Tuesday, October 04, 2005

Thoughts on Best Buy, Gamestop, and the Business of Gaming

Okay, my head still feels like it’s inflated to 80 psi today thanks to sinus pressure, but I think I can write coherently about this Best Buy pilot program and its implications.

There are a few fundamental principles at work here. The first is this: free markets, over time, become more efficient. The used game market, as defined by Gamestop/EB, has obscene profit margins. However, they make the market.

At least, they did.

Here’s the fundamental question, though: why should profit margins on used games be significantly higher than they are for new games? Well, the answer is that they shouldn’t be. As the market gets more efficient, the gap will narrow substantially. Used game trade-in values are going to rise. Selling prices are going to drop.

Is this going to crush Gamestop/EB? Absolutely. Look at it this way. Best Buy has an overall gross profit margin of twenty-five percent. They see a product class that offers profit margins nearly double that. Best Buy doesn’t need to maintain the existing, extreme margins to increase their profitability. Even in a vastly more efficient market for used games, Best Buy can still make more money.

Gamestop/EB, on the other hand, desperately needs to maintain those margins—they’re keeping the company afloat. It’s not Best Buy, per se, that’s poisoning the well for Gamestop/EB—it’s their reliance on a business model that’s dependent on unsustainable profit margins for one merchandise category.

Don’t think it’s just going to be Best Buy competing for the used game market, either. Think Wal-Mart. Think Circuit City. Think very, very big. It’s going to be a flood of competitors, not a trickle, and they’re all willing to accept lower margins than Gamestop/EB. All of them.

Do gaming specialty chain stores survive? No, not in any substantial way. It will take years for this to play out, but I don’t think Gamestop will exist outside their online business. I felt a little regret when I first typed that.

In the mid-90’s, there was an Electronics Boutique at a local mall that was so cool I bought every game from them. I was totally, one hundred percent loyal. The manager (who is still a good friend of mine) was a serious gamer, and everyone on his staff played games. There was a pecking order in the store based on how much you knew about games. It was a great place to hang out. I can’t even remember how many times I drove down there at lunch, totally blowing the entire hour, to pick up the latest release and chat for a while.

That era is over, though, isn’t it? I have no better chance of talking to a gamer at EB or Gamestop than I do at the video game section of Best Buy of Fry’s. And quite a few of the new titles aren’t even available on their release date unless you pre-order them. Plenty of used games, though. Lots and lots of used games.

There are still individual gaming stores with excellent, knowledgeable personnel (and some of those managers read this column—I only wish they were in Austin). Those stores are just happy accidents, though, not a result of anything Gamestop or EB is doing to promote that kind of culture. Most of the people who work at gaming stores now could be working at Old Navy or The Gap. So when I said I felt regret, it was regret for something that no longer exists. This era isn’t ending—it ended a long time ago.

That’s a natural evolution, really. Ten years ago, we all played the same games. Gaming was still narrow enough that being a gamer implied some level of common experience. Now, with at least six major platforms and literally thousands of games, gaming is a much broader hobby, and being a gamer can mean a hundred dissimilar things. Even if gaming specialty store employees all played games, we’d still have much less in common.

Is that a bad thing? No. It’s just different.

Without providing unique value, I don’t see how Gamestop can survive. And I don’t see them offering anything that can’t be found in other places. Their earnings are going to erode, and they’ll announce store “consolidations.” Their earnings will erode further, and they’ll try some last-ditch novelty programs, like an annual fee “subscriber” mode in exchange for access to all kinds of unique pricing structures (both for new and used games). They’ll call it “Power Gamer” or some stupid-ass thing like that, and it will generate all kinds of publicity and then puke all over itself.

There are all kinds of collateral effects that go along with the used game market becoming more efficient. That $59.99 fantasy price the gaming companies are projecting for next-gen games is deflating faster than the Hindenburg. Sure, they can do it with the launch titles, but the more they charge for new games, the more it’s going to encourage people to buy used ones. It’s self-defeating.

If the film industry routinely charged $49.99 or more for DVD’s, there would be a gigantic market for used DVD’s. At $19.99 for new, though, I’m not sure many people care about buying them used. I’m not saying the game industry can survive charging $19.99 for games—it’s not a true comparison, since films also have box office revenue—but they’re not going to charge $59.99 for long.

Like I said, the gaming business is going to be fiercely competitive. Until online game delivery becomes the industry standard, the used game market is going to thrive. It’s easy to say that the used games market will kill the gaming industry, but DVD rentals haven’t killed the film industry. The gaming market is just evolving into a much more efficient market that is much more competitive.

This same scenario is playing out in other markets, too, used books in particular. Amazon has made the used book market exponentially more efficient than it used to be. Now booksellers and authors are up in arms. I understand their frustration, but it’s impossible to regulate the resale of something that has been legitimately purchased.

I’ve got a bit more, but that’s going to be it for tonight. My head hurts. Let's just call that part one. Thanks for reading.

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