Why Does the Video Game Industry Hate Used Game Sales?
Posted on Saturday, September 17 2011 @ 16:38:49 Eastern
Seriously. What is the Big Fucking Deal?
Video game publishers (and by extension, video game developers) sell millions of copies of their games, and they have the audacity to complain about a few units lost to second-hand sales? Some people have said that, compared to the enormous number of pre-orders and day one sales for triple-A titles, retailers barely sell any used game products. Others have argued that used games that do get purchased are sold at a lower price than the new copies, which means that the retailers make less money on a used game sale than they do on a sale of the same game brand new. This, I am told, encourages retailers to sell new games over used—the second-hand games market is just a service to consumers. The video game industry, some say, keeps complaining because they are avaricious and stupid, churning out banal junk no one wants and then blaming used games for their poor sales numbers.
But why argue solely based on assumptions and hearsay? I, for one, think it’s high time that we, the loyal consumers of video game entertainment, pull back the curtain on the used games market. Let’s reveal these publishers, developers, and hardware producers for what they are: a greedy, hegemonic entertainment-industrial complex trying to squeeze every last dollar out of the retailers and consumers that they purport to serve.
To analyze the used games market, we’ll look at real financial data from Gamestop, one of the most oft-cited retailers on the topic of second-hand game sales. All of the following data represents Gamestop’s 2010 full-year results and is publically available in Gamestop’s annual 10-K report.
Let’s start by looking at just how big the used games piece of retail pie actually is:
So of Gamestop’s $8.1 billion of video game-related sales in 2010, $2.4 billion came from used games and used game hardware. That’s 30.3% of video game-related sales coming from used game products… not exactly what I would call an insignificant portion of the market. Still! Gamestop is first and foremost a new games retailer. It’s not as though they’re making the majority of their money from second-hand sales.
The thing of it is: When we want to find out how much money is made by selling something, we can’t just look at the sales dollars—we also need to consider how much the sold item cost to create or, in the case of retailers, to purchase in the first place.
If I buy a boat for $499,000 and then turn around and sell it for $500,000, I haven’t actually cleared a cool half million. In fact, I’ve only made $500,000 - $499,000 = $1,000. This number is my gross profit—it’s the amount of money that I have earned on the sale, which I can then use to pay for common business expenses like labor, rent, utilities, travel, hookers, and blow, ultimately pocketing the final difference as earnings. For a game retailer, gross profit shows how much money was made off a video game sale after paying back the company or person the game was bought from in the first place. This is how Gamestop’s gross profit breaks down:
What the hell happened to “selling at lower prices means lower profits?” According to these numbers, in 2010 Gamestop made more money selling used game products than it did selling new gaming hardware and software combined. 54.7% of Gamestop’s video game-related gross profits came from used game sales--Gamestop isn’t a game store that also carries used games, it is a pawn shop that also sells new products!
What’s going on here? How are these used games generating so much money?
To find out, we start by looking at the margin rate for used and new game sales. Margin rate measures the percentage of each sale Gamestop earns as profit. It answers the question, “If I could have one additional dollar of sales, what type of product would I want to have sold?”
To calculate margin rate, we take gross profit and divide by total sales. In the case of Gamestop, this gives us:
For cheap-ass second-handers, those are some valuable used games: Sales dollar for sales dollar, used game sales earn over DOUBLE the profit of new game sales. Put another way, if Gamestop had the choice of selling a $60 new game or a $60 used game, the used game wins hands down. In fact, Gamestop would rather sell a $50 used game than a $60 new game. And a $40 used game. And a $30 used game. If Gamestop had its way, it would not sell a single new $60 game until the price of the used game fell to just under $27.
But Gamestop doesn’t have to reduce used game prices to $27 in order to generate sales. Generating over one billion dollars in gross profit is as simple as a five dollar discount.
We know now that selling a used game is more profitable to Gamestop than selling a new game. We know that this profitability is coming from not just the ability to acquire used games more cheaply than new games, but to then sell those used games at a nearly identical price to the new. What we don’t yet know is, how? How is Gamestop able to sell $2.4 billion worth of used games while only offering such a slim discount?
To answer that question, we need to tap into broader economic theory. Pay attention; this is where things get interesting.
There is an important distinction between used video games and other second-hand markets: With video games, a used product acts as a near-perfect substitute for a new one. Unlike cars and furniture, which degrade with use, a “used” game disc is functionally identical to a disc fresh out of the factory. Spinning around inside a console, both process the same data, project the same images onscreen, and react the same way to inputs. This substitution effect confounds developers and publishers, who work for years through countless software iterations and millions of invested dollars to bring to market the best product they have the faculties to produce. Within twenty-four hours, a competing product appears, only this game required no up-front investment, received free advertising and marketing, and is identical to the first in all aspects except one: It is less expensive.
Let’s take all of the above as a given: The thriving used games market, the products, and the price points all exist the day that you, Joe Consumer, step into a Gamestop outlet. You’ve traded in all of your old games, and now you’re browsing the PS3 rack. Arkham City catches your attention—new for $59.99, or used for $54.99.
You glance back to the register; a grizzled father is demanding to know why Gamestop released a new DS two weeks after he bought his daughter the old one she no longer wants because it has “fewer ‘D’s”. You’ve got some time.
First question: Does $5 make the difference between purchasing Arkham City and leaving the store empty-handed? This is the “market expansion” argument—that the lower price of used games allows gamers to buy software they otherwise would not have. In the majority of cases, the answer will be no. There are new games available from sixty to ten dollars, suggesting that an inability for new games to meet frugal consumer price points is not the issue. In fact, Gamestop intentionally prices their used stock as close to the new as possible, so long as the remaining difference still registers psychologically with consumers as being a ‘discount’.
But damn it, WHY? Why doesn’t anyone see what’s happening here? If we all buy used, the gaming industry suffers. Can’t we all just band together and give that $2.4 billion back to be reinvested in making the games we enjoy?
If one gamer were given the choice to fund the future of game development with that $2.4 billion in exchange for buying every game he played new, that single person might say, “Hey! Said $2.4 billion is going to fund a ton of great games that wouldn’t exist otherwise, and having the option to purchase all those future entertainment experiences is going to give ME much more happiness than a measly five bucks per game. I’ll definitely buy new, because in the long run, it will be the bigger benefit to ME.” But his decision to buy new doesn’t give $2.4 billion back to his favorite developers and publishers. It gives $40—enough money to buy a developer a foot-long sub instead of the usual six-incher for a couple weeks, but not enough to influence anything in the long run. The other $2.4 billion worth of customers are in the exact same position, and they are all thinking the exact same thing:
“It doesn’t make a difference.”
Consumers make decisions at the margin. Whether the other $2.4 billion is going to the publishers or to Gamestop, my $40 contribution will not make ANY difference on the state of the industry. And it IS an industry—we owe it nothing. If my $40 donation won’t bring ME happiness, then as a rational consumer, I have no reason to buy new. If there is no discernable difference in quality between the new and used product, I have no reason to buy new. But, if I were to perceive one otherwise identical product as having a discount in price over the other otherwise identical product, no matter how meager the true dollar difference may be…?
So we buy the used game. And then publishers and platform owners, in a desperate attempt to re-capture sales lost to their doppelganger competition, push pre-order bonuses and downloadable content and subscription services and microtransactions and map packs and digital distribution and online passes and games that can only be played once and any other method of product differentiation that a retailer can’t turn around and resell in the same ****ing box the publisher created to house their own product. And then consumers complain that the video game industry is greedy and stupid and bereft of creativity and building things that customers do not want. And the video game industry takes this criticism with as much stoic optimism as their PR teams can muster because shouting back, “It’s your own ****ing fault!” will not in any way bolster what new game retail sales are still being captured.
And that is why the video game industry hates used game sales.
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