oh, if only I could stay awhile; but what am I afraid of?

Posted on | August 31, 2010 | 2 Comments

Penny Arcade followed up their contentious post on buying used video games last week with another post on Friday:

People who buy used games are not pirates, by definition. Used games (used everything, really) are and will continue to be a legal and protected form of commerce. Other industries have done what they can to co-opt, destroy, or harvest those markets, but their existence is settled law. What I have said is that the end result of that purchase from a developer perspective must be indistinguishable. Isn’t it? That is the question I couldn’t answer. I still can’t answer it. And because I couldn’t, I had to change the way I invested my leisure dollar.

People want to talk about used cars, or libraries, or any other thing really, but I’m not talking about the universe in general – I’m talking about the tiny part of it I have any control over. That bit up there is the part I can’t resolve: the moral dimension contained within the purchase. Yes, I’m giving somebody money when I buy used. Is that sufficient? What is the end result, and what systems am I sustaining by doing so?

Also, I got some good comments on my LiveJournal (which mirrors every post here, but gets more comments). The most interesting one was from Dan S., longtime friend of the blog:

What Holkins is taking for granted that his audience knows, and he shouldn’t, is this: GameStop controls 98% of the used games market. So when we say “used games”, what we should be saying is “GameStop”. Also, we’re talking about hundreds of millions of dollars here.

The problem is GameStop will encourage gamers to return new, hot games quickly, and then push the used copies onto people trying to buy the game new. So not only does the developer not see a profit, they’re not seeing a profit on the order of, depending on the game, tens of millions.

This also allows GameStop to artificially inflate the price of used copies for an insanely long time: part of the reason I don’t bother with GameStop is that I can go to Best Buy and get the game new for either the same price or at least ten bucks less than their used price.

This is an important point.

If I buy a copy of HALO Reach at Best Buy for $60, play it for a while, then get tired of it, I can sell it to GameStop. They’ll pay me about $15 for it. They will then turn around and sell it for at least $40. If someone buys it and does the same thing, GameStop can keep collecting $40 for the same disc every time it crosses their counter. And since most people trade in their games for store credit, rather than legal tender, GameStop makes money on every aspect of the transaction.

So, yes: I can see why game developers wouldn’t like that.

How to stop it? Aside from legal obstructions (which wouldn’t work) or some sort of shaming campaign (which has been great at convincing America that our President is a Muslim, but little else), publishers could lower the MSRP. GameStop can only make the profits they do because of the margins involved. If I’m choosing between a brand new copy of a game at $60 and a used copy at $40 – which has a 90% chance of being playable – I might take the gamble on the $40 copy. GameStop’s margin on the game is $25 ($40 retail, minus the $15 credit they gave the person who traded it in), all other things being equal.

But if a brand new game retailed at $40, what’s GameStop going to do? Lower the “used” price to $30? That would lower their margin to $15, which cuts their revenue by 40%. They could also lower their trade-in value from $15 to $5, but then you’d get fewer trade-ins, which would also cut revenue.

Of course, it’s easy for me to say that huge corporations that already spend millions of dollars in developing new games should experiment by slashing prices. That decision’s always scary. But GameStop’s behavior is exactly the sort of rent-seeking that comes from massive margins. So long as there’s room for middlemen to whittle away at the price, you’ll find middlemen whittling.

Plus, maybe it’s not that much of a gamble. As several other commenters pointed out last week (Joel being the first), consumers are willing to pay $60 with the knowledge that they can sell a game used. So they’re already discounting the price of the game in their heads. If you want to be really cynical about it: you’ve already lost that $15 to GameStop anyway. Why not cut it out of the retail price to spite the bastards?

Of course, as my good friend Jason pointed out, the future of profitable video game development lies in mobile and social, not in the console. Angry Birds took a team of ten developers less than a year to make. It retails at $0.99 ($4.99 on the iPad). It’s now the #1 app on iTunes, with revenue in excess of $4.5 million, and has been optioned into a movie. That’s not the billions in revenue that World of Warcraft clears every year, but it’s not the hundred million dollar bath that investors took on APB, either. Which would you rather take a chance on – that Activision will still be around in five years, or that your Mafia Wars / Farmville knock-off will make you enough money to pay your rent?

The future will not be kind to business models that require real estate. The future will be creative, like Schumpeter said, but it’ll have to be destructive first.

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