Monday, November 17, 2008

A Sticky Situation

Epic Games president Mike Capps had this to say about the used game market in the U.S.:
The secondary market is a huge issue in the United States. Our primary retailer makes the majority of its money off of secondary sales, and so you’re starting to see games taking proactive steps toward that by… if you buy the retail version you get the unlock code.

“I’ve talked to some developers who are saying ‘If you want to fight the final boss you go online and pay USD 20, but if you bought the retail version you got it for free’. We don’t make any money when someone rents it, and we don’t make any money when someone buys it used - way more than twice as many people played Gears than bought it.”

Electronic Arts recently disabled access to the "365" feature in NBA Live 09 for used purchasers unless they want to pony up $9.95 for a "subscription." Five extra multiplayer maps were downloadable with a new purchase of Gears of War 2. Nintendo's Wii Speak peripheral is coming with a one-use code that's needed to download the Wii Speak channel, which is fundamental to the unit's functionality.

This is a dangerous game.

Here's how I believe publishers view the used games market: as a filthy parasite. Shutting down that market is 100% upside for them, because it's going to increase both their revenue and their profits.

Shake yourself, gentlemen.

I've played business simulation games that modeled more complicated consumer behavior than this. Do they seriously expect the real world to be this simple?

Well, it's not. No one, and I mean no one, has ever successfully measured, in an unbiased manner, the effect of the used games market on the new games market.

In the meantime, though, almost every publisher seems to be taking action (in a somewhat concerted manner, seemingly) to start including these "one-use" codes. Does anyone seriously believe that these codes are going to always be limited to bonus features or small pieces of the game?

That's not what's going to happen.

What's going to happen is that publishers are going to, as rapidly as possible, make these one-use codes unlock more and more important features and content in the game. Everyone is thinking along the same lines as Mike Capp--they're just not admitting it yet.

Oh, and it's not just used games, either. Mike Capp specifically mentions "rentals" as well.

Hey, why not? If "way more than twice as many people played Gears than bought it," shutting off the used and rental market is going to make Epic a fortune, right?

Not so much.

Actually, not to split hairs here, but they already made a fortune. The original Gears of War generated over $250 MILLION in sales of new copies (that's probably conservative, too), and Gears of War 2 broke $100 million in the first week. So the correct question is whether shutting off the used and rental markets would make Epic a SECOND fortune.

Let's expand that question. Let's say that publishers of console games are able to successfully kill the used and rental games market in the U.S. does that make them money or lose them money?

My money is on "lose", and here's why.

For one, I don't think new game sales will go up--they will actually go down. When a consumer buys a $60 game today, he knows that the trade-in value of the game will be $25-$30 for at least the first few weeks.

By the publisher's own statements, the used game market is huge, right? So what happens when a huge part of your market suddenly has 40% less gaming cash?

Sure, there are plenty of people who are buying used games only. But I think there are many more who buy only new games, but always trade them in--so that they can buy more new games.

See how quickly this gets sticky?

It gets worse. Let's say, for the sake of discussion, that Mike Capps is correct, and at a wider level than just Gears of War--more than twice as many people play every game used as play it new. Now let's take a new game, Johnny's Rotten But Socially Refined Journey Through The Wasteland, and assign it new copies of 250,000. In its lifespan, another half-million people will be talking about the game because they bought it used or rented it. And those people talking about the game to their friends are going to generate some of the new copy sales.

Oh, and if you want to make a sequel (Johnny's Rotten But Socially Refined Journey Through A Remarkably Similar Wasteland), think those half-million people might be useful when it comes to buying copies of the second game? Or in building anticipation for the game?


So here's the thing: it's not a parasitic relationship. It's mutualism--both parties benefit from the association. The problem, for publishers, is that Gamestop seems to be benefitting a hell of a lot more than they are.

Here's a grown-up approach: focus on adjusting the benefits of the relationship between the parties. Grow the relationship with Blockbuster and Gamestop and everyone else instead of muttering darkly like Captain Queeg in The Caine Mutiny.

Ironically, every time someone in the industry screams about how much money they're losing to the used game market, they're publicizing the used games market. Oh, damn.

This is even more unwise in light of the state of the economy right now. People are cutting back on everything, and the gaming industry is talking about reducing how much money we have available for games as a strategy? That's not a strategy--that's a stabbing.

Now it's absolutely possible that I'm wrong. Maybe the gaming industry would reap unbelievable windfalls by killing the used game and rental markets.

The problem for them, though, is that they can't prove I'm wrong. And it is very, very dangerous for them to change the relationship between themselves and the consumer so radically unless they are absolutely sure they can.

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