Sony’s Plan to Squash Game Retailers Is a Longshot—For Now

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Sony Corp. President and CEO Kazuo Hirai delivers a keynote address at the 2014 International CES at The Venetian Las Vegas on January 7, 2014 in Las Vegas, Nevada. CES, the world's largest annual consumer technology trade show, runs through January 10 and is expected to feature 3,200 exhibitors showing off their latest products and services to about 150,000 attendees.

PlayStation Now, Sony’s just announced video game streaming service, is a bold move in game distribution. Instead of forcing people to buy bulky consoles and wait in line for the next Grand Theft Auto, Sony wants to beam games directly to your TV, smartphone or tablet, just like Netflix. If it works and is priced affordably, the service could expand PlayStation games to a broad new audience and be a death knell for physical retailers like GameStop. But a host of technical and financial issues mean it will be difficult for PlayStation Now to change the status quo anytime soon.

The new service, which launches this summer in the U.S., will allow gamers to stream PS3 games on the just-released PS4, the PS3 itself and new Sony Bravia TVs, with plans to expand the capability to mobile devices. Customers will be able to rent individual titles or pay a subscription fee for access to more games. Eventually the company plans to add PS2, PS1 and even PS4 games to the streaming catalogue, according to Sony’s blog. The announcement of the service sent GameStop’s stock tumbling 11 percent Tuesday, on fears that streaming games will eat into the company’s extremely lucrative used games business.

That’s probably exactly what Sony is trying to do. For years video game companies have been trying to squash the game reselling market. Both Microsoft and Sony long ago set up digital stores where gamers can directly download games, often the same day they have a physical release. On PCs Valve has spent a decade building the successful Steam platform, where users and purchase digital games but can’t resell them. Microsoft had originally planned to limit gamers’ ability to resell purchased games for its Xbox One console, but backed off the policy due to widespread user backlash.

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GameStop has weathered these attacks on its business model fairly well. The company posted small year-over-year increases in both net sales and same-store sales for the first three quarters of 2013, thanks in large part to the runaway success of Grand Theft Auto V. GameStop has also launched its own quickly growing digital store, which generated about $600 million in revenue in 2012, or 7 percent of total sales. But almost half of the company’s gross profit comes from selling pre-owned games and consoles. The increase in digital services from console makers pose an unmistakable long-term threat to the retailer. “GameStop has a great business model right now, but it will most likely face significant structural challenges in the future,” says Liang Feng, an equity analyst at Morningstar. “The question is how far along are we on that timeline.”

Though PlayStation Now seems like a knockout punch to retail sales on paper (digital media services have shuttered Sam Goody, Borders and Blockbuster, among others), Sony has some big challenges to address. The service requires a persistent broadband connection and even a small amount of lag will make competitive multiplayer games virtually unplayable. Beyond the technical concerns, licensing games will be difficult. Turner Broadcasting (a sister company of Time Inc.) tried to launch a retro digital gaming service called GameTap in the mid-2000s, but it floundered with a shallow lineup. Startup OnLive actually streams over 300 games right now, but the company laid off most of its staff in 2012 and has yet to gain widespread adoption. If the huge outlays that companies like Netflix Amazon cough up to acquire media content are any indication, Sony will have to spend many millions to create a deep catalogue of streaming titles.

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Michael Pachter, an analyst for Wedbush Securities, doubts Sony will be able to convince video game companies to experiment with such a radical new revenue model. “It is a huge stretch to believe that Sony would ever get a million subscribers,” he says. “Game publishers historically have only had one opportunity to make money: selling games new. They’re very protective of that model.”

Sony is likely hoping that the convenience PlayStation Now provides—play a game at home, then seamlessly carry your progress with you on your smartphone—will be a strong enough selling point to lure subscribers. And the company will be able to release its own games on the service, seeding it with quality content. It’s likely to be slow going at first, but the foundation PlayStation Now lays will have big implications for the way games are bought—and possibly not resold—in the future.

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1 comments
Animomos
Animomos

I love PlayStation since it's first generation. I wish the game like the aurora world is also available on PS.