PS3 Informer

Are Used Game Trade-In Programs Hurting the Industry?

It seems like everyone and their grandma are jumping into the used games business. Who doesn't want to be swimming in money? GameStop reported sales of $7.1 billion in fiscal 2007, $1.6 billion of which came from used games alone and accounted for 23% of the total annual sales. Although their 2008 earnings hasn't been posted, GameStop announced sales totaling $2.8 billion during the 2008 holiday period, with used games making up 20% of this figure at $543 million.

GameStop, the world's largest games retailer has proven itself recession proof. What better role model to follow than GameStop? Buy a costumer's used game for $20-30, turn around and sell it to another customer for $55. The numbers don't lie. Toys "R" Us seems to agree and is making a bid for the used games sector by running a few test markets. But the real whopper is Amazon and the beta phase launch of their video games trade-in program. When you have a 800-pound gorilla moving in on the action, you know you've got a winner. Up until March 19th, Amazon is offering an additional 10% off a future single game or accessory purchase with every trade-in.

The ramifications of Amazon's entry into the used games market is huge. Amazon can potentially bring used game trade-ins to the mainstream mass market. Because of its easy to use program, Amazon may soon get grandma trading-in games. Their program will surely attract a lot of attention, especially since video game trade-in credit can now be spent to buy virtually anything --- being that Amazon sells virtually everything.

Another strength in Amazon's program is the visibility of their prices. By simply checking the website, users know exactly how much they'll be paid and what games qualify. This is an incredible luxury for the guy who's had to bring in a box full of games, only to have a handful accepted at the local GameStop. Amazon's wide reach may spell big profits in 2009 for the internet giant. But Amazon's success will probably doom many smaller traditional retailers and mom-and-pop operations and even give GameStop a run for their money (GameStop stock has dropped ~18% since the start of Amazon's trade-in program).

Game developers must be trembling in their boots to see trade-in programs like Amazon's become successful. Throughout the years, publishers have bemoaned how the used games market has bitten a huge chunk into their profit margins. Who can blame them? It's the same for even big selling titles. Halo audio director Marty O'Donnell told GamesIndustry.biz that "complaining about sales when you have a multi-million seller is somewhat difficult to justify, but it seems to me that the folks who create and publish a game shouldn't stop receiving income from further sales."

With the cost of games running so high and the consumer being bombarded with a myriad of special editions, collector's editions, limited editions, and *gasp* legendary editions, some price tags for new games can soar beyond a $100. So who's looking out for the little guy? GameStop? Okay, most games average $60 nowadays, but when deciding between full retail and a $5 or greater savings for a used title, the answer becomes oh so clear for the average consumer with an ever-shrinking budget.

Unfortunately, more used game purchases mean less new game purchases. Profit from a used game sale is not re-distributed to developers or publishers, whose income comes from royalties during the initial sales of games. It's hard to refute the realization that when you buy used from GameStop, not a dime goes to the original guys who made it. Instead of supporting the creative force behind your favorite titles and investing in their company to make bigger and better games, you've become another cog in the giant wheel that allows GameStop to spin the same used copy over and over, charging faithful trade-in customers something akin to a $30 rental fee since you only get back around 40% or less of your original purchase price.

The buy back value of used games continues to drop every day, so the longer you hold onto your copy before reselling means less money goes back into your pocket. Last gen titles from the PS2 and Xbox era aren't even accepted as trade-ins anymore. This kind of thinking lingers in the back of your mind and it may impact your enjoyment of the game. Gamers may feel rushed to trade-in a game if it doesn't quite click with them during the initial hours of trying it out. The game may turn out to be decent, but some people don't want to risk the time and money to find out. Better to get out before it's too late.

Electronic Arts expressed concerns on how the used games trade is becoming "a very critical situation." How critical can things get? To put it into perspective, used game trade-in programs may indirectly affect publishers and developers, but they directly hurt normal retailers. The year started out with the closing of Circuit City. There's no denying running a traditional retail business is tricky. And retail shelf space is expensive real estate. Most games make the bulk of their sales during the initial week or month of their release. With so much competition for shelf space, games have a limited window before they are relegated to bargain bins or go unsold.

The trade-in market is an ever-green field where prices go lower the longer you wait. GameStop buys their used games, at the value they set and adjust on a weekly basis, from customers trading-in prior purchases. The cost of stocking used games become much lower than stocking new ones. Retail stores pay publishers a set price upfront for their new copies. Retailers get a return on their investment after the games are sold. Until then, those copies are burning up money from the viewpoint of initial investment, inventory management, product diversity management, and storage costs.

The profit margin on selling new software is slim, even moreso for hardware like the PS3, which is still sold at loss by Sony. Selling a new game for $60 that cost $50 to stock makes $10. Selling a used game for $55 that cost $30 to stock makes $25. It's obvious which is the better investment.

If the following year shows an increase in used game sales, retailers may find selling new games too risky and are sure to be more conservative on their next orders, putting the onus on publishers like Activision to pump out sure-hits. This usually translates to adding more sequels to bonafide winning franchises. Do used game trade-in programs hurt the industry? Yes, creatively and financially. Traditional retail outlets too.

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