time is just too great for us to be interested in shares.
Valuentum’s Take
We see no reason to own GameStop’s stock, and we prefer Microsoft’s valuation upside over Sony’s. The launch of PlayStation Now may be the beginning of the end for GameStop, at least with respect to the profit potential of pre-owned games. We continue to hold Microsoft in the portfolio of the Dividend Growth Newsletter.