A war on used games is a war on GameStop, but we explain why that won’t happen
We’ve already tackled the issue of an all-digital gaming console, but what about used games? There have been multiple rumors about technology that would block the sale of used games on consoles in the past few months, and Kotaku has the latest details about what could be the next-generation PlayStation console. The source is unnamed, so take all these details with a large grain of salt, but it’s still interesting to read. The bit that sticks out is that each game you buy will be locked to a single PlayStation Network account. “If you then decide to trade that disc in, the pre-owned customer picking it up will be limited in what they can do,” Kotaku reported. “While our sources were unclear on how exactly the pre-owned customer side of things would work, it's believed used games will be limited to a trial mode or some other form of content restriction, with consumers having to pay a fee to unlock/register the full game.” When we talk about limiting the use of used games, we’re talking about GameStop. The retail giant has over 6,200 stores worldwide, and its business model is largely based around the buying and selling of used games, accessories, and hardware. The profit margin on used games is hard to beat: Instead of buying games at a set price from a distributor and reselling them for a small markup after shipping the game across the country or importing them from another continent, GameStop buys used games for around half of what they sell them for in the store, and there is no cost to ship the games. There is also no pesky publisher or distributor to get a cut of the profit. GameStop may make a few dollars from the sale of each new game, but the company can make $25 or more from the sale of a used game. This is why publishers and developers have such a love/hate relationship with the retailer. GameStop is responsible for the sale of many consoles and new games, but the company is also aggressive about pushing used games on consumers to take advantage of that margin. If a customer brings a new game to the counter, the sales person will try to talk them into a used copy, usually for around $5 less than the new game. If the customer says no thank you, the sales person will often press the issue. That card you received with your subscription to Game Informer will help you save money on used games, and get more money for your traded-in games. GameStop knows how much profit there is to be taken from that transaction, and is willing to trade some of that money for your loyalty. The only reason GameStop stocks new games and systems is to get you in the door to try to talk you into used games, controllers, and systems. Just how dependent is GameStop on used sales? Let’s take a look at the numbers. Here are the sales for 2011, taken from the company’s latest 10-K form, filed on March 27 for the fiscal year ending on February 28. New video games account for 42.4 percent of all sales for the company. That’s why publishers love GameStop; the company moves an insane number of new games, and that’s where publishers make their money. Things snap into focus when we look at the company’s gross profit for 2011. These numbers are a little tricky to read if you don't know what you're doing, and in fact I turned to our own Robert Khoo to make sure I was looking at the data correctly. We see that the highest profit margins are found in used games, but that's not exactly a company secret. We can also see that GameStop took in almost $2.7 billion in gross profit, and by comparing that to the gross profit in each product line we can find the importance of used game and hardware sales. Used video game products make up 45.58 percent of the company's total gross profits, with new video games and consoles making up 35.55 percent of the company's total gross profits. Used products are a tent pole for the company, and make up the largest percentage of its gross profits. Those profits will only continue to come in if The Big Three don't find a way to control used game sales; and when your largest source of profit is also your most volatile product things begin to look shaky. GameStop knows this, and each 10-K filing has to include extensive information on the risk factors of each company. “Our financial results depend on our ability to take trade-ins of, and sell, used video game products and used mobile devices within our stores,” GameStop stated in its form. “Actions by manufacturers or publishers of video game products or mobile devices or governmental authorities to limit our ability to take trade-ins or sell used video game products or mobile devices could have a negative impact on our sales and earnings.” There are other high margin items in GameStop stores, such as accessories, cases for portable systems, and of course warranties, but the company was built on used games and depends on them. The technology described in the Kotaku article wouldn’t kill that business, but the price of used games would have to go down significantly to cover the fact that the customer would also have to buy the re-activation key directly from the publisher, and GameStop’s margins would be squeezed significantly. GameStop is dependent on used games in the same way that Activision Blizzard is dependent on World of WarCraft: If that one product were to disappear the company might survive, but the days of milk and honey would be over. The question is whether the publishers could survive the wrath of GameStop. Would the company still sell the hardware if the used game profits were stepped on? We're already deep into speculation, but ultimately the publishers and console manufacturers hold most of the power. There are retailers out there that aren’t GameStop and digital sales will become even more popular in the next generation, even if they don't become the primary method of purchasing games. GameStop would have no choice but to accept the lower margins if all three of the console manufacturers work together to roll out this sort of technology in the next generation. If GameStop’s profit margin on used games goes from $25 from new releases to $5 or so from new releases we can expect a hit to the company’s stock price and much more importance placed on building up the company's digital strategy. This is all doom and gloom, but the reality is that there would likely be a compromise struck between the console manufacturers and retailers before any details of this sort of thing reached the press or consumers. Sony, Nintendo, and Microsoft need GameStop to build up hype and take pre-orders for new hardware, and GameStop needs to make money from used games. It's very possible that the margin may change, but the result will be tolerable for both sides of the coin. The only one who loses out is the person who ultimately buys and sells the games. Note: we contacted GameStop for comment on this story, and they have not responded as of the time of writing.