Colin Sebastian, senior equity research analyst covering Internet and interactive media for Robert W Baird & Company, offers some interesting opinions on E3 next week including yesterday's revelations from Microsoft on used games. In a note to investors the firm says that Microsoft's clarification on used games is a mixed bag for GameStop, raising concerns about publisher discretion and how it will impact GameStop's used games business. Despite these concerns, the firm believes it is "still unlikely that publishers will block used games" but may position themselves to "extract a retail fee." If they do that, we wonder how that fee will be dealt with – will GameStop eat that cost and lose revenue, or will it pass the cost onto consumers?
"At first glance, we would not be surprised if publishers use the opportunity to ask for a revenue share, although we see it as unlikely that GameStop would agree to any meaningful fees given business model constraints and outsized market share (almost 50 percent of Xbox software sales)," notes Baird. "Without any change in trade in values, we estimate that every 100 bps impact to used margin would lower EPS by $0.10-$0.15."
On digital distribution, Sebastian says that he expects Microsoft to announce "a digital marketplace is likely still in the works." Microsoft did indeed confirm that games available at retail will be available the same day as a digital download. Sebastian also thinks that requiring consumers to connect the Xbox One to a network every 24 hours "should not be a major issue with the majority of gamers."
Finally Sebastian expects mixed headlines and shifting shares in the video game sector from E3:
"Expect mixed headlines from E3. We remain cautious on the video game sector, and expect choppy share performance on a mixed batch of headlines from the E3 conference; however, there continue to be potential positive catalysts later in the year, including a return to positive comps in Q4 and ongoing capital allocation."