Monday, August 20, 2007

Used Games and Sustainability

We here at ConsumerConspicuous are interested in the whole green side of our world. But not really being experts in the field, we’ll just try to highlight the systems already at work in the world that seem aligned with a sustainable future. First up are used videogame sales.

As has been noted by just about everyone, consumer recycling is what it is: a good step, but perhaps not exactly a revolutionary act. With only minor cash incentives and inconsistent, sometimes unnecessarily Byzantine systems, recycling is clearly only one part of the edict to Reuse. The good folks at Worldchanging (full disclosure: my girlfriend was their managing editor until a few weeks ago), have tossed out all sorts of interesting new ways that items can be dematerialized or shared under the “use community” paradigm. But the bowels of modern American capitalism have produced a fantastic and underrated example of reuse that really works for consumers, retailers, and arguably for content creators too: the rise of used sales of durable media like books, music, movies, and games. What makes the story better is that there is no “moral” or “eco” justification for what these companies are doing. It just makes sense.

Walk into almost any videogame chain specialty shop (like GameStop) and you’re likely to see between 25%-50% of shelf space dedicated to used game sales. Imagine walking into a Home Depot and seeing the same percentage of used products! The economics are not hard to figure out. A new game, say, Gears of War for the Xbox 360 can have a wholesale price of something like $55 and a retail price of $60. That’s a skinny margin. As etailer DVD Empire wrote when they quit the games business:

Video Game Manufacturers set the price using what is called MSRP (Manufacturers Standard Retail Price)…When we sell a game we make on average 8.3% gross margin. That does not take into account any of the cost to store the video game or labor to receive/ship an item.

Brick-and-mortar retailers were in an even worse position, having to pay for the retail storefront and a greater number of employees. These companies struggled their way into mass consolidation, leaving GameStop’s 4,000+ store chain now dominant in the North American market with similar movements occurring in many other countries like the UK and its dominant chain GAME. GameStop’s scale has allowed them to broker better deals with game companies and avoid middlemen distributors such that their gross margins on new games are around 20%. Still, in the end, net profit margins would be dangerously close to 0 without used sales.

Into this situation, on which a $30 billion industry partially rests, came used games sales. The idea is simple: consumer sell back their games for a small amount of money, between $5-25, which the store in turn, resells with about a 45% markup. While used game sales only accounted for $1.3 billion (25%) of GameStop’s sales in fiscal 2006, they accounted for 50% of the company’s gross profit.

What makes this story so compelling is how well the value chain is aligned towards a sustainable alternative to new consumption. Consumers get to salvage a decent amount of the monetary value of their original purchase while reaping the full entertainment of the product; this reduces the effective cost of the product. Retailers get a way to bolster the thin margins of today’s ultracompetitive retail world. The world receives a reduced amount of packaging and actual material. The stickiest issue is what the value proposition is for the companies actually producing these types of content. They often wonder aloud if used games are good for them, but given that the used games enable retailers to have the amount of floor space they do and 75% of sales volume is still of new games, there is not a clear incentive to attempt to restrict the sale of used entertainment items.

In the videogame industry, used sales clearly work. The bigger question is: What types of other goods are likely candidates for this particular kind of dematerialization?

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