The Friendly Ogre: Trade Values, Used Game Sales, and the Economy

Something I wanted to talk about is a packet I got a few weeks, maybe a month ago.

TB: From GameStop?

From GameStop, with the ogre, and the air freshener and everything -- it seemed to be about perception, the perception of GameStop.

TB: Trade value perception?

Yeah. Can you talk about that?

TB: We did some research with customers and that's what it was born out of it. You're talking about the 150 titles every day, worth over $15. What we found was that the perception of our trade value was far different than the reality of our trade value. Far different. I'm sure you see that on the blogs, and so forth, you don't have to read very far. The reality is that there are a significant portion of our games that do actually represent a strong value.

So that was the basis of our campaign -- to let people know that a large portion of our games are over $15 when you trade them in. We see that really as a very unique part of GameStop. We provide currency for the purchase of new games.

We really believe, and the reason that we're so passionate about our trade program, is that it drives new games. Last year, alone, we put over $700 million of trade credit back toward new games. I think that new games is about a $9 billion market. So if you stop and think about the currency that we're generating for the sale of new games, it's an absolutely amazing proposition.

BM: Especially, we feel, with the economy in the current situation where it is, and it seems to continue to be probably a tough economy -- gasoline prices, the way they've been and so forth -- the value perception is something that we feel very strongly about and are committed to.

What about your relationships with publishers? We've talked about this before, and we talked about it last year -- I know it's come up a lot. There's a certain point at which publishers become uncomfortable with the used game market.

BM: I think, again, as Tony mentioned, it's a significant amount of currency that we've put back into the new gaming market. Again, over $700 million worth of games. And what's interesting, is that the transactions where we have trade-ins, 80% of those transactions, the credit is applied to the purchase of a new game. Again, it's a significant amount of money that we're generating purchasing power to allow them to buy the games that they want.

TB: And actually, it's something that we speak very openly with the publishers about. It's not a hidden topic. It's who we are. It is not something we are not proud of. We believe that we are bringing a tremendous value to the customer by doing it. I think that all of the publishers, from a trade perspective, there's really very little discussion on that.

To your point, there is discussion more on the used side, but I will tell you that, as we've explained the model and as Bob has articulated, over 80% of those trade credits go back toward new purchases. And, quite frankly, as our frontline market share continues to increase year after year after year, it's a little hard to argue that that portion of the business is hurting our frontline market, when our market share continues to increase year after year.

I would say that it doesn't hurt you, but the question is how much do the publishers perceive it as hurting them?

TB: I really think, again, when you look at the fact that nine percent of the total currency spent on new games last year was generated out of one company's trade program, I guess you'd have to ask yourself, "Okay, if that went away, how much would the industry suffer?"

I think that from a trade perspective, a great example is the used car industry. Let's say that you were just to take out the trade program on used cars. How many new car sales would be impacted by that? I think it would be a dramatic reduction in the sales of new cars. I think the same thing would happen here.

Actually, we had a lot more of those conversations two years ago than we have had in the last two years.

BM: Yeah, definitely, we have. I would say in the last year more of the conversations are on digital, and again, our position is as we've stated. We're not afraid to compete against any of our competitors, and if they turn the tables and they create a non-parity situation, and it's not a fair situation where they're giving us a chance to compete.

TB: And I'd say we've had a dramatic reduction this year -- and that's another thing that's has changed from last year -- we've had a dramatic reduction in the number of discussions on trade and used, simply because trade is becoming such an integral part, especially in this economy, in the affordability of the games coming out, that we really are just not having a lot of discussions about it.

You spoke a little bit about this, but I wanted to talk about the impact of the economic downturn on you guys. Obviously, it's been news within the industry that we've been fairly resistant to the downturn -- in fact, there's been growth over and over and over. At the same time it's been at the forefront of people's minds, particularly as things don't seem to be improving.

TB: The economy is difficult. There's no doubt that for retail, the economy's difficult. At the same time, we just released our second quarter earnings, and our sales are up 38% year to date. So I don't think there are a lot of retailers that could even articulate those numbers. I think that's where our model really helps us -- the trade currency that we talked about has really come into play. It's been very strong for us, and it's kept us in a very strong position for frontline market share. And obviously, we're selling a lot of new games to be up 38%.

BM: I think, too, that with a tighter economy, the consumers are making entertainment decisions that are in our favor. That entertainment choice is now at home -- whether it be a game for their own needs, or for a family interaction. That's one of the neat things, I think, about what we keep referring to as "the expanding market", it's the family focus of getting these games and really bringing that into the fold.

TB: My family's a little unique. I have six children. So when I go out to a movie, I just take out a loan, basically, to go out. But for the cost of a normal family to go to the movies, you could buy a video game. So I take my family out and basically spend 70 bucks to take them out to a movie. For a little more than that -- if we get Rock Band, let's say, which we play a lot of at our house. Two movies, versus Rock Band, which we've played for hours and hours and hours, I mean, it just... there's no correlation whatsoever.

Definitely. If you look at it from a value perspective, for time versus cost, it's a lot higher than, particularly, movies.

TB: The real beauty is, along the same line -- you asked about the value, earlier. The other thing that GameStop has that I think is a really powerful message. We have over 3,000 games in our portfolio, right now, that are $19.99 or less. Again, in a value-oriented economy, to have that level of selection for an incredible experience for $19.99 or less, we have 3,000 different games.

BM: And that will serve well going into the Holiday gift-giving season.