Best Buy Enters Used Video Game Market

Best Buy has launched a trial program allowing video gamers to trade in their old titles for store credit.

The big box retailer is the latest in a string of companies that is exploring ways to tap into the growing used game market, which currently is valued at between $2 billion to $3 billion annually.

AP

Historically, GameStop has been the king of the hill of used games. With the company’s strong position among core gamers, it has so far managed to withstand all competitors who have tried to chip away at its used game dominance.

That includes Best Buy , in fact. The company tried selling used games in select markets in 2005. One test store had over 5,000 titles available. It never expanded the test, though, and quietly pulled out of the space later that year.

This time around, Best Buy is using in-store kiosks to handle the trade.

Customers “insert their used games into a kiosk that will scan it for functionality, and immediately issue a voucher that is instantly redeemable for a Best Buy gift card,” wrote Best Buy Chief Marketing Officer Barry Judge on a corporate blog post announcing the program. “We’ll also be testing the sale of used games in those stores, and some of the kiosks will even rent games and movies.”

The gift cards can be used on anything in the store—not just games.

Best Buy is hardly alone in making a run at the used game market. Wal-Mart   launched a similar program in May, also using a kiosk system to quickly inspect and give credits for games. And both Toys R Us and Amazon jumped in the field in March.

While the move by so many major retailers into the space could be seen as a threat to GameStop’s bottom line, not all analysts believe it will be detrimental to the company.

“While we believe that Best Buy’s entry into the used video game market will create a new overhang on shares of GameStop, we expect Best Buy’s initiative to expand the used video game market rather than take significant share from the specialty channel,” said Colin Sebastian, an analyst at Lazard Capital Markets.

Used video games normally sell 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 Sebastian.

They are a lucrative business, but a complicated one. Allocating inventory among stores can quickly become a logistics nightmare. And forecasting which games will have a high resale value requires an in-depth forecasting model.

Typically, video game publishers and developers aren’t big fans of game trade-ins, since they feel the practice cuts into their bottom line. They’re largely powerless to oppose it, though.

GameStop, for its part, argues that 70 percent of all trade-in credits are used to purchase a new game.

While Best Buy is the latest in a string of major retailers to test used game sales and trade-ins, it likely won’t be the last. With Wal-Mart and Amazon establishing footholds in the market, it may be just a matter of time before Target and Blockbuster (another company that has tried its hand at this once before) jump in as well.

© 2009 CNBC.com