Are Used Games Harmful To the Game Industry?

(UPDATE: The article has been edited to take into account information on the XBO and PS4 revealed prior to and during E3.)

(UPDATE 2: The article has been edited to take into account news that Microsoft has rescinded their policy on second-hand XBO games.)

usedgames
In my article “Do Video Games Cost Too Much?” I defended the video game industry’s current pricing practices, specifically the standard $60 price point for console games. I argued that the common complaints some gamers offer in regards to pricing practices — “Games cost more than ever,” “We’re getting less value for our dollar,” etc. — were false. But I did mention in that article that there are many legitimate complaints gamers have regarding the games industry, and in this article, I’ll be focusing on one of those, namely, used games and industry antagonism towards them.

The used game market has been around since there’s been games to sell, lend, and trade, perhaps all the way back to the early days of the Atari 2600 some 35 years ago. Many of my games I’ve played over the decades I got from borrowing or trading with friends, or as hand-me-downs from family, or from buying a pre-owned copy from Gamestop or Play N Trade. But as of late, some game publishers & developers and even some gamers have been claiming that the second-hand market is harming the industry. Members of the recently-bankrupt THQ have roundly criticized used game sales as “cheating” them out of money. One of the co-founders of Heavy Rain developer Quantic Dream claimed that sales of used copies of said game cost them “millions.” Rumors regarding the next-generation Xbox claimed that the system would block used games, and when the “Xbox One” was officially unveiled, it turned out that such claims were not entirely inaccurate. They confirmed that there would be significant restrictions on the lending/borrowing and resale of second-hand titles, and that third-party publishers may have the option to completely block used games if they so wish. However, likely due to significant backlash, they have since backpedaled on this and announced that they will maintain the status quo in regards to used games, with things working just like they did on the 360. Meanwhile, Sony and came right out of the gate and said they will not impose restrictions of any kind on used games for the PS4 (though publishers will still be free to impose online passes, a practice recently discontinued by EA — the most notable user of online passes — but still used by Ubisoft and several other publishers). As for Nintendo, it’s already been established for months that the Wii U does not restrict used games in any way. In any case, the used games issue a moot point for the eight generation. But regardless of the fact that no eight-gen console will restrict used games, it still won’t change the fact that many publishers will remain antagonistic towards used games and will continue to advocate against them.

Needless to say, there doesn’t appear to be much love for the second-hand market in certain segments of the industry. It’s part of a worrying attempt to move from a “games as products” model to a “games as services” model where the publishers control everything, where possession (of game discs, in this case) is no longer nine-tenths of the law. In their vision of the future, they are basically saying “The games you buy are no longer your property to sell, lend, or otherwise dispose of in accordance to law. That system of rules no longer suits our agenda, so those days are over.” But is the industry rationale for blocking or otherwise hindering gamers from engaging in the second-hand market valid? Are used games a problem as some have claimed? As it turns out, the supposed negative effects of used games on the industry are overblown.

One has to wonder why the used games market is suddenly being regarded as such a horrible thing that must be fought tooth and nail. It reminds me of back in the late ’80s when Nintendo made a huge fuss about game rentals. They swore up and down that rentals would be the death of them, and they tried to litigate rentals out of existence. They failed at this, and despite worries that rentals would ruin them, Nintendo continued to do very well for themselves, and for the last 23 years or so they haven’t made another peep about rentals or about used games. That old story seems very apropos today in regards to the used game debate.

Personally, I don’t buy the “pleading poverty” arguments offered by various publishers. Not one bit. For there to be a used game sale, there must first be a new game sold, and more games have been sold this generation than in any prior generation. Well over 3 billion games have been sold worldwide between the Wii, DS, 360, PS3, and PSP. All told, between games, systems, and other revenue streams, the video game industry is bigger than ever, and generated $65 billion in revenue globally in FY2011. Activision Blizzard alone made over $4.8 billion in revenue in 2012 and $1.1 billion in profit. Of that, they made $1.77 billion in revenue in the fourth quarter of the year and $343 billion in profit; Black Ops II alone generated $1 billion in revenue in just 15 days, which translates to over 16 million copies sold assuming $60 per copy (2011’s Modern Warfare 3 did about the same, making $1 billion in 16 days). Most other notable publishers are profitable as well. The games industry is doing well and keeps getting bigger.

Compare that to the used games market, which is only worth a fraction of the total video game market. Gamestop controls the lion’s share of the second-hand market, at least as it exists in retail (their share of the used games market is estimated to be anywhere from 60% to upwards of 90%), and they made only $2.6 billion in revenue and $1.2 billion in profit worldwide on used games for FY2011, though according to NPD data for the year 2012, in North America exclusively used games generate $1.6 billion in revenue, vs. $7.1 billion for new retail games, with the N. American market as a whole valued at $14.8 billion.

But what do these numbers actually mean? Isn’t $2.6 billion still a lot of money? Well, according to noted industry analyst Michael Pachter, it has been estimated that at least a billion dollars have been paid out in store credit annually at Gamestop, most of which has been spent on new games. According to Gamestop’s own internal numbers about 70% of store credit is spent on new games, and that only 4% of the used games that are sold are titles that have been out for less than 60 days (most popular titles make much if not most of their sales within that span). So, people selling their used games at Gamestop put some $700 million in store credit each year towards buying new games, and those buying used games are mostly buying older titles, and used games are cannibalizing very little of the market for new releases less than two months old. Gamestop might be making good money off of used games, but it doesn’t change the fact that used game sales do vastly more good than harm towards the new game market.

It’s also important to point out that a used sale does not necessarily translate into a loss of a new sale, as many customers might not purchase a game at all if there was no option to buy used. There are many valid reasons for buying used. While the $60 price point of the typical console game is quite fair, as I talked about in length in my “Do Games Cost Too Much?” article, it’s still a lot of money to put up for a single purchase and thus it carries a lot of risk for the consumer. While I usually buy new, there have still been titles that I wasn’t sure I would like, and thus I bought them used because not only does it cost less than buying new, but more importantly you cannot get a refund for a new game once it’s opened, whereas Gamestop (and perhaps other retailers who sell used games) does allow you to return a used purchase for a full refund within a week after purchase. Thus, buying used incurs less risk for the customer. I would never have bought Bayonetta, F.E.A.R., or BlazBlu new, but I did buy them used (and as it turned out, they were okay games, but the latter two are nothing I would spend $60 on). There have also been plenty of games I’ve borrowed, some I liked and some I didn’t, but they weren’t titles I’d be willing to risk $60 on. Also, even if the customer bought new but found they didn’t like the game, or they simply didn’t want it anymore, or whatever other reason they may have for getting rid of it, the ability to sell off the game allows them to recoup at least a portion of their losses; even if you only get $20 back from selling off a $60 game, it’s $20 more than you’d have if you didn’t have the ability to sell off your used games at all. (PROTIP: If you want more money, sell your old games directly to the end user via Amazon, eBay, etc. Gamestop may be more convenient, but as with any middle man you pay for that convenience.) Finally, the used games market is beneficial for customers who like older games. There are several PS2 games I bought used because they had gone out of print at the time, such as Gradius V. Games go out of print all the time, often while the system they’re on is still in production, so buying new isn’t always an option even on a current-gen system.

Now, while I’m not a fan of Gamestop (mainly due to how they treat their employees, but that’s neither here nor there), I do have to admit that they are very convenient, they have a great selection of titles, and their approach to used games is beneficial to the budget-conscious consumer, and that helps explain why they’ve cornered such a large portion of the used games market. But just because they found out a way to “industrialize” the sale of used games doesn’t make them a threat to the games industry, and claims of the second-hand market’s “harmful effects” have been greatly exaggerated. The numbers just don’t pan out. Rather, the second-hand market is a net positive for everyone. Being able to buy pre-owned titles or borrow games from friends results in less risk for the customer. The ability to sell off one’s old games (or trade them in for store credit) also reduces risk for the customer, not to mention it helps facilitate the purchase of new titles, which is a boon for publishers. Also, the ability to buy older titles that are no longer is print is a major plus for consumers.

On the other hand, eliminating used games from the market would do more harm than good. Gamestop only gets around a quarter of their revenue from the sale of used games and hardware, but they get nearly half their profit from that source. New games simply don’t have a good profit margin for retailers. Gamestop is by far the biggest retailer that focuses exclusively on games, and they account for over 20% of the total games retail market. If the ability to sell off used games were eliminated, Gamestop and other smaller specialty retailers who deal primarily or exclusively in games could be crippled or even driven out of business, which could have potential consequences of its own. While some customers would naturally gravitate towards more general retailers like Wal-mart and Best Buy, a lot of animosity would be generated amongst gamers towards the games industry, considering that things they’ve taken for granted for years or even decades will be taken from them. Given the massively negative reaction to the possibility that next-gen systems could block used games, there’s reason to believe that any console manufacturer that attempts to hinder the used game market in any way will suffer from loss of sales as their former customers will abandon them. There was a recent study that determined that if used games were eliminated without retail prices for new games being reduced substantially, the industry would see their profits decline. And as we saw from the Xbox One announcement, real-life attempts to curtail First-sale rights are not received well by the public. You antagonize the consumer at your own risk.

Now, if used games possess no demonstrable threat to the industry, what’s causing studios like THQ to go bankrupt? Well, there could be any of a number of reasons. Perhaps they just weren’t budgeting themselves properly. Perhaps they were just not selling enough games. While they had a few games with respectable sales figures (their best-selling game of this generation, Saints Row 2, sold upwards of 4 million copies worldwide), there were several titles that underperformed commercially and/or critically such as Homefront, Warhammer 40k: Space Marine, and Red Faction: Armageddon. The commercial failure of their uDraw accessory was also a likely contributor to their demise. But as far as we can tell, the failure of THQ had nothing to do with used games. Besides companies go bankrupt all the time. It’s hardly unprecedented. How many third-party developers and publishers from the 80s & 90s are still around? Just pulling from the list of defunct game companies at Wikipedia, I can name a few old developers & publishers of note from back then that ceased existing by time the current generation began in 2005: Acclaim, Broderbund, Data East, Flying Edge, Infocom, Presto Studios, Sculptured Software, SNK (the original company), Technos, Tengen, Tradewest, Virgin Interactive, and Westwood Studios. Are we to blame used games for their failure as well?

If a company loses money or fails outright, it’s usually their own fault (either that, or they happened to be an arm of a larger company that was shut down simply to reduce operating costs). We’ve had recent reports of game companies stating that their game’s sales were disappointing even though they sold several million copies, which should be considered healthy for any title. Let’s compare two very recent games that have very similar sales figures: Tomb Raider and The Last of Us. TLoU sold upwards of 3.7 million copies each in their first several weeks on the market and those figures were regarded as successful by Sony. Meanwhile, Tomb Raider sold 3.4 million copies (that’s over $200 million in revenue, assuming $60 per copy) in its first several weeks, but its sales were regarded as “disappointing” by publisher Square-Enix, who expected the game to sell 5 million copies in its first month. So, how could one be considered as having disappointing sales numbers and not the others, despite all three having similar commercial performance? Well, perhaps Tomb Raider cost a lot more to develop (hello, unnecessary multiplayer!) and/or had a much larger and expensive advertising campaign. Who knows? In any case, you gotta screw something up somewhere along the line to make it to where your game has to sell 5+ million copies in its first month to be successful. Maybe next time Square will A) realize that not all games need MP and can stand on their own as a single-player-only experience (BioShock Infinite being an obvious example), and B) streamline their marketing-advertising process. Basically, if I could offer any advice to game publishers, it would be this: If you’re not making COD, GTA, or Halo, then don’t spend like you are. Temper you expectations, otherwise, you’ll likely end up just bleeding money.

Speaking of good advice, Nintendo’s Satoru Iwata also offered some of his own: “The best possible countermeasure against people buying used product is making the kind of product that people never want to sell. Taking as an example Mario Kart or Smash Bros., even though you might think, ‘I’ve done enough with this,’ you’ll still have second thoughts. ‘Wait a minute. If one of my friends comes over, I might need this again.’ You’re never going to want to sell these games. That’s something that always occupies our minds. We need to make software that players don’t want to sell.”

Moving on. Claimed effects on the industry aside, there are other issues involved with the used games market, namely the First-sale Doctrine. According to that law, which is outlined in Title 17, Section 109 of United States Code, I can sell, lend, or otherwise dispose of my legally-obtained physical copies of a copyrighted work just like I could with furniture, clothes, tools, computers & other electronics (including game consoles), motor vehicles, real estate, or any other durable good. Attempts to restrict or block used games are therefore legally suspect, and thus they could possibly be construed as a violation of the First-sale Doctrine and could be challenged in court. But what makes a game any different from a book, CD, record, cassette, DVD, or Blu-ray? Why should games get special treatment? You don’t really see book publishers, record companies, or movie studios raising a huge fuss over the selling of used products, at least not to the extent the games industry does. They made a stink about such things in the past (see the movie industry’s reaction to the VCR in the ’80s or book publishers complaining about used books being sold on Amazon in more recent years), but they all failed miserably in their attempts to stifle rentals and/or the second-hand market. They eventually had to accept the reality of those institutions, and today such things are a non-issue. It’s ridiculous how bent out of shape games publishers are getting over used games. There’s no evidence that it’s causing any harm. They need to chill out and stop trying to get on gamers’ bad sides.

FURTHER READING & RESOURCES

Cinema Blend article discussing 2012 game industry revenues

Gamestop Exec Defends Used Game Sales

“When the Starscreams Kill Used Games” by Jim Sterling @ The Escapist

Gamestop Financial Report

Study: Killing Used Games Could Be Profitable, or Suicide

Nintendo’s Used Game Policy: Make Games People Won’t Sell

Kirtsaeng and the First-sale Doctrine’s Digital Problem” @ Stanford Law Review

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