I work in an independent videogame store that sells used games. I think this gives me a somewhat unique perspective on the differences between new and used games.  It is amazing, but few things divide publishers and consumers the way that used games do.  For publishers, used games are destroying their business and gutting their profit margins.  Recently, games like “Gears of War 2″ have come with bonus maps that are only available if you purchase the game new. It doesn’t take much to realize this is a way of trying to disrupt the used games market. For consumers, used games are a great way of saving a few bucks when they are picking up the games they want.  As someone with a bit of firsthand experience when it comes to ordering in new games and taking in used games, I thought I would share with you some of my thoughts.

Publishers see all the money that used games sellers like Gamestop or Gamecrazy (or the store I work at) make from selling used copies of games, and they want in.  Anyone who has ever gone into a store like Gamestop knows how hard the clerks push the used games over the new ones.  A typical exchange goes something like, “Hey, I’d like a copy of X”. “Oh well we have a used copy of X for $5 cheaper, and you can get 10% off if you have our Edge/MVP card.”

Few people want to pay more for the same product, so most people just get the cheaper used game.  The problem for a publisher or a developer is that they don’t see a dime of this money.  For example, take a game like “Beyond Good and Evil.” This game, awesome as it was, sold terribly when it was released.  Within a week or two the price had plummeted to the point where stores were taking a huge loss just to get it off the shelves.  Over time though, word of mouth spread and people started to realize that the game was actually amazing, but the only place you could find copies at this point was in used game stores.  The game becomes a cult hit and is bought and resold over and over again.  Gamestop makes a killing, Ubisoft (the makers of the game) gets nothing.

A typical new game trades in for about half the price you bought it for.  So that $60 game gets you about $25 – $30 credit (you’ll get 10% more with your Edge/Mvp card).  At most used game stores, that game that you just traded will be priced at $54.99.  So when that game sells the store just made right around $20-$25.  Most new games cost a store around $50 from the various videogame distributors so they make around $10.  Mrs. Wong, my second grade teacher, taught me that $20 > $10.  This is about as simple as math can get. You should understand this long before you ever go to business school, so it is safe to say that the high powered executives at Gamestop are fully aware.  What makes things even better for a store like Gamestop is those games are usually traded back in so they can be sold again.  Look at the shelves the next time you are in a Gamestop, and look at one of the games where the cover is gone, and they have had to put that crappy homemade looking cover instead.  That game has probably come in and gone back out a half a dozen times.  Each time it trades in for less and less until they have sucked every bit of possible money they can from it. I am not mad at Gamestop for doing this. It makes for a very effective business model.  There is a reason that Gamestop is a Fortune 500 company.

Are used games a bad thing then?  Well at first glance it would appear to be so.  The companies that make the games are not seeing a dime of those used game sales so they must be suffering right?  Well here is where things get a little more complex.  What the game publishers don’t ever seem to mention is that, for the most part, people that are trading in their old games are doing it to get new games.  Most kids are not able to pay $60 at a time for the new 360 games that come out.  By allowing them to trade in their old games they are able to afford it.  The publisher has already gotten their money so it doesn’t matter if the game was picked up with cash, credit cards, a check, or a stack of used games.  In this way tons of people are able to pick up games they wouldn’t be able to afford.  These are sales that would not be made if people couldn’t trade in their games.

For a retailer, the profit margins for new games are just too small.  The $10 you make selling the new titles just goes to cover the losses that you take on the games that don’t sell right away.  The next time you are at a big retailer and digging through the bargain bin, think about how much of a loss the store has to be taking if they are selling them that cheap.  All those “Halo 3″ sales go to cover those losses on “Fracture” or “Golden Axe.”  A big department store can afford to break even or get by with a little bit of profit from new games, because they know, while you are in looking at games, you will probably grab that new movie or a case for your I-pod or a big screen television.  They know that they have a hundred other things within an arms reach that you want.  A store that only sold new video games would have unbelievable difficulties.

Let’s say that rent for your business is $3,000 a month,  another $2,500 for employees, $500 for garbage, electricity, and security that would be about $6,000 a month (and that is really a super low underestimation, running a typical business in most markets would be way more expensive).  Remember we are only making $10 for every game we sell, so we would have to sell 600 games a month or 20 a day.  Doesn’t seem too crazy right?  Well this only works if you know exactly what every customer is going to want and you are able to sell everything you bring in.  But what happens when that game everyone in the industry was buzzing about turns out to be a total flop.  What if the crazy Japanese tactical RPG is way to weird and no one wants it?  Or the NHL game comes out the day the NHL players decide to strike? Or any of a thousand things happen that are unpredictable and completely beyond your control?  You have already paid for those games and suddenly our $6,000 a month is beginning to creep up and up.  What if you only guess right 80% of the time and 20% of the games you bring in don’t sell at $60.  That would mean you have bought 750 games and sold 600 of them.  150 x $50 and you’ve spent $7,500 dollars that are virtually wasted and now our $6,000 a month is over $13,500 and we have to order in more and more or become Nostradamus.

This is definitely an extremely simplified example. Not all games are $60. The DS, PSP, and PS2 change the math a bit but the basics are clear.  At this point, it seems impossible for anyone to make it selling only new games.  I think, in the end, both sides are going to have to come up with some kind of compromise.  As it stands now, retailers don’t make nearly enough selling new games and publishers are not seeing any of the returns from used game sales.  The perfect set up would be if retailers could get a break on the new games and in return publishers receive a cut of the back end.  This would change the entire dynamic between publishers and retailers.  As it stands now, games have to make the bulk of their money in the first 2 weeks of release, but with this model publishers could see returns on games they released years previously, this would hopefully motivate developers to make the kind of games people can play again and again.

Tags: Editorials, Gears of War 2, money, used games, Xbox 360

This entry was posted on Thursday, February 26th, 2009 at 8:30 am and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.