New Players Eye Used Video Game Marketplace

The used video game business has historically been the sweet spot for specialty retailers.

Avid players, having beaten a game, would head to the local GameStop or Game Crazy store to exchange it (and a little bit of cash from their wallet) for another, with the cycle repeating itself time and again.

GameStop has been the reigning king of the used game hill for a long time, but there are a whole lot of companies looking to shove them off these days.

In the past month, both Amazon and Toys R Us have launched pilot programs, trading and selling used games.

And Best Buy , which dipped its toes in these waters four years ago, looks to be gearing up for another run.

The stakes are high.

A used video game normally sells for $5 to $10 less than a new copy of the same title.

Retailers, though, do not have to pay a penny to the game’s publisher on used sales, meaning the profit margin is notably higher.

At GameStop, roughly half of the company’s gross profits come from used game sales, according to Colin Sebastian, an analyst at Lazard Capital Markets.

Of the new competitors, Amazon is the biggest threat. (Toys R Us is only dealing used games at a handful of stores in New York. And it’s unclear whether it will expand the program.)

Amazon’s program is still in beta, but users can use their game trade credit for anything the site sells – not just other games, which could prove intriguing to non-core gamers.

GameStop executives downplay the Amazon threat.

"We've attempted this model on GameStop.com in the past and didn't get a lot of consumer acceptance,” says Paul Raines, chief operating officer at GameStop.

“When you dig into our customer database, you find that 70 percent of trades are immediately used for a new purchase. When you have to mail in a trade and have to wait [several] days to get a gift card... We look at that and scratch our heads and think if you're wiling to wait a few days, why not sell it on eBay – and get more for it?”

Trade-ins are a lucrative business, but a complicated one.

Allocating inventory among stores, ensuring that the traded-in games are in good condition and forecasting which games will have a high resale value are among the challenges.

It’s manpower intensive work – and GameStop has taken the extra step of having an economist on staff to help model trade-in demand.

Complicating the equation is the attitude of publishers and developers toward trade-ins. Because the practice cuts into their bottom line, very few game makers actively support trades, but they’re relatively powerless to oppose it.

Digital downloads of titles could cut into used game sales, but the public has not yet fully embraced the practice. PC game downloads are growing in popularity, with Valve Software’s Steam service leading the pack.

Console games are still retail purchases, though – and digital add-ons, where publishers publish additional downloadable content for roughly $10-$20, have been hit and miss.

The highest profile downloadable content to date has been “The Lost and the Damned,” an expansion to Take Two Interactive Software’s “Grand Theft Auto 4”.

Microsoft noted the expansion “eclipsed first-day revenue for all previous downloadable content on Xbox LIVE" soon after its release, but neglected to put that in financial context.

Take Two has not discussed sales numbers either.

Analysts are mixed, but most agree that the ratio of “GTA 4” owners who bought the expansion compared to the over 10 million copies sold was almost certainly less than 25 percent – an impressive, if not overwhelming number.

GameStop offers PC game downloads, but has not seriously invested in the digital space to date. CEO Dan DeMatteo hints that may be changing in the months to come, though.

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“We are definitely interested in investing in methods of alternate distribution,” he says. “We are looking at opportunities digitally. … I would say if we do not [have a deal to announce by the end of the year], we would not have been successful.”

Industry sources say Amazon has also been hinting that it will be widening its foray into the digital distribution space soon. (It currently only offers downloadable casual games, but could begin selling AAA titles as well.) If so, that would be another battle line between the online retailing giant and the specialty retailer.

The big concern at GameStop isn’t Amazon, though.

It’s a company that, so far, hasn’t shown a lot of interest in used games or digital downloads – but is certainly watching both spaces carefully: Wal-Mart .

“We’re dancing between the toes of a giant,” acknowledges DeMatteo.

“We're not afraid of them, but obviously we have a healthy respect for anybody as big as Wal-Mart. … I consider my job not really as CEO, but director of threat management.”

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