Walton's World

Walton's World
A Marginal Business

Max Steele | 3 Jan 2006 11:00
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"It is 100% legal to re-sell videogames. The publishers have no leg to stand on," explains Jason Schultz, staff attorney at the Electronic Frontier Foundation. Because of the First Sale doctrine, publishers have no legal right to get paid for used games, anymore than book publishers get paid from secondhand bookstores, or music companies from used record sales. This won't stop them fromfinding another way to strike back at GameStop, however.

Even as the publishers make war-plans, Best Buy and Blockbuster have joined the fray. Most Blockbuster stores now not only rent videogames, they buy and sell used games, too, usually offering significantly better trade-in values and charging less. Blockbuster is largely ignored in discussion of game retail, but it needs to find a new business as TV on-demand catches on, and looks willing to fight hard for games revenues.

Best Buy is still testing a pilot program for used games, but industry insiders seem to expect it to go forward. As a big box retailer, Best Buy isn't suffering from the tiered pricing model the way GameStop is, and it can accept lower margins on used games. And if Best Buy succeeds with used games, Target, Wal-Mart and the rest might follow.

What does it all mean?

The New Model
GameStop's margins in the used game business are almost certain to erode, as consumers seek alternatives, whether peer-to-peer likeeBay, or from competitors such as Blockbuster and Best Buy.

At the same time, the uneasy alliance of retailer and publisher that has long dominated the interactive entertainment industry will crumble. This, in turn, will open the way for publishers to aggressively embrace digital distribution. Up until now, the publisher's fear of channel conflict with retail has obstructed their adoption digital distribution. By "striking the first blow," retailers open themselves up to a digital distribution counterstrike.

These two forces - used game sales and digital distribution - will have strange and conflicting impacts on consumers. The higher the price of new games, the more likely the consumer is to buy it used for less. A flourishing used game market will drive prices lower. But the more the used game market flourishes, the more publishers will race to adapt digital distribution. With digital distribution, publishers can prevent re-sale and used game trade, both legally and technologically.

"You are already seeing with Xbox Live and Valve and these ties online, theyare trying to use the online hook as a way to enforce their business model. You're going to see more of a trend towards that," says the EFF's Schultz. "It's part of an overall battle that's going on in all the content industries."

Here's what's likely to emerge as the new business model: Publishers will release new titles exclusively in digital format at a premium price. Big box retailers will carry the most popular titles in physical form at a sellthrough price point. There'll be little margin left in used game sales, but it'll survive with pricing similar to your local Blockbuster's secondhand DVDs.

And as for GameStop? If you want to know what's in store, head over to your local college and find the students' favorite used record store. There's not a 100% profit margin in sight.

Max Steele is an enigma wrapped inside a riddle. When not actively being mysterious, he passes his time manipulating time and space to fit his plans for world domination.

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