Despite many troubles, GameStop (NYSE: GME ) might yet survive the death of
physical media. The video game retailer reported its second-quarter earnings
Thursday, and not all the news was good. Total sales came to $1.74 billion, a
fall of more than 3% for the period. Profits dropped down to just below $31
million from $40 million during the same period last year. As always, it was
used video game products that accounted for the lions share of GameStops gross
profits. Used video games and gaming machines sales totaled more than $292,
generating 46% of the companys profits. Chief executive Paul Reins said,
GameStops resilient retail model enabled us to achieve our earnings plan despite
a challenging period for the industry. Challenging period indeed. The second
quarter was rough for most players in the traditional video game field. Nintendo
s (PINK: NTDOY ) Nintendo 3DS crashed after a successful March release, Sony
(NYSE: SNE ) saw PlayStation 3 sales sink , and game publishers like Take-Two
(NASDAQ: TTWO ) saw earnings fall even with successful releases like L.A. Noire
, a title GameStop singled out as one of its bestsellers for the period. These
companies are GameStops business, and their poor sales mean trouble for
GameStops future. There is a major silver lining in the companys earnings
report, however GameStop is growing its digital games business. One reason
those game device makers and game publishers are hurting is the growing
prominence of low-cost mobile and social games accessible on smartphones and web
browsers. GameStop has been pushing hard to evolve its business beyond its brick
and mortar stores to accommodate the new digital market. GameStop has opened new
stores that push digital content alongside retail products and has made a number
of high-profile acquisitions to give itself a foothold in the space, including
the independent games website Kongregate. The effort is paying off. Digital
sales grew 69% over the second quarter. The companys other reporting category,
which includes digital products, racked up sales of $98 million and accounted
for nearly 42% of the companys profits. Will digital content see GameStop return
to the massive profits and huge share prices it enjoyed back in 2008? Probably
not, but the company has at least proven that it wont die alongside the
disk-based video game. The chain isnt slowing down, either. A Friday report at
Games Industry.biz said GameStop currently is testing a new cloud-based gaming
service that will stream PC, PlayStation 3 and Microsoft (NASDAQ: MSFT ) Xbox
360 games to audiences without them having to purchase the games themselves.
Think of it as Netflix (NASDAQ: NFLX ) but for video games. This is similar to
existing services like OnLive that have proven viable if not yet profitable.
Spawn Labs, a streaming technology company GameStop acquired in April, is
developing the service. Although it hasnt detailed pricing yet, GameStop expects
to open the service for business during the first half of 2012. This is how
GameStop will survive the death of physical media by transforming from a
retailer into a service company. Will it survive as a major publicly traded
company? Check back in 2015 . As of this writing, Anthony John Agnello did not
own a position in any of the stocks named here. Follow him on Twitter at
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