GameStop Thinks Rental Subscriptions Will Pay Off

A couple plays a video game.

GameStop (NYSE: GME) recently introduced a subscription-based video game rental service called Power Pass. The service lets gamers borrow as many pre-owned physical games as they want from its stores, one at a time, for six months for a $60 fee. As an added bonus, customers can keep one free game after the subscription period ends. Sign-ups will start in early November.

PowerPass sounds like a good deal for gamers, who regularly pay $60 for a single game. It could also boost traffic at GameStop's stores while providing the retailer with a new stream of revenue. But will it move the needle for GameStop, which shed more than 25% of its market value over the past year? Or will it fail to overtake similar digital subscription offerings from leading video game publishers like Electronic Arts (NASDAQ: EA) and Sony (NYSE: SNE) ?

Understanding GameStop's business

To understand why GameStop needs PowerPass, we should first understand GameStop's core business of selling video games and gaming hardware. Over the past few years, its software business was disrupted by the rise of digital downloads and declining mall traffic. Those secular changes caused some investors to label GameStop the "next Blockbuster," a former brick-and-mortar champ brought to its knees by technological shifts.

However, GameStop has been aggressively diversifying its business to avoid Blockbuster's fate. It started offering its own digital downloads, expanded into self-published games , and started selling consumer electronics (like smartphones), gaming accessories, and collectibles at its stores.

Last quarter, sales of GameStop's pre-owned games and new software -- which are the most heavily exposed to digital disruption -- generated just 52% of its revenues. Pre-owned and new software sales respectively fell 7.5% and 3.4% annually, supporting the notion that digital games are killing the company's core businesses.

However, the remaining 48% of GameStop's revenues came from sales of gaming hardware, accessories, digital games, consumer electronics, and collectibles. Sales across all those units rose annually, offsetting its software declines and lifting GameStop's total revenues 3.4% annually to $1.69 billion for the quarter. Its total comparable store sales also rose 1.9%, as robust overseas growth offset a slight decline in the US.

Why GameStop needs PowerPass

To stabilize its growth, GameStop needs to monetize all the unsold pre-owned games that are sitting on its store shelves. It also needs to bring customers back to its stores, where they might buy other consumer electronics products or collectibles. PowerPass is an elegant solution to both problems. GameStop doesn't need to invest much capital into the program, and it could generate some fresh revenue growth and store traffic.

However, there's already plenty of competition in this space. Electronic Arts offers Origin Access for PC gamers and EA Access for Xbox One owners, which both offer unlimited access to a library of games for $30 a year. The games are slightly older and limited to EA-published titles, but both platforms allow gamers to temporarily own multiple games simultaneously, instead of renting out a single game at a time.

Sony offers PlayStation Now, a $100 per year service that lets gamers stream PS3 and PS4 games on demand. That platform, which now hosts over 500 games, is cheaper, faster, and more convenient than PowerPass. Discount bundle site Humble Bundle also offers a subscription-based service called Humble Monthly, which delivers "over $100" worth of games to gamers for $12 a month.

The bottom line

I get what GameStop's trying to do with PowerPass, but it just doesn't seem like a game changer in a market that is already served by platforms like EA Access and PS Now.

There's certainly a niche group of consumers who might like PowerPass, but those customers are more likely to be GameStop's regular customers who regularly browse its pre-owned games than customer who regularly use digital downloads. Nonetheless, PowerPass is still a low-cost initiative that fits the company's current strategy of diversifying away from physical software sales -- so it's a step in the right direction.

10 stocks we like better than GameStop

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and GameStop wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of October 9, 2017

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.