Monday, October 03, 2005

Best Buy/EB

Yes, I thought that Best Buy or someone like them would eventually start offering used video games for sale. No, I didn't think they'd do it three days after I wrote about it.

From Gamespot
In a move that could pose competition to specialty stores GameStop and EB Games, one of the nation's biggest retailers is toying with the idea of selling used video games.

In a memo sent to investors and media today, PiperJaffray analyst Tony Gikas reported on the still-under-wraps test being conducted by the retailer at select stores in the California and Illinois markets.

According to Gikas, Best Buy, which has 700-plus stores nationwide, is testing the new business model in four stores. Gikas says the likelihood Best Buy (ticker: BBY) will roll out the new service is very high.

Why did I think this was going to happen? Like Deep Throat said to Bob Woodware: "follow the money." If you can correctly follow the money, then large chunks of the future can be clearly identified. The margins on used games were just too high for everyone to concede that money to Gamestop and Electronics Boutique.

There's another piece to this puzzle, though. Last week, Certis over at the always excellent Gamers With Jobs wrote about a new pilot program at his local EB (Certis lives in Canada, by the way). Here's the link:

And for the lazy among you, here's an excerpt:
...almost all of the new games on the shelf that have just been released sported a gold medallion sticker that says you could "rent" this game for $10 dollars a month...Essentially, you pay full price for your new game and if you trade it in within one month of your purchase, you get the full price of the game minus $10 (and taxes) in store credit for it. So if I were to buy Far Cry Instincts for the Xbox at $59.99 Canadian tomorrow, I could return it anytime before October 28th and get $49.99 store credit for it. So I've basically "rented" the game for $10 bucks.

The reason I hadn't discussed this until now was that it was just too bizarre to wrap my tiny brain around. Here's what I couldn't grasp: if EB is paying retail price minus ten dollars after a month for your game, they could resell it (at most) for five dollars more than they paid you for it. So they've gone from a situation where they resell games for twice (at least) what they paid for them to an environment where their profit margins are even less than they are for new games. That's not really an apples-for-apples comparison, because they are making the ten dollars from the original rental, but they're also assuming some degre of risk by locking in the price they'll offer you if you return the game within thirty days.

To some degree, the pricing mechanisms for used games aren't efficient. EB might have taken the collar on a game that they paid you twenty dollars for, only to find out the market for that game had collapsed and they couldn't move it at forty dollars, or thirty, or even what they paid you. The key, though, is that their profit margins on used games were generally so huge that they could absorb those occasional losses with no problem.

If they roll out this program nationwide, though, they are going to be skating on very thin ice, with far less buffer to overcome mistakes.

Like I said, that's baffling.

However, it becomes less baffling with the information about Best Buy actively exploring the used game market. Prior to this, EB was battling companies like Blockbuster to make buying a used game more attractive than renting a game instead. Now, though, with Best Buy in the mix, the atmosphere has turned predatory. EB can no longer distinguish itself as the used game store if Best Buy is going to offer them as well. And if EB (and Gamestop, obviously--I'm essentially speaking of them as one) can't distinguish itself, it won't survive.

So in that light, it's possible that this pilot program for EB is an attempt to establish a very high degree of customer loyalty that just doesn't exist for them right now. Listen, if EB did this in Austin, I would buy EVERY GAME I purchase from EB. Period. And I'd return over ninety percent of them inside the thirty-day period, lose ten dollars, and let them figure out the rest.

It's great for us. For them, maybe not so good.

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