Blue Light Special: How GameStop’s Used Game Sales Affect The Industry

Image via The Guardian

For most gamers, used games aren’t evil. Buying used means access to titles you might not be able to afford new. They also validate the day-one purchase of a new title, with the promise that you can at least get some of your money back on your full-price game investment.

For publishers and developers, however, the secondary market represents a threat to profitability—even viability. Every used game sold (they say) means missed revenue for the people who created the software. These sales cannibalize profits on new titles, and make the prospect of launching a successful AAA title that much smaller.

GameStop, the Grapevine, TX retailer that defined the used game market, stands at the center of the conflict, reaping the rewards of a controversy that it largely created. Examining the company’s bottom line shows just how big the rewards are—and how the firm might even be helping the industry.

Buy/Sell/Profit

The mechanics of the secondary market are simple: A gamer takes her old titles to GameStop and trades them in, with the value for each game determined by title inventory and availability. The gamer can then spend her credit on anything in the store, from new titles, hardware and accessories to the store’s inventory of used hardware and software.

Multiply that by thousands upon thousands of transactions and you have a healthy business model. According to the company’s earnings call on March 22, used software and hardware sales accounted for just over 27% of total sales in 2011, but a whopping 47% of all profit.

Break that out into actual numbers: At the end of its fiscal year 2011, GameStop sold $5.6 billion in new games and hardware, compared to $2.6 billion in used inventory. Note the italics—this is an enormous business. For reference, Electronic Arts, the largest game publisher, sold only $2 billion in games in its previous 12 months. But despite the overwhelming topline impact of the new games—nearly 2:1 over used games—GameStop made only $952 million in profit off new products, versus $1.2 billion in gross profit from used games and accessories.


Source: GameStop

The numbers tell us two things: First, sales of new games—at least through specialty retail stores like GameStop—are pretty impressive. But a closer look at the data also suggests that used game sales may not have as big an impact as many in the industry would have you believe.

Defending The Devil

GameStop’s model has advantages for both consumers and publishers. First-in-line consumers know they can get resale value out of the initial $60 purchase, which GameStop executives argue helps drive new software sales in the first place. Without a built-in out for that new game purchase, there’s a greater chance that alpha consumers would wait well past the first day of release, hoping for a sale.

The more far-reaching advantage is tied to trade-in credit. GameStop said in its March 22 earnings call that it generated $2.6 billion in sales for used games and accessories. Wedbush Securities analyst Michael Pachter estimates the company also paid out around $1 billion in in-store credit for trade-ins. "That billion dollars is used as a currency to buy new games," Pachter said. For perspective, the NPD group estimates total sales in the industry at roughly $16.6 billion, which means GameStop’s $1 billion of trade-in currency equals roughly 6% of total sales. "Most people who trade in used games don’t turn around and buy used games," said Pachter. "They trade in used games so they can buy new games."

It’s not a generalization: GameStop's own data bears this out. Speaking to the Dallas Morning News in August 2009, GameStop CEO Paul Raines provided statistics in defense of the used game market, stating that 70% of trade credits from used games immediately go into sales of new software. On top of that, only 4% of used games sold by the retailer have been released in the past 60 days, thereby having the chance to cannibalize new software sales.

One could argue that the availability of cheaper software actually increases the user base long term. Consumers who normally wouldn’t purchase a game at the full value now have a chance to join a game’s established player base. If you can’t get on the $60-a-pop Mass Effect train for 3 games in a row, maybe you can go the cheap route for the first two, get hooked, and then splurge for the collector’s edition for the finale. Forget for a moment that the person buying said used game isn’t giving money upfront to the publisher—DLC and potential subscription-based content can mean that secondary consumers are possibly extending a franchise lifespan.

In pure numbers, 4% of used game sales cannibalize new game sales and 6% of new game sales are fueled by game trade-ins. "On balance," said Pachter, "it’s pretty friggin’ neutral."

Potential Solutions

Neutral or not, publishers would rather have the dollar today, than the loyal customer tomorrow, so they are taking steps to make new software purchases more attractive. Electronic Arts has spent enormous effort on this, although not everyone likes the solutions it’s come up with.

For its newest titles—SSX and Mass Effect 3—EA employed an “Online Pass” system that locks out content until a code is provided. New purchases have an insert in the case with the required code, but theoretically those trading in SSX at GameStop would have already used the code. In most cases, the Online Pass is tied to multiplayer content, but a few titles have withheld single-player content for those without a code. New codes can be purchased as DLC through both Xbox Live and PSN. This gives EA a potential revenue stream straight from the pocket of the gamer who just grabbed SSX off the used rack, direct from consumer to EA, with no middle man.

Critics of the online pass system say it punishes consumers who opt for the cost savings in used games. They view the additional fee required for all content as a slap in the face, or as potentially limiting the value of a trade-in. Whether or not that’s true is still up in the air—there’s precious little data to show if a successful title like Mass Effect 3 was hurt or helped by online passes.

There are, of course, other solutions. Pachter suggested GameStop hold off on accepting newly-released titles for trade-ins.

"The only part publishers don’t like is used games sold approximate in time to the release of new games," he said. "I think before a publisher would bring pressure to bear on Microsoft or Sony to block used games, they’d probably be smarter to say to GameStop, 'Hey, cut us a break. Don’t accept trade-ins until a game’s been out for three months.'" Pachter envisions GameStop imposing a credit limit for newer titles. "The way to regulate that is to just say, 'We will never pay more than $20 for a trade-in.' It’ll piss you off to sell your $60 game for only $20."

The likelihood that GameStop would bite the hand that feeds it, however, seems slim. Limiting payouts on trade-ins would diminish the amount of "currency" available for new purchases, and no company likes to leave money on the table.

What about locking out used games right in the hardware? Rumors this spring have circulated about a successor to the PlayStation 3, dubbed "Orbis." (Hey, Vita turned out to be real, so who knows.) Under the list of imaginary or leaked specs, news centered on a supposed plan from Sony to “block” used games from operating on the console. "Orbis is apparently locking titles to PSN accounts so as to lock down on the used game market," wrote Ross Miller at The Verge.

Because they're only rumors, take them with a grain of salt. It’s not in Microsoft's or Sony’s best interest to fight against the secondary market. "Each of them sells way less than 10% of the software on their own consoles," said Pachter. In fact, in Microsoft’s case, Pachter speculates that only one percent of revenue for the Xbox division comes from publishing games that could be sold as used. "Why would they ever risk alienating consumers over one percent?"

What’s more likely is that both Microsoft and Sony will push deeper into digital distribution. Sony’s Vita is the model: AAA titles are released both in digital and physical formats, giving consumers a choice while leaving existing distribution channels with retailers open. It’s still too early to know how well that’s working, but it’s safe to say Microsoft and Sony will continue the push when the next console cycle begins.

Who Wins?

No matter what, used games aren’t going away anytime soon. Gamers will continue to trade in old titles, while publishers will continue to develop more reasons to buy new. You’ll think of GameStop as the place next to the Orange Julius in the mall. EA will think of them as the big brother with the baseball bat and a bad attitude.

And either way, GameStop wins.

Comments

Nathaniel wrote:

My first reaction: all the arguments in the discussion are largely hand-waving. Let me start with a supposition that I think is fairly realistic:

A changed business model (ie. eliminating used games) would not significantly change the amount of money that gamers would spend on games. To put it another way: GameStop and the game companies are advertising and setting price points for optimal overal sales. No one is letting a buck slip by. It might affect WHICH games are purchased, and WHEN, but basically we're all spending all of our allowance on games.

Then, the question is, where is our money going?
1. Game development costs
2. Distribution costs
3. Game company Profits
4. GameStop expenses
5. GameStop profits.

Which of these things benefits us? Items 2, 3 and 5 give us no benefit - they have to exist, but they don't really improve our lives. Item 2 might even be a detractor: digital download is in some ways better than a physical disk. (I hate changing disks.)

Item 1 is clearly a place we want money to go: more money for development means more and better games.

Item 4 is debatable. Having a local game-house is convenient, and it's good to have a knowledgeable human around when you have hardware problems or need to return a defective item. It forms some sort of community, and gives some local employment. But do I want to pay for it?

I think most of us realize intuitively that this is how it works, and so we are largely ambivalent to the argument. To a large extent, this is a turf war between two corporate groups who each want a larger slice of the profit pie. Each is trying to co-opt gamers to support their cause, but neither makes a strong case. I'm neither convinced GameStop keeps overall accessibilty better, nor am I convinced that if GameStop dissolved, the extra resources would go towards doing anything I wanted.

I completely agree with the first paragraph. The bottom line is people have X dollars they're willing to spend on games. Take away used games and they'll probably just spend them differently. Wait until the games go down in price instead of day one purchases or focus on downloadable games, for example.

I disagree that profits aren't good for the consumer. Without profits the publishers wouldn't want to pay the development costs. If they win, we win. There's definitely a diminishing return there though, but it's not something that should be discounted entirely.

Nathaniel wrote:

My first reaction: all the arguments in the discussion are largely hand-waving. Let me start with a supposition that I think is fairly realistic:

A changed business model (ie. eliminating used games) would not significantly change the amount of money that gamers would spend on games. To put it another way: GameStop and the game companies are advertising and setting price points for optimal overal sales. No one is letting a buck slip by. It might affect WHICH games are purchased, and WHEN, but basically we're all spending all of our allowance on games.

I think it would be more realistic to suppose that if the used game market were 100% eliminated, that of the $2.6 billion dollars in used gamestop game sales, maybe a billion would be converted to new game sales. A billion in additional new game sales would be a big deal to a lot of companies which are currently losing money, laying folks off, and cutting development budgets (which we care about).

wordsmythe wrote:
Nathaniel wrote:

My first reaction: all the arguments in the discussion are largely hand-waving.

Except in the article itself. Cory should be commended for putting real numbers to this debate.

It's even more commendable given that Cory still counts on his fingers. Toes, too, if it's a real hard problem. Gold star, kid!

In all seriousness: let me echo others that it is incredibly refreshing to see a review of the used game issue that makes such good use of data.

I'm curious about one thing, though. The GameStop CEO stated that 70% of trade credits immediately go into sales of new software. I wonder what percentage of those trade credits comes from recently-released games. Obviously, very few people (4% of used sales) are buying those $55 month-old games, but GameStop must be giving customers at least decent trade-in value for them. If the percentage is high, and I suspect it is, the Pachter's suggestion that the publishers ask GameStop to implement limits on trade-ins of recently-released games holds even less water.

Obviously, very few people (4% of used sales) are buying those $55 month-old games, but GameStop must be giving customers at least decent trade-in value for them.

GameStop typically advertises a guaranteed $30 trade-in value for brand new games if those games are hot commodities. So something like Skyrim or Mass Effect 3 would net you at least $30 trade-in value within a few weeks of release, but that doesn't hold true across the board for all games that are still selling for full retail price.

Like you, I'd love to see the average age of games traded in for store credit.

Take a look at Steam's top sellers list today. Batman Arkham City is $15 and the #1 seller.

On Amazon, Arkham City for the Xbox 360 is $48, or $29 used.

Maybe a world without used game sales is better for consumers and publishers?

Arkham City is also currently on sale on Steam for 50% off, so the comparison isn't entirely fair.

MrShoop wrote:

Maybe a world without used game sales is better for consumers and publishers?

Maybe it's not all that valuable to compare prices of a digitally-distributed release with a retail release as though they were identical products with identical production costs?

Sure, the software contained therein is mostly the same, but buying a physical copy of that game carries some value in itself, insofar as it affords the consumers more opportunities in its usage. (e.g. loaning/giving to a friend, easy portability to play on other console systems)

If that value is unimportant to you personally, as a consumer, that's perfectly fine...but ignoring that value in any kind of comparative analysis will distort your conclusions dramatically.

ClockworkHouse wrote:
Obviously, very few people (4% of used sales) are buying those $55 month-old games, but GameStop must be giving customers at least decent trade-in value for them.

GameStop typically advertises a guaranteed $30 trade-in value for brand new games if those games are hot commodities. So something like Skyrim or Mass Effect 3 would net you at least $30 trade-in value within a few weeks of release, but that doesn't hold true across the board for all games that are still selling for full retail price.

Like you, I'd love to see the average age of games traded in for store credit.

In addition, they often offer a percentage boost of trade-in credit towards new games, or deals where you trade in 3 or more games and you get 25% extra credit.

MrShoop wrote:

Take a look at Steam's top sellers list today. Batman Arkham City is $15 and the #1 seller.

On Amazon, Arkham City for the Xbox 360 is $48, or $29 used.

Maybe a world without used game sales is better for consumers and publishers?

ClockworkHouse wrote:

Arkham City is also currently on sale on Steam for 50% off, so the comparison isn't entirely fair.

He does point out the price.

And Steam sales were mentioned on the last page too. And clearly there is benefit to the sales on Steam, since the publishers keep agreeing to them. Apparently cutting prices 50-75% can increase sales numbers so much that it becomes more profitable. Especially when you're talking digital distribution, where all the printing and shipping costs are eliminated.

As the consoles start making sure everything is released for download, then maybe they can start seeing some more benefit from copying Steam's model of big discounts pushing huge numbers of sales, and cutting out the middleman Gamestop. If they really want to stop Gamestop, that's the idea way to do it. Go digital, go cheap, and cut them out of the profits.

OzymandiasAV wrote:
MrShoop wrote:

Maybe a world without used game sales is better for consumers and publishers?

Maybe it's not all that valuable to compare prices of a digitally-distributed release with a retail release as though they were identical products with identical production costs?

Sure, the software contained therein is mostly the same, but buying a physical copy of that game carries some value in itself, insofar as it affords the consumers more opportunities in its usage. (e.g. loaning/giving to a friend, easy portability to play on other console systems)

Also, you can sell it back to GameStop for, I'd guess, $5-10.

Demiurge wrote:
Jonman wrote:

Maybe I'm living in the bubble a little bit, but when I look down my friends list and around at GWJ, I see a lot of folks playing games that are don't have that new car smell anymore. We talk a lot about the $60 price point, but we don't talk about that same game 6 months down the line at the $30 price point, and that's honestly where most of my game purchases happen. I'll pick up a handful of games on day-one over the course of a year, and the rest are discount purchases, games bought new at around that magic $30 price point, usually during a sale of some kind.

I barely buy used anymore, because I can buy "cheap" new games just fine.

Do you play a lot of multiplayer titles? That's certainly a factor in the industry's push for first-week sales.

You're spot on there. I don't tend to play a lot of MP games, but when one comes out that the MP is a genuine draw for me, that's definitely part of the justification for why I'd opt to pick it up at $60 instead of $30.

But looking critically back at the games I've bought new, that's rarely the driver. Mass Effect and Skyrim are the last two games I paid full price for, and the draw for both of them was the SP.

In fact, it's often something that I consider, but rarely act on. I'd like to play the new SSX, and I'm aware that by the time I'll get to it, the community will most likely have moved on. I'm OK with that sacrifice, and it's actually more a reflection that I've got other irons in my gaming fire right now than an objective assessment of the worth of SSX or the draw of it's MP.

OzymandiasAV wrote:
MrShoop wrote:

Maybe a world without used game sales is better for consumers and publishers?

Maybe it's not all that valuable to compare prices of a digitally-distributed release with a retail release as though they were identical products with identical production costs?

Sure, the software contained therein is mostly the same, but buying a physical copy of that game carries some value in itself, insofar as it affords the consumers more opportunities in its usage. (e.g. loaning/giving to a friend, easy portability to play on other console systems)

If that value is unimportant to you personally, as a consumer, that's perfectly fine...but ignoring that value in any kind of comparative analysis will distort your conclusions dramatically.

That a product is physical is a meaningless distinction if it ends up being locked to a console or an account. I'm not ignoring the value of trading in - it is a clear loss to the consumer. I'm just pointing out the reality that the console world will start to look like a lot more like the PC world, and the loss is made up for in other ways.

One thing is for sure, George R.R. Martin likes his used games.

One of the bizzare behaviors I see exhibited in these threads over and over is how the exact same people that hold up Steam and Digital Distribution as the "perfect" model will similarly proclaim that digital distribution is basically a non-starter for consoles for various reasons (lack of broadband for the majority of console owners, used games, etc.)

It seems pretty clear that if the console guys and Publishers just adopt a Valve model for the next gen then the whole second market issue will become even less of a problem...with the Publishers and Console guys not looking like Jerks. You don't have to kill the used market at all...you don't even have to kill physical media even..just make digital more attractive than physical (through sales whatever) and the consumer will choose on their own.

Excellent writing Cory! This pretty much seals my opinion that the used game market is the bogey man of the day sitting right next to it's big brother: piracy.

HedgeWizard wrote:

I opt out of buying anything at Gamestop because of the people and policies they employ.

I think it really depends on the management at your local store. However, I've heard enough war stories and dealt with a couple of stores that are on the gruffer side (for some reason it's always the ones in the malls) and just try to push the issue of things like GI subscriptions, warranties, pre-orders, etc. So I'd just much rather shop at Amazon for the majority of my gaming needs. It's convenient, slightly cheaper, and almost as fast.

ClockworkHouse wrote:

Not only that, but they made what looks to me like a pretty savvy business move. Not only will people be able to buy digital copies of games directly through the Nintendo Network/eShop, but they'll be able to buy codes for digital copies at retailers.

This isn't much different than what you see in the PC sector with Steamworks games. Retail sells big box with optical media. Optical media installs and registers the game with your Steam account. Roughly the same thing.

Seriously, at the end of the day digital stores and retail are selling the same bits and bytes. It's just the delivery mechanism that changes. Although now that I think about it, are we reverting back to the 80's/90's where you bought software via mail order and the developer ships you a ziploc baggie filled with diskettes?

Al wrote:

I've said it before and I'll say it again: the fact that the used game market is thriving is a signal that new games are overpriced.

Not just used games, but lower priced products like indie games, free to play, mobile and social network games are thriving too.

wordsmythe wrote:

Cory should be commended for putting real numbers to this debate.

Aye. I hope Sheawn put a gold star on the draft

MrShoop wrote:

That's a 50% increase in new game sales, and for these companies that are losing money and looking at bankruptcy, the difference between profitability and layoffs or bankruptcy.

Are outfits like EA looking at bankruptcy at this point? I know EA's stock price is down significantly since around when Riccitello took over and THQ is on the rocks but it's mostly only the big publishers who are crying wolf. Paradox and Atlus certainly aren't having a problem right now. Both of them deal in niche products that have great incentives for people to buy new. It would seem to me that the problem isn't as simple as new/used game sales and there's probably a number of factors at work here including development costs.

So I am conflicted. I just bought Boom Blox at Goodwill.

Nathaniel wrote:

A changed business model (ie. eliminating used games) would not significantly change the amount of money that gamers would spend on games. To put it another way: GameStop and the game companies are advertising and setting price points for optimal overal sales. No one is letting a buck slip by. It might affect WHICH games are purchased, and WHEN, but basically we're all spending all of our allowance on games.

True, it wouldn't change how much serious gamers spend on games, but it may drastically cut down the sales to the casual sliver of the market who are very cost sensitive and buy Used games because otherwise they wouldn't buy any at all. Like my aunt, who waits for games to drop to $10 before buying them for her children. Games are not the only things competing for the money in that group, and if there are no used games, they may price themselves out of the market and that money could go to other things. That money would then not get filtered back to the serious gamers who would end up with fewer new games purchased. Also, without used games, games may go out of print permanently and not be accessible in any form.

Nathaniel wrote:

Then, the question is, where is our money going?
1. Game development costs
2. Distribution costs
3. Game company Profits
4. GameStop expenses
5. GameStop profits.

Which of these things benefits us? Items 2, 3 and 5 give us no benefit - they have to exist, but they don't really improve our lives. Item 2 might even be a detractor: digital download is in some ways better than a physical disk. (I hate changing disks.)

#3 gives us a benefit in that the game company can use that money to fund their next game, or fund even bigger games. It also gives those companies an incentive to engage in that activity. #5 has the same benefit in that it gives them an incentive to do all the hard work of having your game ready for you when you want it without waiting for shipping. It's less useful than #3 though, for sure. Without the hope of profit, there will be no investment in an activity.

#1? it's not really going to game development, it's going to repaying any deficits generated in game development... The game development is almost entirely done by the time the game is being sold, except with some of the newer models like Minecraft and Kickstarter.

Nathaniel wrote:

I think most of us realize intuitively that this is how it works, and so we are largely ambivalent to the argument. To a large extent, this is a turf war between two corporate groups who each want a larger slice of the profit pie. Each is trying to co-opt gamers to support their cause, but neither makes a strong case. I'm neither convinced GameStop keeps overall accessibilty better, nor am I convinced that if GameStop dissolved, the extra resources would go towards doing anything I wanted.

If Gamestop dissolved, the only place I could get my NIS games would be the NISa store or Amazon. The same goes for Xseed, Atlus, Aksys, and many other game developers too small to get into Walmart, BestBuy and Target. Most of these aren't available digitally either as of yet. This means shipping costs that I would need to pay for, and extra time I would need to wait. The big developers like EA are the main ones fighting against the game stores and used sales, but it's the smaller developers who will be hurt by it.