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Xbox One uncertainty, earnings drag down GameStop

The game retailer's shares have taken a hit this week, falling nearly 20 percent.

Microsoft unveiled the Xbox One earlier this week.
James Martin/CNET

GameStop is having a pretty rough week.

First Microsoft unveiled the Xbox One but didn't provide much clarity into how used games will work with its new console. Then the video game company reported its fiscal first-quarter profit dropped by a quarter as its revenue fell 6.8 percent.

Neither of those factors is pleasing investors, who had sent shares soaring more than 100 percent over the past 12 months through last Friday. GameStop's shares tumbled 11 percent Friday to $32.10, putting the week's drop at 19 percent.

Particularly worrisome is what GameStop's business will look like if it becomes more difficult to sell used games or if retailers make less money from those sales. Microsoft on Tuesday said its new Xbox One will support used games, but it didn't say much about how that will work. What we do know is that users have to install games from a disc onto the console's hard drive to access the information. Users can then play that game whenever they like without using the disc, but the action also limits how often that disc can be shared. If the install disc is used on another console, there will be a small fee for doing so.

"While Microsoft has clarified that used games will be playable on Xbox One, there are still concerns if the economics will in any way change for [GameStop]," Sterne Agee analyst Arvind Bhatia said in a note to investors. "Management of [GameStop] seemed quite confident on the earnings conference call regarding prospects for used games. That said, we think investors are looking for a clearer indication from Microsoft on this topic."

GameStop declined to comment Friday.

A new report Friday from gaming news site MCV said Microsoft will take a cut on the sale of each used Xbox One game. In the process of selling a used game, original owners would also see the game wiped from their online accounts so they no longer can play it. And to deal in used games, retailers will reportedly have to agree to Microsoft's terms and use Microsoft's online Azure-based pre-owned system.

Retailers can sell the used game at any price they choose but with the understanding that Microsoft and the game's publisher will each share in the proceeds. MCV cited unconfirmed reports from U.K. Web site ConsoleDeals that the retailer's cut of the action could be a little as 10 percent.

While that doesn't mean the outright death of secondhand games or the end of the business for GameStop, it could put a damper on the market. It's unclear how much the second installation fee will cost and how many additional accounts are allowed. It's also unclear if people can easily share games and just how much the retailers will be able to make from the sales.

For GameStop, its most recent quarterly earnings and sales were hurt by a decline in store traffic. Executives attributed that to the fact the current game consoles are about to be replaced, and it said the traffic slide was partially offset by sales of pre-owned video games.

GameStop shares have dropped this week. Google Finance

Chief Financial Officer Robert Lloyd said during Thursday's earnings conference call, according to a transcript from SeekingAlpha, that GameStop expects the pre-owned game market to grow during the new cycle of consoles. New consoles tend to cause more game trades as people upgrade their consoles and games to the latest generation. Also, older-generation console and game sales continue even after a new console has launched, he said.

"In summary, historical trends suggest that pre-owned will benefit significantly from the growth sparked by the new console launches," Lloyd said.

GameStop President Tony Bartel said during the company's earnings call, according to a transcript from Seeking Alpha, that while the console makers will be controlling information about the process for trading and selling used Xbox One games, all three new consoles coming out this year have found some way to address used games.

"So we anticipate that we are going to be able to leverage that like we leverage it on the consoles today to make not only those consoles, but the new games, the new deals, see all these other ancillary products that we sell, more affordable by running the buy-sell-trade model in the future," he said.