Mannconomics: You Gooze(x), You Lose

[WARNING: This article contains ideas that may only interest people with elbow patches on their jackets. It often grossly oversimplifies esoteric concepts. As is usually the case when I'm grossly oversimplifying things, I don't care.]

Once upon a time, waaaay back in July 2006, there was a man. This man was upset with the current landscape of the used games market: he could either sell them for a lot of hassle but little money, or he could hope and pray that he could find someone to trade with. Neither of these were ideal. So he came up with an idea to facilitate game exchanges between like-minded gamers that avoided the normal downsides of other trading options. Thus, Goozex was born.

The man looked at his creation and saw that it was good. Trades were happening quickly. Concurrent trades were up to over 5,000. People seemed happy with the service, and he had a good system of monetization. It was, as Martha Stewart may have proclaimed, A Good Thing™.

But the man got greedy.

He and the other operators at Goozex made a series of seemingly logical but economically ill-informed decisions. Within a couple short years, the whole house of cards collapsed. Through ignorance, negligence, or maybe plain old-fashioned greed, Goozex took a good idea and killed it. The company inflated its currency, capped the prices that inflation needed to change, and have not remedied their situation. What was once a vibrant trading community is a ghost town of tumbleweeds and EA Sports titles from 2005. And the man is left to wonder where it all went wrong.

Goozex was created in part to avoid the difficulty of hunting for a suitable trade for your game — in other words, to bypass the normal barter system. A barter system is a system in which goods are traded directly for other goods. This has some obvious shortcomings, the main one being that the person who has what I want may not want what I have to trade.

Goozex created a similar setup using a medium of exchange creatively titled “Goozex Points.” A user could send their game to someone who requested it, thereby earning points, which then enabled them to request their own game from someone else. Instead of having to find the one lunatic willing to trade you their copy of Gears of War for your copy of Aquaman 64, you can simply trade with anyone who wants what you have, then purchase anything else that you want. If the price is right.

So far, so good. Games rotated in and out pretty quickly, and the queues moved. Goozex seemed to have a pretty good pricing mechanism, with the newest games going for 1,000 points (a real-world $50 equivalent) and the cheapest games going for 100 points ($5). Ideally buyers and sellers would set their own prices, but an active and well-written pricing algorithm seemed a reasonable and lower programming-time option.

Eventually Goozex seemed to realize that it wasn't making enough money off of trades to make maintaining the site worth their while. By my math the company was only pulling in around $180,000 a year*, and after paying taxes, credit card fees, server/bandwidth fees, etc. there's not much left. So it needed a better way to monetize traffic on the site. It needed more money. So, in 2009, it began allowing users to directly buy points. This decision had some very predictable and very deleterious effects. Namely: inflation.

Inflation is simply an increase in currency (e.g. Goozex Points) without a corresponding increase in wealth† (e.g. actual video games). Inflation has a great many effects, a few of which are good but most of which are very bad. You may hear the aforementioned brainiacs in elbow patches debate this, but they are talking about very slow, steady inflation in the order of 1%; not what we see in Goozex's example‡. Still, once the initial dust cleared from this currency move and things re-normalized, it probably wouldn't be a lot worse except for some disgruntled users who thought they’d had a lot of valuable points beforehand.

That is, assuming prices could adjust. But Goozex didn't let them.

Goozex, holding all the control over prices, held prices where they were. To this day, new games are priced at 1,000 points. Now, price controls have a long and storied history in economics, and unlike inflation, are thought by pretty much everyone to be a terrible idea. Whether it's the oil embargo of '73 or Rome's Edict on Maximum Prices, price controls create shortages. If a good (say, our Goozex game) is worth 1/10th of the economy, but a person can only get 1/20th of the economy's medium of exchange for it, that person is going to choose not to sell the good. It wouldn’t be worth it.

Goozex, which has (perhaps foolishly) been kind enough to publicly post its concurrent trades since its inception, has provided a very clear window into the aftermath of their inflation/price control death spiral. Overall trades, which were well above 5,000 in 2009, dropped by more than half to 2,400 in late 2010 and as of the time of this writing are sitting at 835. Anecdotal evidence bears out the shortage, with fora across the internet complaining about the inability to get games, especially newer (read: higher priced) titles.

I myself have witnessed the drop. One game in particular that I had on my queue for a long time is a sad-but-funny example of the weird situations this scenario can create. Alice: Madness Returns for the PS3 "launched" at Goozex on June 30th, 2011 for 1000 points. It is still 1,000 points, 16 months later. In that 16 months it has been traded a mere 65 times, and ahead of me on the queue there are 152 other people. At that rate, it would take me an additional 37 months to receive the game. At a "$50" rate. The actual market, however, is pricing used copies at a mere $13 and brand-new copies for $20. PC versions have been seen on Steam sales several times for a mere $5.

There is a fix to an inflated system, of course: deflation. But to the site owners, it's a messy proposition. The only way to deflate the currency in Goozex's case is to remove points from the system without removing games. The only legitimate ways to do this are to buy back points from users, or to give them a site-bought game instead. To Goozex's credit, it did try a small run with the Amazon exchange, but it was far too little, far too late.

Better would have been to have found other ways to monetize the site. It could be ad revenue, becoming a sales source themselves, selling "perks" like cutting to the front of a game queue, or a combination of several things. All have their own trade-offs, of course, but the economy-ending spiral of inflation and price controls was the worst possible outcome. It may even be possible that their original model is sustainable, given a conservative enough approach.

Economics, at its simplest definition, is the study of scarce resources. Unfortunately, in practice it is anything but simple. The real world has a tendency to contain far too many variables to ever properly isolate into a concrete scientific analysis. Modern multiplayer and interconnected video game systems, on the other hand, often contain very closed and controlled worlds and an ability to quickly aggregate a tremendous amount of data. This is a boon to anyone who likes to get their nerd on.

Perhaps some companies think that their virtual systems are more controllable or somehow don't follow the same rules. Some (like Valve) certainly do, but at this point there is still plenty of instructional fodder for those with patched elbows. Goozex, much to the chagrin of both its owners and gamers writ large, falls into the instructional category. It still stands today as an example of the dangers of inflation and price controls run amok in a system.

[size=9]*5,000 trades happening concurrently. Each trade lasted roughly 10 days. So roughly 180,000 trades a year. At a dollar net per trade (Goozex's fee), the math is pretty easy.[/size]

[size=9]†To use a simplistic example, suppose all of Goozex was ten people, each of whom had traded in a single newly-released game for 1,000 points. So the economy of Goozex is ten games, with a total currency of 10,000 points. Each game is 1/10th of the economy. But now, suppose Goozex sells an additional 10,000 points to people who haven't put any actual wealth (e.g. games) into the economy. The currency count of the economy now stands at 20,000 points, but each game is still 1/10th of the economy. Remember, the points are just a currency and have no inherent economic value. Since the actual wealth of the economy (still games) hasn't increased but the currency has, each game is worth 2,000 units of currency. [/size]

[size=9]‡No one knows for sure how much Goozex Points have been inflated over the years, but since points have been for sale for years and have often been for sale at half-price ($25 for 1,000 points), one can assume it is quite severe. The data we do have, as we will see momentarily, bears this out.[/size]


Excellent article. I wonder if it would have been better to take games at 75% value instead of 100%, that way they can make their profit from that 25% that remains, while still being a much better deal than Gamestop. They could also make the exchange rate of buying points dependent on how much they've taken out of the system in that 25%.

I get the arguments about inflation, but it seems like there is a simpler scenario.

Goozex was getting $1 per trade in their original model. They saw the chance to get more, namely the price (or during sales half price) of the game. $50 in one trade, or even $25 is very appealing deal for the company when they were previously getting $1.

The unforeseen result was that every game bought with points decreased the quality (and quantity) of games in the marketplace. This is because no games went in, they only were removed. Since 'sellers' are being paid in 'stock in the marketplace', each time a points purchase happened, it decreased the worth of their stock. They essentially destroyed the marketplace by removing all of the games. The resulting sellers are left with nothing. Those harmful transactions in effect left Goozex caching out on the stock and left the 'sellers' holding a bunch of worthless points.

I can see that over time price adjustments could make up for this, but I think at the end of the day, it's really down to stripping the market of it's goods.

Panda, I think that is the inflation argument.

I think this is, in some ways, similar to the problems game rental sites like GameFly come accross. It's just a given that your $60 copy of Dishonored won't be $60 after some time. It makes it incredibly difficult to part with disc that for a much more diminished price, especially if it's for a Flavor of the Month game that won't really find a cozy spot in your collection.

And GameFly experiences this to the tune of thousands of copies of games. It makes my head spin.

I dunno, GameFly just starts selling games when the demand decreases. The problem is they usually don't have enough of the new releases to go around, and if you have nothing but new games on there then you can find yourself paying for nothing for several months. Usually it's a better sort of "games I missed" rental service.

Thanks for the kind words, everyone! I'm glad you all enjoyed it. To be honest, when I wrote this I thought it would only appeal to me and maybe one other person, so it's nice to see you find it interesting. Sorry I couldn't respond over the weekend; I was in a castle.

garion333 wrote:

Also, if Goozex has more or less killed themselves off then perhaps it's time for someone else to take a stab at this and try and do it properly. Anyone have some capital to start a company?

At one point I had a couple lines saying just that, but I'm not so sure. As I wrote the paragraph talking about how they could have chosen to monetize it instead, I think it's a pretty tough road to travel. It's probably possible, but you'd need to work hard to keep things running well enough to build a very large install base, and then hope some of your ancillary monetization ideas pay off better than expected.

pgroce wrote:

They'd make a great case study, if this becomes a series. (And I hope it does, I love me some game economies.)

That's the idea. Hopefully there will be a whole series of Mannconomics articles; I just need to figure out what to write about next.

I presume the seller got the points from the buyer, right? How did they bootstrap this? Did they give a bunch of points away first, sell them, or what? TF2 Warehouse solved this by being a clearinghouse, so you sold to them and they gave you points, but your description suggests this wasn't the case with Goozex. Just curious.

That is an excellent and astute question, but unfortunately I don't know the answer. I looked for that information when researching the article, but came up blank. If I had to guess, I'd say they did it by severely limiting available SKUs at launch (most of the older and more obscure games weren't added until later; ditto movies), so that with the first 1-200 people they could easily find barter-style matches that would grant both parties 1,000 points and seed the system, so to speak.

ClockworkHouse wrote:

Nice piece. What did the people at Goozex have to say about it?

No response to request for comment. Considering they just sold the site a couple months ago, I think they've checked out altogether.

Gravey wrote:

I learned more about economics in this article than I ever did trying to bash my head against Ferguson's writing in The Ascent of Money.

So you're saying he should forfeit his PBS salary to me, right? I heartily endorse this idea.

Could you ethically even take a PBS salary, Mr. Minarchist?

ClockworkHouse wrote:

Could you ethically even take a PBS salary, Mr. Minarchist? ;)

Minarchist wants to fire Big Bird.

Quintin_Stone wrote:
ClockworkHouse wrote:

Could you ethically even take a PBS salary, Mr. Minarchist? ;)

Minarchist wants to fire Big Bird.

He does, actually. Jerk.

I approve of this. Does Amazon sell elbow patches?

Al wrote:

I approve of this. Does Amazon sell elbow patches?

Do you even have to ask?

super article.

Gravey wrote:

I learned more about economics in this article than I ever did trying to bash my head against Ferguson's writing in The Ascent of Money. Well done, Min!

great book

As of last week I now own TWO sport coats with elbow patches, but neither was required to enjoy this excellent article. More, please, Min!

Minarchist wrote:

Thanks for the kind words, everyone! I'm glad you all enjoyed it. To be honest, when I wrote this I thought it would only appeal to me and maybe one other person, so it's nice to see you find it interesting.

It was great. I think something like this had to be written about Goozex but I hadn't seen anything like it anywhere.

I never hopped on the Goozex train, but I enjoyed reading this so much I'll change into an elbow-patched sweater right now.

I loved Goozex but it wasnt a good source for a collector (folks would say they were sending you the box but wouldnt).

Nice article, I didnt know it had gotten that bad

Hmm. I never used Goozex and only came into an interest in them after reading about one of the founders. As it turns out, this is the creation of a group of University of Maryland business school graduates who met during their time at the Robert H. Smith.

One would think that they would have known better.

Paleocon wrote:

One would think that they would have known better.

In many avenues where people provide services and goods online, there is an air that money will come from magic. Some of the best advice I have ever heard, but is rarely followed is from Dave Kellet (a webcomic author/artist) and that was for people looking to do their art online or in print to get savvy with some business and law classes to be sure they are not screwed. Clever idea + web site =/= profit if you do not know the business of it. You see this a lot in the restaurant business.

Similar to Minarchist, I never actually got to get any games from Goozex in 5 years. I had no interest in paying in to their Goobucks. I had better success in buying and selling used games on Ebay and Amazon or just donating them for a tax write off.

I received a fair number of games through Goozex, but none in the last ~12 months or so, despite having "vendor trash" games high up in my queue. It worked for a while, but as discussed, eventually fell apart.

Roughly when did the decline begin? I understand that they were bought out in May of this year. Was it previous to that?

Oh yeah, definitely. I don't know exactly when, but if I had to offer an estimate I'd say it began in early 2010? I know by the start of 2011 it was back down to ~2,000 trades concurrent from over 5,000 at one point. Goozex is probably the only source of the actual trade count graphed over time, though.

So my guess would be that the buyout price wasn't enough to make the founders terribly rich.

I'm a little surprised it was bought out at all and wonder what exactly the new owners plan to do with the site. It's pretty much fundamentally broken at this point.

Paleocon wrote:

So my guess would be that the buyout price wasn't enough to make the founders terribly rich.

There was a rumor going around in the Goozex forums a couple months ago that it was as little as $150k, but that's completely unsubstantiated from all I could tell. It was a private sale and there are no official filings to my knowledge.

It's certainly not worth much, IMO.

Nice to see something, anything, that intelligently discuss the fall of Goozex. In my own experience, I saw the trade counter start dropping in early 2011 after Goozex doubled the cost of trade tokens and let folks trading out recently released games cut in line for new releases. The former just killed the incentive to buy older, low point games. The latter was evidently not enough of an incentive to spur trades of newer games. Minarchist is right, Goozex needed to lift the cap on points for games. Would I have traded "Skyrim" for 1500 points? Hells yeah.

During the last summer, you could at least make trades, including the aforementioned Skyrim. Now the death spiral has reached black hole status. The trade counter is in the low 700s and dropping fast. There are a few die hards hoping the sale of the site will reinvigorate it and others who will never give up on Goozex. As for me, I may end up with 1000 points in the system when it all goes under.

More articles like this, please!

Yup, sounds like the business case for profitability AND growth wasn't really thought out that well at all. Why on earth would you infect an absolutely awesome transaction system that cost users nothing but allowed them to trade within the constraints of the games they had to offer??

So, I think you nailed it on the greed thing... I think. If this system worked as well as you claimed it did initially, the increase in membership would have started creating load on their initial servers. Growth is essential to keep the community increasing in size - and also serves to increase the number of games on offer. If they needed cash, there's no question that they had to monetise. So, maybe they weren't greedy.

But I think they were people who thought they were smarter than they actually were. Having one brilliant idea doesn't make you a frickin' genius.

I think the best way to monetise would have been to create a subscription based service - as cheap or as expensive, as frequent (weekly) or infrequently (annually). If the service was that good, they could find a price point people would be willing to pay. I guess maybe they wanted people to feel they got something out of contributing, but that method obviously poisoned the pot. A subscription membership would not only provide an income, but would also restrain growth of the membership base keeping expenses from getting out of control. Obviously, the price point is the key here. Too cheap and you can't pay the bills, too expensive and you shrink your member base too much.

Anyhoo, thanks for the lovely article. Great read.

I always wondered what happened to Goozex. I was able to score a few good games for my trades. But the whole "buy tokens" to trade setup seemed suspicious to me. But it worked for a while until the games stopped moving, and they kept deactivating my account due to inactivity.

I hadn't thought of Goozex in quite a while and now I'm kinda sad that it has dried up. But I seem to remember the point conversions were always slightly off. I have to admit I got into Goozex in 2009, when Best Buy was running a sale on xbox 360 games. I picked up a few new-ish games for $20.00 and traded them still in shrinkwrap for more points than they should be worth, and used the points on DS games that I wanted. The point values were something like 2 360 games were worth the same as 3 DS games, which makes sense at suggested retail price but didn't change when a game went on sale.

Goozex acquisition complete:

zannabianca wrote:

Dear all,

It is with great satisfaction that Goozex announces the completion of the acquisition by Bay Acquisition Corp. Bay Acquisition Corp has acquired 100% ownership of Goozex Inc. and has completed the first round of fund-raising towards a total goal of $2 million.

You can read more in the news:

During the next few weeks Goozex and Bay Acquisition Corp will complete the transition process to the new management. In addition, we will craft the new operational plan intended to resume developing the Goozex system, to revitalize the Goozex community, and to introduce new opportunities to trade video games and movies.

This has been a long process and we certainly appreciate the patience and faith that all Goozex members have shown during the last several months. We have worked hard to find a financial partner (Baytree Capital, an investor in Bay Acquisition Corp) able to inject new resources into Goozex to help us grow the business. With your support we have kept the community active and the site alive.

Our work is not complete. This is just the start of what will be the new Goozex. We will announce as soon as possible the plans for the system's evolution, and we certainly welcome your feedback in this process.

Happy Trading!