Tuesday, August 23, 2011

Gamestop: Used Games, We Just Can't Quit You Edition




After realizing my call for the destruction of Gamestop was for naught, I had to come to terms with the need to accept their business model as a fact of life - even though they are killing the geese who so lovingly innovate, fund, develop and so lovingly deliver golden eggs into their grubby, cold, clammy, unappreciative hands. I even moderated a panel with Gamestop's CEO, and kept my opinion to myself . . . mostly. But do I really have to accept their repeated efforts to persuade us their actions are good for the business. Does the crack dealer stand on the corner and say he is enhancing the junkie's lives, or does he just take their money? Gamestop senior executives do understand that if they have to keep repeating that their actions are good for the industry, they are probably not good and constant repetition will not make it so.

In a recent interview in Edge, Mike Mauler, EVP of Gamestop International said:

"I can understand the feelings," he tells us, "[but] we've sat down with developers and publishers and really gone through the data. I personally think there's a lot of benefit to the publisher.

"A great example is sequels, where there's a large percentage of people who are just not going to spend $60 every single year without being able to do something. They'll look at their shelf and see ten FIFAs, Pro Evos or Maddens.

"Being able to take the older one and do something with it in order to buy the next version is really important to consumers. That drives new sales quite a bit."


To say this is the stupidest thing I ever heard would be an insult to the memory of the pitch I heard for the sperm racing game. This whole new level of stupidity is inconsistent on it's face. He explained the data TO developers and publishers and HE personally thinks there is a benefit? He could not say the game makers see the benefit. He may as well have said he spoke with the plant in his office - or the other EVPs.

I understand they can no longer spew the used car analogy with a straight face, but couldn't they come up with something better than the rest of the argument? The sentence seems to be missing a few words "a large percentage of people who are just not going to spend $60 every single year IF WE GIVE THEM THE OPPORTUNITY TO SPEND MUCH LESS." Isn't this like saying, no one will pay to see Transformers 3 because they just saw Transformers 2 a couple years ago? If Gamestop was not reselling these games at 10% off the very same week they come out, and less every week thereafter, consumers would be pay the USD 60. Those who won't pay will go online and download the older version on XBL or PSN, where the publisher who funded the game and took the risk can be properly compensated. Gamestop, or should I say the Mother Theresa of the game industry, is really not helping anyone by taking the old games off their hands, or capturing all the money they generate. We still get back to the fundamental fact that publishers take risk to make and market games and only get paid on the one sale, while Gamestop profits from multiple sales of the game. Each downstream used sale is one less unit sold by the publisher and therefore less revenue on the game. This impacts initial sales as well as re orders. A healthy stock of used games means Gamestop will not reorder from a publisher.

If this was the whole picture, I could stop here, but you know my posts are never this short. It is time to for Gamestop to fess up and acknowledge their real business. Relative margins reveal Gamestop's actual business to be the collection and resale of used games. New game and accessory sales revenue may equal or exceed the used game revenue, but they do not come close to matching the profit. The stock of used games is financed by the very publishers who are being harmed by the market. They put up the risk capital to make and market the game and put the unit on the shelf. Publishers receive a one time, per unit fee for putting the game into the Gamestop system and are required to pay marketing development funds to Gamestop to have posters and other promotions in store. But Gamestop does not pay for the games, customers do. Gamestop only provides credit until the games are sold. The consumers' payment covers Gamestop's initial outlay, plus a profit. Because Gamestop pays on terms, the consumers' money is in the bank before Gamestop ever makes a payment on the new game units. If the consumers do not sufficiently cover the expense, Gamestop will call on the publishers for price adjustments and protection. While this business shows a profit with no downside risk, the entire retail side is merely a highly cost effective way of funding the used game inventory. To ensure return of the games, consumers who buy a games are bombarded with offers to turn them back in for credit. Each turned in game builds the used inventory, at no cost to Gamestop. When sold, the only person receiving the benefit, is Gamestop. When I put it this way . . . . I don't want to say it sounds like laundering, but . . . . . They take a game unit a publisher should get paid for, run it though a consumer, and turn into a game unit they can sell over, and over, and over, and over without compensation to the publisher.

I feel better now.


10 comments:

Jon said...

What would it take for the games industry to classify Gamestop as a rental outlet (citing its own financial statements as proof) and make thus up by charging it a markup on initial stock to cover it? Isn't that how Blockbuster used to operate with movies?

Keith said...

I was not a big fan of rental either, but at least with Blockbuster, there was a limit on the number of times they could rent a unit of the game.

AMAZING POWERS OF OBSERVATION said...

well the law on first sell doctrine is clear. i buy a game i own it. the license theory is crap.i will sale the game i own to who i wish and how much i want . if the imaginary properties you wish to impose on the owner then i will not be a customer to the product

Keith said...

Thank you Amazing Powers, but I don't remember addressing the first sale doctrine in this post (although, before you are so certain in your position, you may want to take a look at Vernor v. Autodesk). In fact, nothing in the post addresses the consumers ability to do as they please with the game they purchase.

The point of the post is the hypocrisy of Gamestop continuing to argue the institutionalized sale of used games is good for the industry. It is not.

Whether Gamestop or consumers are legally entitled to engage in the practice is a completely different topic and I did not address it here.

E. Zachary Knight said...

Keith,

I think First Sale is an important point in this discussion. Other than PC games, no games are sold as a license. So the Autodesk case would not effect anything in regards to GameStop's used game business.

With First Sale, once a transaction takes place between the copyright holder and the retailer, the copyright holder could not control further sales of that item. This doctrine was first introduced to prevent book publishers from dictating terms of sales after the first sale where they retained control of the goods. Specifically, it stopped book publishers from dictating prices. At the time some book publishers wanted to prevent some book sellers from under cutting their competition.

With games, once the publisher sells to GameStop, they have no control over whether GameStop can resell those same copies. Now you do bring up the fact that GameStop operates under a credit system. However, it is up to the publisher to maintain a flat rate if they want to maintain control over new prices. If you contract with GameStop to be paid $45 when the game sells, it is up to you to retain that price and only drop it on your terms, not theirs. The fact that GameStop can convince you to drop the price is not a problem on their end.

Now let's discuss the stock replenishing aspect of this. Granted I don't run a game store, but I would assume the margin on a new game is quite slim. For a $60 game, GameStop would only make $15 on it. (correct me if I am wrong) So that means to replenish inventory of new stock, they would have to pay the publisher $45 per copy. Having done business with GameStop as a customer, I know that on that $60 game, they will pay me $30-35 to take it off my hands when I am done with it. They then turn around to sell it for $50-55. That is a margin of $20-25. $25 dollar margin is a much nicer prospect for GameStop over a $15 margin you would offer them.

Perhaps at that point, the publisher should look at making it more profitable for GameStop to sell new rather than used.

E. Zachary Knight said...

Sorry, I couldn't post this all at once.

Now let's talk about how this benefits the industry. I will focus this from a consumer perspective.

Let's say I am a customer. I just got a PS3 because it is finally affordable to me. I want some games. Now, I really like Batman and want to play a game about him. I keep hearing about this Arkham City game coming out soon, but I want a game now. I remember that it is a sequel to another game and go look for it. I look on the shelves and can't find it new, because it is no longer being sold by the publisher. So I buy it used. So now I play it and love it. Come this fall, I will be buying Arkham City. But, since I am on a tight budget, I can't pay $60. But, GameStop is nice enough to take the other game off my hands for a $20 credit reducing the price of the new game to $40. A much more reasonable price for me at this time. GameStop is still paying the publish $45 when I buy that new game with the credit. So they are not losing anything. That is the benefit to the industry.

Now let's talk about the whole "Games showing up as used within the first week of sales" problem. That is not a problem. That is a symptom of the problem. The actual problem is that the game is not something people want to keep for more than a week. If the game were something that people wanted to hold onto, they wouldn't be showing up used so quickly. Yelling at GameStop for alleviating that problem is not going to solve it. That is something that must be taken care of at the source, the developer. In this case, they are providing a service to remedy the problem created by the publishers and developers. This should be a benefit to you as it provides you some information about what you can do better next time.

My whole point is that if Publishers don't like the used market, they need to stop trying to shoot the messenger. The facts remain that people don't hold onto things forever. People tire of games. They can't afford $60 games every week. They want something cheap and fun. That is one of the reasons why free to play and mobile games are taking off. They offer a better value for the dollar. Game publishers need to learn to compete in these markets rather than complain and try to force change.

christopher said...

Just so you know, Techdirt and its readers are laughing at your argument. As are rational people everywhere.

Keith said...

Thank you for the comment Mr. Knight.

First sale is relevant to the business, but not to this post. My only point was to address Gamestop's continued effort to justify resale of used games as a good thing for the industry. No question it is a good business for them, but the threat to the industry is equally without doubt. Let them just come out and say they do it because they can, and it is profitable.

As far as the credit sale and price protection, you are underestimating the power of Gamestop. Gamestop will order a certain number of units of a game. The publisher will manufacture to that order and incur the related cost. If those games do not sell through, even though the contract requires Gamestop to pay for the games ordered, Gamestop will call the publisher and ask the publisher to either accept return of the games - which no one wants to do - or reduce price. In the alternative, they may ask for a price break on the next major title. Whether legally required to do so or not, publishers much do this because Gamestop is still a strong channel.

Publishers cannot legally dictate the retail price of the product. If they reduce margins, retail will likely fall as well and used will fall a proportionate amount. Publishers have much more effective tools to use to impact used games and are starting to employ some of these positive reinforcement tools to great success. Again, these are beyond the scope of the post.

Anonymous said...

http://www.techdirt.com/articles/20110824/01364015649/more-misplaced-hatred-used-games-market.shtml#comments

techdirt says it all

Eo Nomine said...

Congrats Keith! Apparently your concerns about the negative impact of institutionalization of used game sales is just typical industry "whining...that they just don't like a free market where they can't artificially inflate the market price of games even higher."

So sayeth Mike Masnick of TechDirt, so it must be true: http://www.techdirt.com/articles/20110824/01364015649/more-misplaced-hatred-used-games-market.shtml

Of course, my experience is that if The Masnick writes an entire post basically dedicated to calling you an idiot, it probably means you're doing something right... especially when his primary evidence that "a healthy resale market increases primary market sales" is one of his own posts that in turn links to an NYT article by Hal Varian from 2005 summarizing research on the used book market on eBay and Amazon. Of course, that's a different issue than the retail sale of used games... and that same article concluded that "16 percent of the used book sales directly cannibalized new book sales", despite the fact that "used books...are not strong substitutes for new books" (clearly not the case for digital products such as games).