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The Economics of Used Games
by Johnathon Swift on 04/17/12 06:02:00 pm   Featured Blogs

The following blog post, unless otherwise noted, was written by a member of Gamasutra’s community.
The thoughts and opinions expressed are those of the writer and not Gamasutra or its parent company.

 

So, what's the rumor? That the, lets call them Playstation 4 and Xbox 720, will block the ability of people who buy used games to actually play those games. This implies a lot of things for the video games market, in large part because used game sales, especially from the likes of Gamestop et. al.

This begs the question of what sort of impact Gamestop et. al. have on the console industry in the first place. Perhaps the biggest thing to note is that because the sales are second hand the developers, publishers, and console makers of the platform receive no benefit from these sales. And so the obvious motivation for them is to get rid of these sales, sales that may potentially be going to them.

Microsoft and Sony ultimately rely on attracting third party developers, who in turn recieve no real benefit whatsoever from used game sales. Thus it is in both their interest to retain as many such developers as possible, and will no doubt gladly do away with whatever dubious benefit used game sales may possibly provide them in order to better serve those same developers.

Legally this brings it into an interesting space. There is something called the "first sale doctrine" that has been fairly well established in court for software. It means that purchasers have the legal right to resell their own purchased software, and that EULA agreements that "license" the software do not actually apply to physically sold software. However, the question of whether this precludes the software from deactivating itself after the first sale, as has supposedly been proposed, has not been covered in court.

Another interesting affect that Gamestop has on game sales is as a competitor, and what this does to the market equilibrium price of games. Now, the market equilibrium price is the outcome of what customers wish to pay, which is hypothetically zero, and what the producers wish to charge, which is hypothetically infinite. In the end it comes out that the price will be whatever will realistically give the producers the most money, which remember must be balanced against what customers are willing to pay.

Now, Gamestop is, as I said, a competitor. And they are a competitor that can, assuming supply, always deliver a game at a lower price than buying it new. In other words, Microsoft lowers Halo X's price to $40, Gamestop lowers it to $35, and thus Microsoft cannot beat Gamestop, or ebay, or etc. on price. This may, in fact, help raise the aforementioned equilibrium price to artificial highs. I.E. Microsoft has less motivation to lower price, which keeps the expected price of used games higher, which means used games are sold for a higher price as well. Customers may be getting charged more because of used games.

In any case they are getting charged close to the same as if Gamestop actually existed. To try and get at this quicker and in a less complex manner, take the ever popular Steam sales. As I mentioned, the motivation of the producer is hypothetically to make as much money as possible. Participation in steam sales is voluntary, so why do producers do this? Because there is a large portion of the market that will be willing to pay a lower price for a game than it is currently at. By lowering the price they get more sales, and overall more money than they would have if they kept the game's price high.

But in the consoles space Gamestop gets this pricepoint equilibrium, with competition such that new game sales find it hard, but not impossible, to compete (remember, used game sales DO require new game sales in first place still). But the point is, because Gamestop exists, and always at a lower pricepoint than new, the motivation to lower new game prices is lowered. If Gamestop doesn't exist, then games will be able to be sold "new" at a lower pricepoint, and they WILL be sold "new" at a lower pricepoint, both on specific occassions and perhaps even in general.

The other thing to remember is that the PC has no used game sales market, and it remains quite healthy even with piracy, if odd and fickle enough that some publishers still don't want to sell much in it. Still, and in other words, there is no particularly good evidence that ending used game sales will have any terribly great affect on console sales at all.

There are a host of other effects to talk about. The rise of digital distribution could help create such a tradition as steam sales on consoles. The affect of used games as a financial drain on developers, etc. But I thought the above was the most interesting to talk about. 


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Comments


k s
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Interesting points, I'm glad I read this entire post.

Axel Cholewa
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Very interesting post. Although buying a lot of games new, I am usually a defender of used game sales (though not of GameStop; prices too high, quality too low). Your arguments nudged me in the opposite direction.

Hakim Boukellif
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Preventing used copies from working would be very damaging in the long term. And although I say "long term", that can be as short as one or two years.

While a lack of a secondary market may result in lower prices for new games, it will also greatly increase prices of older games, because the lack of used copies creates an increase in demand for the low supply of new copies. Worse yet, video games become "old" very fast. It's not uncommon for a game to go out of print and become downright rare within a year after release, unless it's very popular. This might be less of a problem if the game is also available using digital distribution, but those can suddenly stop being available as well (see: Irem, Teenage Mutant Ninja Turtles).

There's also the matter of how the enforcement is implemented. As long as games are distributed on read-only media, the only practical way of achieving this is through some kind of validation service accessed through the internet. Putting aside the immediate issues with that, that service isn't going to be available forever.

And then there's also the ecological issues (you can no longer sell or give away a game you don't want any more, so your only remaining option is to bin it), the game preservation difficulties it would cause (hard to preserve something when all unused copies are prohibitively expensive/on a landfill somewhere and have an expiration date to boot) and the effects it could have on security and piracy (the more crippling restrictions something has, the more motivated hackers are to try to lift them and the more people are willing to embrace them).

Other than that, the existence of a pricepoint equilibrium might not be all that bad. At the very least, it prevents an appstore-like race to the bottom from happening. Imagine what would happen if EA and Activision engaged in a price war over their FPS franchises. The effects it would have on the rest of the industry would be disastrous.

Ryan Marshall
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Just on a practical note, physical media decays over time. The online verification needs not last longer than the physical disc remains readable, which might be what? Twenty years? For a single-player game that doesn't rely on vast server resources, where you would just need a simple yes/no for whether a game has been registered before, this doesn't seem too unreasonable.

One solution which I haven't heard suggested is a non-compete period, say six months, during which games couldn't be resold. (Maybe there's an online registration, but old registries decay after six months and then they can be re-used; I'm not a tech guy.) That way, we wouldn't run into the doomsday scenario of a game being completely unavailable once it is no longer being manufactured, which really is the worst possible outcome (in my opinion). Maybe Gamestop would refuse to buy used games that have been released within the last six months, to prevent from being stuck with time-locked merchandise clogging their shelves.

It's just an idea, but it seems like the next best thing to actually making games that people won't get sick of within the first month.

k s
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Ryan I like your idea. Most sales of a game tend to be within a few months of launch so making resale difficult for six months is a fair a reasonable way of limiting the used market without completely hurting to consumer.

Hakim Boukellif
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@Ryan
Twenty years feels on the low side to me, unless the medium is treated poorly or it's used every day of those twenty years. But whether or not it doesn't take much resources to keep the server up for so long isn't really the issue; there's all sorts of complications that could happen in that period. If the company goes under, so does the server. If the company loses the rights to the game, then it remains to be seen whether the new owner is willing to keep supporting a 15 year old game on a dead console.

Anyway, I like your non-compete period idea. On-line registration is probably the best bet for this working, as I doubt companies like Gamespot would concede to it otherwise, but I do think the game should unlock on its own after the period, or else it will still be eternally dependent on a service. That would be easily bypassed by changing the date of the console, but the extra hoops the user would have to go through and network features not working would probably be enough to restrict the sale of used copies in that period.

Luke Shorts
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I really can't fathom how you can define GameStop (or any other retailer, for that matter) as a "competitor" of a game publisher.

Publisher and retailer are different stages of a certain distribution chain, typically Developer -> Publisher -> Retailer. In fact, a retailer normally buys games from a publisher, and then adds to the price the publisher sets its mark-up before offering the product to the final customers. So, it is more correct to say that Gamestop is in a customer/seller relationship with EA/Activision/you name it, and not a competitor. If anything, the closest thing to a competitor of the publisher in used games sales would be the gamers themselves: the retailer may decide to prefer the supplier "gamer" instead of the supplier "publisher" since from the former it can get the "same" (at least functionally) product at a lower price and possibly add a higher mark-up. However, even such a definition would be misleading since gamers cannot put into the market games independently from the publishers, but need to buy them from the retailers in the first place.

Since the premise of your reasoning is flawed, I personally feel the conclusions do not hold water as well. Just for the sake of the argument I'd like to point out that most used games acquisition policies in place at retailers such as GameStop are actually geared to enable gamers to fund future purchases (this is also, at least anecdotally, one of the main reason for gamers to sell used games; a good discussion of this, and other aspects of the issue is here http://www.wired.com/gamelife/2012/04/opinion-kohler-video-expens
ive/). As a consequence of that, I don't think that preventing used games sales is likely to increase the overall size of the new games market, nor would it shape it in the form of more games at a lower price since such restriction does not influence at all the main driver of the new games' price tag, i.e. the production costs.

Bob Johnson
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Much of this doesn't make sense. New game prices fall quite rapidly from most publishers. If the publisher doesn't lower their new game price then the more likely there will be a bigger gap between the new price and used price. Gamestop keeps their used game prices high, but remember they have deals all the time on used games and remember they aren't the only source of used games. Amazon and EBay are two big sources of used games as well.No the opposite is true. Used games force the price of new games downward much quicker than they would otherwise drop in price because those new games compete against used copies. Yes the price of new will always lose out to used as with most things, but a new copy is also generally considered more desirable than a used copy.

Bob Johnson
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But I will say used copies keep the list price of games higher because consumers know they can trade in the game when they are done with it. In that sense they keep prices high, but the real price of a game isn't $60. The initial buy is $60. But your cost in the end is $60 minus resale value.

Stacey Kaminski
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While there is currently no formal marketplace for used PC games, I find it a bit disingenuous to state that there's *no* market for them. The mechanics of used PC game sales make it unreasonably difficult for a company specializing in used games to emerge, but that doesn't mean that consumer interest or demand isn't there. It just happens with less tracking and far more direct interaction between the original owner and the buyer.

Systems like Steam and Origin are the latest big examples of strategies employed to combat the PC used market -- this is analogous to the downloadable games for consoles and handhelds being locked both to one particular account and one piece of hardware, I think. Both have been relatively gently pushing at making game purchases non-transferable, and it shouldn't be surprising that they'd want to extend consumer willingness to forgo resale as much as possible.


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