Industry Wary of Amazon Game Trade-In Move
Posted: Fri Mar 06, 2009 1:43 pm
Industry Wary of Amazon Game Trade-In Move
By Kris Graft
The lure of the lucrative used games business was too strong for leading online retailer Amazon to ignore, as the company unveiled this week a program that will have customers exchanging their old games for Amazon.com store credit, a business model that that can result in fat margins if executed precisely.
With the entry of Amazon, an organization with projected annual revenue of $19 billion, speculation arose that top specialty videogame retailer GameStop could lose some of its used games market share. Amazon’s news caused GameStop share prices to slide on Thursday.
But GameStop CEO Dan DeMatteo isn’t particularly worried about Amazon’s used game move, to say the least.
"I give the probability of this working at zero," he bluntly said during a phone interview.
He may have room to talk. GameStop, which expects to report $8.8 billion for fiscal 2008, attempted a similar mail-in trade-in model several years ago: Ship a game to GameStop for free, receive store credit based on predetermined trade-in values, use that credit to buy GameStop products. It simply did not work.
"Electronics Boutique also tried it and failed. There's no consumer acceptance. With consumers, there is an immediacy for currency when they want to buy a new game,” he says. "It didn't work for us, and I can't see it working for them.
“…While customers wanted to buy a new, say, Killzone 2, they weren’t going to wait the week or two weeks it took to get the credit, then buy Killzone 2. They want Killzone 2 the day it comes out. They need the money and the credit right now.”
Analyst Evan Wilson with Pacific Crest recently said that GameStop, primarily a brick-and-mortar retailer, is poised to report around $2 billion just from its used games business in fiscal 2008. GameStop's gross profit margin for used games is nearly 50 percent, versus around 20 percent for a new game sale. Premium-priced new games sell for $60.
Amazon.com has offered used games for years, albeit via third party sellers. With this new program, it positions the company to take advantage of those kinds of margins on a firsthand basis.
“Video Games Trade-In is an extension of our existing, thriving marketplace–we view this as another opportunity to better serve our videogames customers,” says Drew Herdener, director of corporate communications for Amazon.
However, DeMatteo suggests that the ability for users themselves to sell games via Amazon.com negates the need for a trade-in program. “If [users] can sell a used game and get $35 for it, why would they trade it in and get $25 or $22 [of credit] for it?” He says if a consumer has to wait for the online transaction process in either situation, he or she may as well opt for the method with a greater cash return. It’s the immediacy that gives GameStop’s retail trade-in program the edge, he claims.
Ultimately, a confident DeMatteo says that Amazon’s move will not affect GameStop’s trade-in values or used game pricing. But on the news that Amazon would be entering the trade-in business, GameStop shares dropped 14 percent to $23.46 on investor fears that Amazon could take a piece of the pre-owned pie. DeMatteo believes the stock will recover once investors realize the differences between GameStop and Amazon’s used game models.
Analysts such as Janco Partners’ Mike Hickey and Lazard’s Colin Sebastian concur that Amazon’s trade-in business will have little effect on GameStop.
While the retailers vie for a piece of the used games market, some developers are still more than perturbed that they aren’t seeing any of the huge revenues from pre-owned games.
Game developers speak out
The debate over used games is showing no signs of slowing. One side, the retailers such as GameStop, say that videogame trade-ins fuel the sale of new games, which is good for game makers who get a piece of that pie. On the other side of the fence are publishers and developers who see all of this used game revenue slip through their fingers.
David Braben, founder of U.K.-based LostWinds developer Frontier Developments, says that Amazon’s move into the used games market is yet another blow to developers hoping for extended new game sales.
“GameStop's argument is a hollow one. The current regime is keeping retail prices high,” he argued. But game makers need those high prices to, in turn, counter the effects of the used games business, he says. “They are trying to use that same high price to justify the regime.
“Much less of [of the money] is now going towards the creation of new games, and much more into the pockets of the retailers, as the industry does not see any of the pre-owned sales revenue.”
Braben went as far as to suggest that by fourth quarter this year, games should carry a small “Not for Rental or Resale” label and be priced lower, while a separate otherwise identical group of games without the label should be permitted to circulate in the secondhand market, but sold initially for a higher price. “We should be prepared to enforce [that] as an industry,” he said.
Didier Malenfant, CEO of the studio Ready at Dawn, says of Amazon’s move, “It goes to show that, just like rentals, [used games are] a very lucrative market, no matter how hard some of the retailers who do this are trying to deny it. It's a huge part of their bottom line.”
Echoing Braben, he adds, “Problem is, it's not a sustainable market. The more that people's money goes toward used games, the less goes into making new games. Without new games, there aren't any used games. Less revenue for new games leaves us with only two choices in order to pay for their development: 1) Spend less money on making the games in the first place 2) Charge more for each game that is sold. So this only leads to bad games or more expensive games. Either way, it’s not a great outlook, is it?”
Malenfant is also distraught that videogame trade groups aren’t concentrating more on lobbying for legislation to control the sale of used games.
“Other industries have fought for legislation to regulate used sales; movies have first viewing rights and license their titles for renting. I'd like to see our lobbying powers take a closer look at this instead of worrying about where to put the next E3 or whether booth babes should be allowed or not.”
U.K.-based videogame trade organization Tiga, however, is concerned, as it calls upon developers to find more direct means of selling their products. “Amazon’s role in selling used games represents a further serious challenge to developers and publishers,” says Tiga CEO Richard Wilson.
“Many games businesses will increasingly have to consider selling directly to the consumer, not least in the form of digital distribution. A recent Tiga survey showed that 9 percent of developers in the U.K. already sell games directly to consumers. We can expect this trend to continue.”
Better for the consumer?
In the middle of this debate are the consumers, who, judging by the high volume sales of used games, are happy to knock off a few dollars from their gaming purchases, whether trading in titles for new $60 games or used products.
Amazon’s Herdener wouldn’t comment on competition from GameStop, but when asked about the game makers who denounce the secondhand market, he replied, “We view everything through the customer’s eyes. [Video Games Trade-In] is one of those offerings that is clearly a great option for customers, and we’re happy to make it possible.”
By Kris Graft
The lure of the lucrative used games business was too strong for leading online retailer Amazon to ignore, as the company unveiled this week a program that will have customers exchanging their old games for Amazon.com store credit, a business model that that can result in fat margins if executed precisely.
With the entry of Amazon, an organization with projected annual revenue of $19 billion, speculation arose that top specialty videogame retailer GameStop could lose some of its used games market share. Amazon’s news caused GameStop share prices to slide on Thursday.
But GameStop CEO Dan DeMatteo isn’t particularly worried about Amazon’s used game move, to say the least.
"I give the probability of this working at zero," he bluntly said during a phone interview.
He may have room to talk. GameStop, which expects to report $8.8 billion for fiscal 2008, attempted a similar mail-in trade-in model several years ago: Ship a game to GameStop for free, receive store credit based on predetermined trade-in values, use that credit to buy GameStop products. It simply did not work.
"Electronics Boutique also tried it and failed. There's no consumer acceptance. With consumers, there is an immediacy for currency when they want to buy a new game,” he says. "It didn't work for us, and I can't see it working for them.
“…While customers wanted to buy a new, say, Killzone 2, they weren’t going to wait the week or two weeks it took to get the credit, then buy Killzone 2. They want Killzone 2 the day it comes out. They need the money and the credit right now.”
Analyst Evan Wilson with Pacific Crest recently said that GameStop, primarily a brick-and-mortar retailer, is poised to report around $2 billion just from its used games business in fiscal 2008. GameStop's gross profit margin for used games is nearly 50 percent, versus around 20 percent for a new game sale. Premium-priced new games sell for $60.
Amazon.com has offered used games for years, albeit via third party sellers. With this new program, it positions the company to take advantage of those kinds of margins on a firsthand basis.
“Video Games Trade-In is an extension of our existing, thriving marketplace–we view this as another opportunity to better serve our videogames customers,” says Drew Herdener, director of corporate communications for Amazon.
However, DeMatteo suggests that the ability for users themselves to sell games via Amazon.com negates the need for a trade-in program. “If [users] can sell a used game and get $35 for it, why would they trade it in and get $25 or $22 [of credit] for it?” He says if a consumer has to wait for the online transaction process in either situation, he or she may as well opt for the method with a greater cash return. It’s the immediacy that gives GameStop’s retail trade-in program the edge, he claims.
Ultimately, a confident DeMatteo says that Amazon’s move will not affect GameStop’s trade-in values or used game pricing. But on the news that Amazon would be entering the trade-in business, GameStop shares dropped 14 percent to $23.46 on investor fears that Amazon could take a piece of the pre-owned pie. DeMatteo believes the stock will recover once investors realize the differences between GameStop and Amazon’s used game models.
Analysts such as Janco Partners’ Mike Hickey and Lazard’s Colin Sebastian concur that Amazon’s trade-in business will have little effect on GameStop.
While the retailers vie for a piece of the used games market, some developers are still more than perturbed that they aren’t seeing any of the huge revenues from pre-owned games.
Game developers speak out
The debate over used games is showing no signs of slowing. One side, the retailers such as GameStop, say that videogame trade-ins fuel the sale of new games, which is good for game makers who get a piece of that pie. On the other side of the fence are publishers and developers who see all of this used game revenue slip through their fingers.
David Braben, founder of U.K.-based LostWinds developer Frontier Developments, says that Amazon’s move into the used games market is yet another blow to developers hoping for extended new game sales.
“GameStop's argument is a hollow one. The current regime is keeping retail prices high,” he argued. But game makers need those high prices to, in turn, counter the effects of the used games business, he says. “They are trying to use that same high price to justify the regime.
“Much less of [of the money] is now going towards the creation of new games, and much more into the pockets of the retailers, as the industry does not see any of the pre-owned sales revenue.”
Braben went as far as to suggest that by fourth quarter this year, games should carry a small “Not for Rental or Resale” label and be priced lower, while a separate otherwise identical group of games without the label should be permitted to circulate in the secondhand market, but sold initially for a higher price. “We should be prepared to enforce [that] as an industry,” he said.
Didier Malenfant, CEO of the studio Ready at Dawn, says of Amazon’s move, “It goes to show that, just like rentals, [used games are] a very lucrative market, no matter how hard some of the retailers who do this are trying to deny it. It's a huge part of their bottom line.”
Echoing Braben, he adds, “Problem is, it's not a sustainable market. The more that people's money goes toward used games, the less goes into making new games. Without new games, there aren't any used games. Less revenue for new games leaves us with only two choices in order to pay for their development: 1) Spend less money on making the games in the first place 2) Charge more for each game that is sold. So this only leads to bad games or more expensive games. Either way, it’s not a great outlook, is it?”
Malenfant is also distraught that videogame trade groups aren’t concentrating more on lobbying for legislation to control the sale of used games.
“Other industries have fought for legislation to regulate used sales; movies have first viewing rights and license their titles for renting. I'd like to see our lobbying powers take a closer look at this instead of worrying about where to put the next E3 or whether booth babes should be allowed or not.”
U.K.-based videogame trade organization Tiga, however, is concerned, as it calls upon developers to find more direct means of selling their products. “Amazon’s role in selling used games represents a further serious challenge to developers and publishers,” says Tiga CEO Richard Wilson.
“Many games businesses will increasingly have to consider selling directly to the consumer, not least in the form of digital distribution. A recent Tiga survey showed that 9 percent of developers in the U.K. already sell games directly to consumers. We can expect this trend to continue.”
Better for the consumer?
In the middle of this debate are the consumers, who, judging by the high volume sales of used games, are happy to knock off a few dollars from their gaming purchases, whether trading in titles for new $60 games or used products.
Amazon’s Herdener wouldn’t comment on competition from GameStop, but when asked about the game makers who denounce the secondhand market, he replied, “We view everything through the customer’s eyes. [Video Games Trade-In] is one of those offerings that is clearly a great option for customers, and we’re happy to make it possible.”