Used is a Four Letter Word

It seems like used games have suddenly become the hot-button issue in the gaming spectrum, which is interesting considering that used games have been widely available for going on a decade. The problem is that the used game market has not only redefined the direction of the specialty retailer, but it has attracted the attention of the big box stores, and the success of limited test markets might eventually reshape the landscape of the gaming retail industry as a whole, edging publishers and developers out of a significant cut of the action. This as next-generation systems send development costs skyrocketing put developers in the position spending more than ever just as the biggest retailers are considering keeping more of the profits for themselves.

What this retail conflict means for consumers is the guess of every self-proclaimed professional analyst in the market. The only thing that can be said with any certainty is that should used games continue to eat up larger percentages of the marketplace, developers and publishers will be faced with the potentially difficult issue of trying to either adapt to or subvert the new retail experience. There's no promise that the results will be good for consumers in the long run, though there's also no promise that it won't. The question is what should consumers do now? To buy used or new, that is the question.

The sale of used games is something upon which I have some degree of knowledge. I've spoken at painstaking and largely cathartic length in the past on why retail outlets want you to buy used games, so I will assume you have a basic handle on the situation. Used games mean that retailers pay less for the same product, and don't have to share their usually more significant profits with anyone. Which, as it turns out, is exactly why publishers and developers think it's a pretty bad idea.

On the flip side, the arguments against used games are equally sound, particularly from a developer standpoint. The houses that actually make the games we play usually see only around 20% of the revenue from royalties on their products, and as development costs rise the amount of that revenue that actually becomes profit is increasingly smaller. There's no coincidence that as the next generation of games demand larger resources to move from concept to product, these houses have to resort to being completely bought out by larger publishers. The truth is there's already virtually no room for smaller developers to produce next generation content, and even medium sized houses are often struggling. So, in the face of these mounting problems, how are they supposed to survive a consumer base that is playing their product but paying someone else?

And, standing outside of all this is the consumer that finds themselves in an environment where developers and publishers are financially forced away from taking chances, where there is no room to experiment without the virtual guarantee of market success, and where products must be forced to market quickly to recover revenue lost in large development costs. There's increasingly less time for developers to make it innovative, or even right, a problem that's only going to get worse as the PS2 and Xbox go quietly into that good night. So, consumers are left with a general library of games that are rehashed and increasingly tired from a gameplay standpoint, and increasingly feature incomplete from a technical standpoint.

With educated consumers frustrated at the stagnant quality of games, and uneducated consumers happy to buy whatever has the lowest price-tag, retailers find themselves in a market where even spending $5 less for the same game seems like a perfectly reasonable, if not desirable, idea. Thus leading to fewer revenues for the developers and publishers; thus leading to an industry even less likely to be innovative; thus exacerbating the frustration of consumers. Fear leads to anger, anger leads to hate, and hate leads to guys like Mark Rein coming out angrily bashing the retail industry for stealing food from his mouth. Which, all finally begs the million dollar question: are the sales of used games at least partially to blame for a perceived decline in gaming quality?

The argument is not whether developers are correct in their complaint that retailers are dipping into their supposed cut. Virtually no one is disputing that. But, of course, the retailers would respond that the margins they make on new games are so small as to make business, particularly for the specialty retailers, virtually untenable. And independent retailers can't even get their foot in the door with a distribution model that is entirely geared toward large scale operations, where even if they have the resources to get current titles, they must buy a host of other titles they are never likely to sell. So, the current industry has put retailers into a position where they simply must make money wherever they can.

There is evidence, however, that the problem vexing traditional outlets is opening up new methods and avenues for content delivery, ones that, in the long run, may see more money going to the right people. And, here lies the possible solution to the problem, at least for the gaming industry and consumers. Though the model is largely in its infancy, digital distribution is an enterprise that Valve, and more recently Microsoft's Live Arcade, has shown can be very successful. Even as companies like Electronic Arts eat small developers whole only to regurgitate them later as bland, cookie-cutter games that are woefully overpriced you have games like Geometry Wars and Marble Blast Ultra becoming the killer app for the Microsoft's new 360.

The phenomenon has taken the industry and consumers by surprise; after all, who was talking about Live Arcade and Geometry Wars last November?

I hear a lot of people criticize the 360 as inferior evidenced by the popularity of Live Arcade presuming it to be the sign of a poor launch, but that thinking strikes me as a bit narrow and overly simple. The criticism that these games aren't "next-gen" is entirely wrong. It's just that "next-gen" might have more to do with a new model of business, better systems of distribution, and an expanding online marketplace than it does with texture mapping. There's nothing technically wrong with the 360 retail launch titles like Call of Duty 2, Project Gotham Racing 3, Ridge Racer 6, or Quake 4 per se, but don't mistake them for next-gen titles. They are last-gen titles with a facelift; games that could not afford to do anything daring or particularly noteworthy because the cost effectiveness of the risk was unacceptable.

The truth is that in the retail model of business, games can't afford to be truly next-gen from a gameplay perspective until much later in the system's lifecycle: see games like Guitar Hero, Katamari Damacy, Ico, and Shadow of the Collosus for examples on the aging PS2.

But, the 360 is not likely to develop into that truly next-gen system that plays a significant part in both furthering the game experience while opening up the new model of content delivery. No, Valve remains the closest to the mark on dictating their own fate and recapturing the market that has moved toward used games, a fact evidenced by their expansion of Steam into delivering 3rd party content, and the PC remains the best frontier for digital distribution.

The Valve/Steam model may be the most significant, and in the long run, best threat against the current publisher dominated market. What we may eventually see is larger developers with the resources and capital follow Valve's lead and pull away from publishers by distributing their own works, on their own terms, and cutting themselves a larger slice of the retail pie. These developers would still work with publishers on limited terms to get boxed copies of their game into retailers, after all, regardless of the used threat, developers will always want to have a store front presence in the Best Buys and Wal Marts of the world, but that might eventually be considered a secondary delivery method. Further, as Valve has shown, these larger developers with proper systems in place can act as limited publishers in their own right by giving online distribution access to small developers without the resources to digitally sell their own product. And they can price these independent titles competitively.

What this may ultimately mean is a crash, or at the very least a plateau, for retail outlets and the massive game publishing houses we've come to know and often distrust. As more games are sold online, following the general trend of increasing online sales, with direct download and immediate access at (hopefully) reasonable prices, there will be fewer games actually sitting on store shelves, and both the new and used retail market might actually begin to diminish.

While this doesn't solve the problem of rising development costs, it does mitigate the issue by cutting out the expensive process of distributing games, circumventing the threat of a retail dominated used market, and returns a higher percentage of revenue directly to the developers. It also allows for games like Geometry Wars, where development costs can stay low allowing for professionally produced and distributed budget titles on next-gen platforms. It will ultimately make the gaming experience broader, more convenient, more robust, while funneling dollars back to the developers.

What this is all meant to suggest is simply this. The turmoil created by the used market is an indicator that the industry itself might very well be entering a changing marketplace. The demand and recently exponential success of the used market is evidence that the prices for games have exceeded what people are willing to pay. It is, in essence, a warning shot across the bow of the current publisher based model, and those companies experimenting with online distribution models are banking on a historically growing market and a sense that the times they are a changin'. Microsoft's Live Arcade's immediate and remarkable success has gotten the company's attention, and you should expect to see more games and games of a higher quality begin to make their way to the online service. Nintendo's similar service for the Revolution may prove even more successful.

In the end, the answer to the question of whether to buy new or used is probably immaterial. There is a change in the industry that is already underway, and the question may be completely irrelevant within the next generation's cycle should direct download distribution take off in the manner which it threatens. The reason the question has flared so recently has more to do with an industry being forced to recognize a monumental shift in customer attitudes than anything else, and with luck the end result will be better for both developers and consumers.

- Elysium

Comments

*Cough*
What you can't cough the owners?

If publishers want me to buy new, lower the price. Take a lesson from the DVD industry. Yes, you'll probably have to lower your devlopment costs to do that, though I'd bet higher volumes would take care of a good chunk of that as well. I know I'm much more willing to buy a new game at $30 than at $50. It's not even a question of what I can afford, it's a question of what I'm willing to spend.

I would think the Revolution would have lower development costs than the other new consoles. Hopefully that will further encourage chance-taking on Nintendo platforms. Increasingly, I think Nintendo's risk taking is looking pretty smart.

What you can't cough the owners?

Think of this as my response to that thread.

Hopefully that will further encourage chance-taking on Nintendo platforms.

It always has, so there's no reason to think the same won't hold true for the Revolution. I mean, the controller screams that Nintendo continues to chart their own course.

Elysium wrote:
What you can't cough the owners?

Think of this as my response to that thread.

What, won't post with the unwashed masses, eh?

Distribution methods like Steam and Totalgaming.net seem like the way for developers to go, to get out of this situation. Of course, I don't see things going that way console games just yet. Used games won't vanish, but the developers might find a way to get a larger cut, if they are smart about it, and can get more controller from the big name publishers. I hope so, anyway.

The article leaves out this possiobity: suppose I bought something over Steam (say, HL2) and I want to re-sell that. I just played enough of it, and want to sell it to someone who hasn't. At a discount. With the greedy publishers and indifferent retailers out of the picture, whom then will you have to blame in that case if I am thus stealing a piece of bread out of Valve's mouth?

I wonder how long before we see news that EA bought out Steam for some insane amount of $$.

I think the whole used game thing is just going to lead to more locked down services, not some utopia where game prices get lower and we have more choices. Look at your perfect example of the 360 Arcade. I bough Geometry Wars on my account, I'm tired of it. Can I sell it? Nope, it's tied into me. By using a model that pretty much locks down the games, you completely eliminate the used game market. I think that's what we will see more of as internet connections get faster.

This was a careful, well-reasoned article, Elysium. In spite of how ornery the games industry sometimes makes me, I share in your hope (dare we call it an expectation?) that things will improve in the way that you have described. And you make a convincing case that the process has already begun.

(Edit: Although, LeapingGnome does give me pause.)

Elysium wrote:

Which, all finally begs the million dollar question...

My very first post to GWJ was to correct you for this error. For shame!

The article leaves out this possiobity: suppose I bought something over Steam (say, HL2) and I want to re-sell that [...] With the greedy publishers and indifferent retailers out of the picture, whom then will you have to blame in that case if I am thus stealing a piece of bread out of Valve's mouth?

It doesn't address this question because Valve has already answered it. Simply, you won't be able to, at least not easily. Make no mistake, most developers (at least their accountants) would be fine with eliminating used gaming altogether. I'm not actually passing judgment either way, _but_ if the by circumventing the used market and going to online distribution developers could create a broader range of games at more reasonable prices, then I'm willing to sacrifice the used model. However, if companies simply maintain current quality and price standards, and simply change the venue, then, as always, consumers will find an alternative.

My very first post to GWJ was to correct you for this error. For shame!

It's a dirty shameful habit that I struggle to break.

I wonder how long before we see news that EA bought out Steam for some insane amount of $$.

And if they do, so what? It'll signal to other developers that they can create this distribution method, make a larger percentage off their big titles while running it, and then sell out later for exorbitant amounts of money. If EA does any such thing, they might very well accelerate the online distribution model.

Elysium wrote:

However, if companies simply maintain current quality and price standards, and simply change the venue, then, as always, consumers will find an alternative.

Yeah, I guess that'd be my take on things, too. After all, if we're in the midst of a transition of this kind even now, there's no reason why it couldn't happen again, should the need arise.

I'm suprised we aren't seeing games coming with some form of CoA like you get with PC Software (not games, stuff like Office, Windows Etc...) that tie it to the console or some such. While obviously not the best thing for the consumer, I could definitely see publishers looking into some method of doing that.

Sinatar wrote:

I'm suprised we aren't seeing games coming with some form of CoA like you get with PC Software (not games, stuff like Office, Windows Etc...) that tie it to the console or some such. While obviously not the best thing for the consumer, I could definitely see publishers looking into some method of doing that.

Actually you can sell your copy of Office or Windows so long as you transfer ALL copies of the software and stop using it.

Not the ones labelled OEM Paint. You know, the ones that pretty much everyone has that they bought with their computers for a discounted price.

GREAT article. Some of the things I've been thinking of intuitively and economically, but never would have put all together in this way. You have heard our questions, our conflicting opinions, and moved your prodigious intellect into place upon our wills so that there can be no disagreement. Huzzah!

(if I kiss ass enough, do I get a free tshirt or something?)

Great article. I'm surprised you didn't mention in passing the rumors that the PS3 will have some tech that will tie your disc to your console, thus preventing it from being resold. What kind of consumer fall out do you think that would generate? How would it factor in people's decision between a 360 and PS3?

I used to love buying used games because they were guarenteed for life. Then for three months. Then for 14 days.

First: Lowering prices of new games would destroy the used market.

Second: I think you will see more and more subscription based games like MMORPGs and Xbox's network.

Ovid wrote:

First: Lowering prices of new games would destroy the used market.

How so? It'd just make used games cheaper as well.

LeapingGnome wrote:

I think the whole used game thing is just going to lead to more locked down services, not some utopia where game prices get lower and we have more choices. Look at your perfect example of the 360 Arcade. I bough Geometry Wars on my account, I'm tired of it. Can I sell it? Nope, it's tied into me. By using a model that pretty much locks down the games, you completely eliminate the used game market. I think that's what we will see more of as internet connections get faster.

Yeah, except it costs a whole six dollars. What do you want back, a buck? With reduced costs on our end, the consumer, games would hopefully be cheap enough that it's not really worth bothering.

Look at the used book industry. A paperback costs around 7-8 dollars now. If you take it to a used book store, you basically get nothing back for it. It's practically donating the book to the store, something that a place like Half-Price even mentions.

And what about mp3 purchases? You can't just burn these onto a cd (well, not legally) and sell them to people, and I don't see the angry villagers with their pitchforks and chairlegs over that. When you purchase something that's been digitally distributed, it's just something you've accepted.

You get so little back already on a game that costs $50, how much would you expect back from a game that cost half that much? And if you sell your hardware, yes you could sell the game. I'm pretty sure if my friend wants to play Geometry Wars on my console, he can log on with his Live account and do so, which means if I pawned my 360 off on him, he'd get the game.

booty wrote:

Great article. I'm surprised you didn't mention in passing the rumors that the PS3 will have some tech that will tie your disc to your console, thus preventing it from being resold. What kind of consumer fall out do you think that would generate? How would it factor in people's decision between a 360 and PS3?

That's because they're just rumors. Something I already mentioned. I think it's a moot point, because it's a move consumers wouldn't like, and it would hurt their business in a market they can't afford to not be competitive in. Someone out there holds the patents to Divx and EZ-D, too. Game companies didn't exactly snatch up those concepts for their platforms.

How so? It'd just make used games cheaper as well.

When games are fifty bucks you have an incentive to find it cheaper, saving 50% is $25. But if the game only costs $20 to begin with the difference falls to $10. First, it makes selling used games less economical for the retailer. Second, since there is a preference for new over used, the less the price difference between the two the less the incentive to go for used. This has happened a little bit in the CD market. (but with both used CD's and MP3 files being the competition). The music industry has had to lower the price of a CD to make it compete with the copiers. If I can come up with other examples from other products I will - can anyone else think of one.

Ovid wrote:
How so? It'd just make used games cheaper as well.

When games are fifty bucks you have an incentive to find it cheaper, saving 50% is $25. But if the game only costs $20 to begin with the difference falls to $10. First, it makes selling used games less economical for the retailer. Second, since there is a preference for new over used, the less the price difference between the two the less the incentive to go for used. This has happened a little bit in the CD market. (but with both used CD's and MP3 files being the competition). The music industry has had to lower the price of a CD to make it compete with the copiers. If I can come up with other examples from other products I will - can anyone else think of one.

Yeah, but the used cd market has hardly been destroyed. Even the mall carries used cd's now. I think people used the words "destroy" and "change" interchangeably when they really shouldn't. Just because something is different doesn't mean it's been obliterated, otherwise every market in existence would be wrought with phoenix like descriptions of their rise and fall, and that's too dramatic even for most sensationalist newspapers.

The best thing about Steam is how it does nothing but advance the interests of Valve, while making the end user experience of installing and playing the game complete Hell.

If Steam is the bright future of modern online distribution, I'll take my EA Games and my PS2/Xbox/whatever and go home and enjoy myself, thanks.

At the current rate I can certainly see PC gaming moving to more of a STEAM type distribution model if anything simply to lower the costs of business and remove the need for big publishers for PC oriented developers. It costs money to produce a boxed product and put it on store shelves.. it costs much less to distribute via an online model (and even less to make that model based on torrent tech) Sure you will sacrifice some box sales but in the end if the profits go directly to a developer they will probably still see more $ per unit sold than they did selling 40% more units via a publisher and box sales.

The trick will always be of course how does a developer ever get into a good enough position to MOVE to a said development structure.. Well I guess thats where Valve steps in...and then probably Blizzard (once they buy out Vivendi and go 100% private)

unntrlaffinity wrote:

I think people used the word "destroy" and "change" interchangeably when they really shouldn't.

You are right; lesson learned. I would like to change "destroy" to "diminish".

psu_13 wrote:

The best thing about Steam is how it does nothing but advance the interests of Valve, while making the end user experience of installing and playing the game complete Hell.

If Steam is the bright future of modern online distribution, I'll take my EA Games and my PS2/Xbox/whatever and go home and enjoy myself, thanks.

I guess its not possible to even mention STEAM anywhere in a forum without at least one of these types of posts.

f Steam is the bright future of modern online distribution, I'll take my EA Games and my PS2/Xbox/whatever and go home and enjoy myself, thanks.

Steam was an experiment, and the first step. Xbox Live's Arcade is a better indication of how that kind of model can be done better to the same end.

--

Ovid, I understand why you make the assumptions you do, but the market already proves you wrong. I can tell you from experience that if the CD is in the same condition (and sometimes even not then) people are currently buying used copies of, for example, $19.99 Sony Greatest Hits games even if it's only a savings of $5. In fact, people are more likely to buy used copies for the cheaper games, though part of that has to do with the fact that cheaper games have usually been out for a while, and even the new copies feel a little 'old'.

Whether that would hold up if brand new launch games were significantly cheaper, I can't say for certain, but I suspect as long as customers can get it for less (regardless of price), they will.

EDIT: Holy crap I either post slow or you guys are on a roll. This entire post is obsolete now.

Ovid wrote:

First, it makes selling used games less economical for the retailer.

I thought the reason EBGames and Gamestop started selling used games was because they were forced into situations where they were making very little on new games. What difference does the price of a new game make to EB if they're only making (hypothetical, since I don't know for sure) $1 a game?

What difference does the price of a new game make to EB if they're only making (hypothetical, since I don't know for sure) $1 a game?

Exactly right. Well, actually that's not quite true either. It's, in fact, often better for a retailer to sell a used copy of an older game, because the markups tend to be higher. People hesitate to part with a new copy of, say, CoD2 for less than about 70% of what they paid to buy it. However, people will sell copies of something that's been on the market for a while (say, God of War) for as little as $7-$10 (those are current trade-in values), but the game gets resold for as much as $35. That's a $25+ markup on an older game, where the markup on a new title may be as little as $10-15.

Great article, and an interesting perspective, Elysium. I hadn't really thought of it in quite this way before.

Also, looks like you got Slashdotted.