The sale of pre-owned games is a major talking point in the games industry; with publishers complaining that the sale of used titles is adversely affecting both their profit margins and their ability to continue producing top quality AAA products. But this is only one side of a multi-faceted story. In this feature, we attempt to peel back the layers of the pre-owned games debate by speaking to everyone affected, from the publishers to the retailers themselves.
The pre-owned market is a bigger threat to the games industry than piracy, according to Blitz Games co-founder Andrew Oliver, contributing hyperbole to a debate that has spiralled out of control in recent months, as games publishers struggling with increasing production costs continue to lash out at a niche retail sector scrambling for profits.
It’s a familiar tale. Each and every time you stroll into EB and pick up a pre-owned title at a reduced price you’re technically contributing zero to the development team that produced it, and nothing to the publisher that helped fund and distribute it. Every cent of the profit from that specific sale goes directly into the coffers of the retailer you bought it from - EB, JB Hi-Fi, Game - and publishers are saying that simply isn’t cricket.
“The sale of back catalogue games largely underpins the development risks of bringing new games to market”, explains Ron Curry, CEO of the Interactive Games & Entertainment Association. “When that source of revenue is reduced, through events such as piracy or the lost sale opportunity due to pre-owned games, it has a knock on effect.”
On some level it’s an issue we’re all responsible for. We all contribute to it - well, most of us. We’d surmise that a large percentage of gamers have innocently taken a bag of used games to EB, scattered a sackful of memories onto the desk, and traded their collection towards whichever flavour of the month AAA title was being pimped at that precise moment. Others may have taken advantage of the ever-growing pre-owned sections - picking up a handful of bargains instead of shelling out the full $100 for a new title. On some level, by participating in this cycle, we’re taking part in a process that has negative consequences for the entire games industry as a whole.
But the issue is more complicated than it would initially seem. On the surface it’s the familiar battle between publisher and retailer, but at the heart it’s a scramble for dollars in an all-consuming price war that could spell the end for the way in which we buy and consume games - an endgame that could adversely affect gaming for all involved.
The Sale of the Century “It’s probably best that we stay out of this article on this occasion,” began Ben Grant, Marketing Director at Game, when we asked him for comment. “I will say however, that if it wasn’t for the pre-owned business, specialist retailers simply would not exist today, as the mint business alone does not deliver the profit levels required to run a successful specialist operation.”
Ben Grant has been more than willing to talk to us freely about a number of issues in the past, but shied away from the pre-owned games debate - and with good reason. Video game publishers and retailers like Game and Electronics Boutique are notoriously interdependent - they need each other to survive, and the issue of game trades is as touchy as it gets.
So it was hardly surprising that the only niche retailer willing to talk to us regarding the issue was Mark Langford, Managing Director of Game Traders, a company that deals with publishers less directly. Having been involved in video games retail for decades Mark has witnessed some changes in the niche video games retail sector, and has picked up on a few trends here and there. The most obvious? Almost all of his competitors have gone bust.
“I’m going to be totally honest here,” starts Mark, ominously, “and I suppose it may offend a few people - but the bottom line is 10 years ago when I started this business there were 160 independent games retailers in this country, at a rough guess. Today? You could probably count them on one hand.
“They’re all gone - and the reason is all the majors are discounting all the titles on day one. They’re all going at cost price, and that’s why there aren’t any independent retailers anymore.”
Mark’s referring to the day-one price-slashing that mega retailers, such as Big W and K-Mart, regularly partake in, reducing brand new titles directly down to cost price the second they’re released. In a crowded market, it’s difficult for niche retailers like GameTraders et al to compete.
In fact, it’s more than difficult. According to Mark Langford it’s nigh on impossible.
“If we didn’t change,” claims Mark, “and we relied on trying to compete on price, we simply wouldn’t survive. Don’t get me wrong, we’re competitive on price, but that’s because of the trades. The trades allow us to compete against the big department stores on price.”
“Of course it could,” claims Ron, “and it has done for many years. You only have to look back not too many years ago to see that the industry existed nicely without the proliferation of pre-owned games.”
To an extent we agreed with Ron, but when we put this theory to Mark Langford his reaction was immediate and instinctive. He quite literally laughed out loud.
“Rubbish!” laughs Mark. “Things have changed. The reason we can’t do it now is that the maximum margin of a new game is 25%, and on formats like the PS3 it’s closer to 22%. Then when you price match, or you have too much stock and it isn’t selling, your margins are under 20%.
“If you could maintain 25% you might survive, but the simple fact is that videogames are like fruit and veg - some of them go off within a week! In fact that’s what we say to our licensees: treat games like fruit and veg. You’ll get your constants like Modern Warfare and Halo that continue to sell, but if you get a highly anticipated release and it doesn’t sell like you hoped, you’ve got to dump it - because if it’s sitting there for 60 days, it just doesn’t have the value anymore.”
The Loss Leaders The facts are clear - in videogames, profit margins are low. Lower than they’ve ever been before; and when you have to compete with other retailers selling at cost price, it becomes increasingly more difficult to make money from new games alone - especially when you don’t have the financial clout to buy in bulk the same way Big W and other big retailers do. The only way stores like EB, Game and Game Traders can compete, according to Mark Langford at least, is through trades.
“Publishers give these deals to the big department stores, big rebates, that they won’t give to us. They will if we buy 20,000 of them, but we’re a smaller group.”
And when mega retailers buy in bulk, and demand low prices from publishers for the stock, everyone loses - the publishers, and the niche retail sector struggling to compete with the low prices.
Mark agrees. “These retailers are the ones that put big pressure on the publishers - they’ll buy 20,000 units, but they want a deal. And the publishers have to take the hit.”
But, perhaps unfairly, or perhaps as a result of frustrations regarding the whole process, Mark has little sympathy for games publishers.
“They’re the ones that brought it on themselves,” he claims. “They’re the ones that wanted their games in the big stores, and in turn the big retailers were happy to sell some of this stuff on as a loss leader. They buy a pair of socks and a toaster along with their game and Big W’s happy.”
A loss leader. Mark is referring to the fact that big retailers, such as Big W and JB Hifi, can afford to discount in lieu of the fact that customers will generally buy something in addition to the cheap game they’ve just picked up - a luxury unavailable to most niche games retailers.
But that’s just one problem Mark Langford has to deal with. In most respects, for smaller retailers specifically, the odds are stacked against them.
“The rents and the costs of staffing, in shopping centres in particular are unbelievably high. Some of the rent you pay in these centres - you’re talking over $200,000 a year just in rent in some of the prime locations.
“And the big retailers like Big W - they pay less for rent per square metre. They’re probably paying $250 per square metre, and we’re paying over $1000!”
Adapting and Reacting But as unfair as this may seem, this endgame is the result of a free market. If you can afford to buy in bulk, and you have the means to distribute and sell said product, then you should get a discount. And conversely, if you can’t find a way to compete in the market, you must evolve or face the consequences - that, whether you agree with it or not, is the nature of commerce.
The flipside of this argument, however, is that game trades and the sale of pre-owned games is another direct result of said free market in action. Selling in bulk results in lowered cost at retail, lowered prices at retail results in the proliferation of pre-owned sales, which, in turn, drives dollars back in the niche retail market. It’s a co-dependent cycle that everyone plays a part in maintaining.
Business, in that respect, is Darwinian - natural selection at work - you must adapt or die.
And we can see this process in action. EA, for example, has trialled its ‘Online Pass’ system with games such as Medal of Honor and FIFA 11. If you happen to have bought a pre-owned copy of either of these games, you’ll have to pay a premium in order to get the full online experience, giving EA, and any other publisher that follows suit, a second bite at the royalty cherry.
GameTraders are evolving too, through trades obviously, but also by wisely embracing the niche market it serves.
“That’s the only reason we’re still around,” claims Mark. “We’re adapting. We’ve cottoned on to the fact that gamers love what we do, and we’ve been diversifying a bit. We’re the only major supplier of rare games in the country. We get a hold of all sorts of stuff that collectors love. We do anime, manga, figurines, and gaming related products - that gives us an edge. We’re actually reacting to business conditions.”
All intelligent evolutionary steps - but are these reactions symptomatic of an industry on the brink of some sort of revolution? Are efforts by both the publishers and the retailers the last desperate splutter of an industry on the verge of major change?
The inevitable advent of digital distribution says yes. Development costs are ever increasing, while profit margins are continuing to decrease. And very few experts expect these trends to reverse themselves any time soon.
Mark Langford grudgingly agrees.
“Let’s be honest about it - publishers may not tell you this, but they definitely want to go down that track. Why wouldn’t they? If we were to say to them, in 10 years time will your customers be downloading directly onto their consoles - are they going to say no?”
In that respect digital distribution is most likely the real endgame, which will be great for developers, and possibly even help publishers. Above all it’ll probably best serve the consumer. But retail? 100% online delivery of all videogames will probably be the final death knell for the niche outlets that have been so paramount to the growth of gaming as an industry and a medium - and we can’t help but feel a little sad about that.
“We think there’s probably a good ten years left in the industry,” claims Mark Langford, finally. “But past that? We just don’t know.”