Used Games: People Are Waking Up

I hate the used game market. I first wrote about last February, but at the time, no one else seemed to care. The "used games are bad meme" is finally starting to build. Folks from Epic, Atari and others spoke out against the practice in recent weeks, while the Gamestop CEO continues to rationalize the value to the industry with voodoo math (In case you are interested, I addressed the flaws in his argument a few months ago.) I guess caring and speaking publicly are steps in the right direction, but the solutions proposed don't address the issue.

The publishers seem to think episodic installments and downloadable content will help, but if they read the message boards, they will quickly learn it will only exacerbate the content. So long as we have trade in value from Gamestop, games become depreciating assets. Gamers are getting a quick lesson in beginning economics. The game is burning value as it stays on the shelf. Each day they way the value to them of keeping the game, against Gamestop's posted value for a trade in and the currently available new games. The quicker they turn it in, the more money the get, the more popular game inventory Gamestop has and the less incentive Gamestop has to re order. It is a great cycle . . . for Gamestop. Contrary to Mr. Gamestop CEO's assertion, games do not have an inherent residual value of $20. Gamestop creates a residual value, along with an incentive to return the game as quickly as possible to maximize the value. Downloadable content plays directly into Gamestop's hands.

With the exception of Rock Band and Guitar Hero, DLC expansions are delivered no more than quarterly after the release of the game. The value of keeping the burning asset on the shelf is not increased by DLC. It is undermined by the gap in time between initial release, and expansion release. By the time the expansions are released, the value of the game at Gamestop has declined significantly, allowing the gamer to repurchase the game to take advantage of the DLC, and return it to the store for another credit. Chaching, chaching for Gamestop on two sales, nothing for the publisher. In an even uglier scenario, the gamer just throws the game back into their Gamefly cue. Publishers may feel they are making money on the downloads, and they are, but downloads only have value after the significant investment made in the initial release - the one suffering from a lot of lost revenue. Moreover, DLC is selling into less than 50% of the initial purchasers and in most cases less than 20%.

We have to treat the disease, not the symptoms. We cannot accept used games as a fact of life. We must take a stand against it. There are a couple of ways to address the issue.

The obvious answer is to make all games downloadable only. It would be great to be able to convert on an impulse directly from a demo. Technologically, it is more than feasible. Practically, it is just not. The biggest problem is we don't have the technology to download a console. Every time the download issue arises, the retailers threaten to stop selling consoles. The downloads will happen eventually, but, like the music business, it will be in the form of a tidal wave hitting the shore, slightly later than it should. Because we can't flip the switch and go download, we have to look at other options to make sure we still have a business when download time comes.

First, don't sell to Gamestop. I am not talking to consumers, I am talking to publishers. It will hurt in the short run, but not as much as you may think. Gamestop sells a lot of games, but when we factor in the losses from used games and MDF paid for every corner of the store, the margins are lower than other retailers. Gamers go where the games are, and if Gamespot doesn't have the new games at release, they will stop going to Gamestop. Most of the lost sales will be made up by other retailers. You may argue about not being able to hold price at Wal Mart or Best Buy, but the increase volume from consumers who no longer buy at Gamestop will allow you to maintain price longer. It is just supply and demand. The gamers learned about it, publishers should too.

Okay, how about something a little tougher to implement, but a bit more palatable. Make games valuable only to the initial consumer. It is kind of like EMA's proposal for activating games, but uses Gamestop for promotion the same way the MMO companies used Chinese software pirates. What would happen if the first purchaser was able to play the whole game, but any subsequent purchaser could only play as far, or with the assets, the publishers wants them to use? A purchaser of a used game would be able to use console stored value points, or a toll free number if not an on line subscriber to unlock the balance of the game. If this sounds familiar, it should. iD used this model with Doom and it changed the business. Consumers will dictate a reduction in the price of the limited game, making it a more attractive purchase, reaching a larger audience. If the game unlock is set at $26, or about the amount the publisher take to the bottom line for full price unit sold at retail, the publishers will receive the currently lost revenue and the Gamestop price could be reduced to roughly the same amount, and no one would care. Some people won't convert because they won't like the game or they may be sated by the shortened experience. But the revenue received from the conversions which do occur is revenue which would otherwise have never been received. Gamestop becomes a promotional partner rather than black hole of revenue. The reduced price will enable the game to reach more people than even the fully accessible game. Which gets me to the final point.

When you point a finger at someone you are pointing four at yourself and this is no exception. At 59 USD games are the most expensive piece of media sold to consumers. The home video market started with a price point of 99 USD and consumers largely yawned. Sales were in the tens of thousands. When prices were reduced to 19 USD the numbers climbed to the millions. The used game market exists in no small measure because our games are too expensive. People don't like paying so much. I hear the arguments about how expensive production is but movies cost more. We can get rid of institutionalized used games, day and date rentals, explore new windows, release less expensive bits episodically and more. In other words, think of ways to grow the market. When Take Two did it with their Madden killer they made the first in roads against the greenest of EA Sports evergreen franchises.

Again, simple economics - supply and demand - prices go up demand goes down. Some may argue the elasticity of demand is small on something like a game, but I do not believe. Nothing in America is perceived to have a lower elasticity than gasoline, but when we saw a significant rise in price, we saw the first demand reduction in history. We determined the value of a gallon of gas and it was less than the one set by the market. Game sales considered as a function of installed base are stagnant from cycle to cycle and year to year because the price is stagnant. We spur demand by console price reduction, but not front line games.

Not that we've woken up to the disease of used games, let's work on the cure.