Walton's World

Walton's World
A Marginal Business

Max Steele | 3 Jan 2006 11:00
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So, imagine you're running GameStop. Imagine you owe $36 wholesale for $50 games, leaving around $14 profit. And imagine you owe $12 wholesale for $20 games, leaving around $8 profit per sale. Obviously, you'd like to sell more $50 games than $20 games, and so you're going to organize your storefront to push the hot new product as much as possible. But to differentiate your business, you have to keep that broad catalogue of older, cheaper games around - otherwise you're not offering anything different than Wal-Mart or Best Buy.

Now imagine that with used games, you only pay $3 for your $20 games. Suddenly you make more money from a $20 game than you do from that $50 copy of Perfect Dark Zero. This is the solution to all your problems. You can offer a wider inventory, stock older games and even still profit! Set the prices right and you can even manage to do trade-in and resale of brand new games for really big profits.

Got that? Good. Now you understand why GameStop is transforming itself, right before your eyes, from a specialty boutique into a secondhand store.

Biting the Hand
It's a transformation fraught with peril. In adopting used games as the solution to the inexorable logic of the new game retail business, GameStop is alienating its customers, infuriating its suppliers and arming its competitors.

Let's start with customer. As a specialty retailer, GameStop has long catered to the enthusiast. The enthusiasts' desires are simple. He wants to be able to buy new games for a reasonable price. If the games are good, he wants to keep them. If the games are worth playing but not worth keeping, he wants to be able to trade them in. And if the games are bad, he wants to be able to return them and get new ones.

Unfortunately, today's retail marketplace offers no way to return bad games and limited value on trade-ins. Barnes & Noble will give you store credit for opened music and DVDs if you have a receipt, but GameStop will just offer to buy an opened game from you for a few bucks - even though they're going to turn around and sell it for $30.

When used game sales were a minor aspect of the GameStop business, itwas easy for regular customers to overlook the trade-in to sale price ratios; no big deal. But as every consumer purchase is presented with a potentially money-saving used game purchase, those consumers have a constant reminder of exactly how much a used game is going for - and, by comparison, how little the consumer gets on trade-in.

Hardcore gamers are nothing if not web-savvy, and eBay is out there as a viable alternative to trading in. Exposés on the economics of trade-ins have already begun to erect the virtual equivalent of "Keep Out" signs on GameStop. As consumers become more informed, GameStop will either have to increase its trade-in values, or watch its inventory supplies ofdesirable used games plummet.

An even more pressing problem comes from GameStop's suppliers, the videogame publishers. The relationship between game publisher and game retailer ranges from Détente to Cold War, with continuous low intensity conflict over "price protection," "marketing development funds" and "return rate." Used game sales threaten to make the Cold War heat up - because publishers see no revenues at all from the sale of used games.

Is it really worth fighting over? It's interesting to note that both Activision and Electronic Arts are reporting that fourth-quarter revenues will fall well below expectations due to unexpectedly low sales. Meanwhile, GameStop has announced "strong margin contributions supporting forecasted earnings" because "used videogame sales growth continues to solidly meet our goals."

And so the war drums have started beating. In an interview with Computer and Video Games, Mark Rein of Epic Games was blunt:

"If you walk into EB in the U.S., they try and sell you a second hand version of a game before a new one. I think that's bad. It would be fine if they share that revenue with us. They can also be marketing partners with us, as well. We can have an official refurbished games policy. That's the problem. Those resold games use server resources, tech support. The majority of guys calling up saying "I don't have my serial number," I'm sure a lot of those are resold. It costs us money. Those customers think they paid for it, and they're entitled to support. The reality is we didn't get paid. They didn't pay us."

Of course, GameStop doesn't have to.

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