In the final part of our wide-ranging interview with HMV UK & Ireland's CEO and MD, Simon Fox, we discuss the thorny issues of pre-owned software and the onward march of digital distribution.
The retail boss also fields questions on the price points of current generation hardware, and explains why he's excited about the launch of the Nintendo 3DS next year.
Q: Well, let's talk a little bit about pre-owned - publishers will tell you that the pre-owned market results in multiple resale points from which they're not seeing any return. On the flipside, diving into the financial numbers of specialist retailers and cutting that revenue stream out could have a very grim impact on the number of stores out there. Ultimately, though, is it down to what the consumer wants?
Simon Fox: I understand where the publishers are coming from - on the other hand it's hard to find a market where I think the original owner/publisher/manufacturer benefits from the future trade of products - whether it's the second-hand book market, the second-hand furniture market or the ticket resale market.
The fact is, in every case, the manufacturer of whatever it might be makes their profit from the original sale, transfers the IP or ownership to the buyer - and if the buyer then chooses to sell that item, it's up to them. You don't hear book publishers asking for a share of the second-hand book market. I've never heard that.
Q: And if they did, it wouldn't look good for charity shops across the UK...
Simon Fox: Or the Amazon market place, or eBay... People trading amongst themselves - car boot sales around the country. People are free to trade their goods between them, and I think it's slightly odd that publishers should somehow think that they have a claim to profit that a customer might make on a second sale.
As a retailer all we're doing is providing an intermediary service, just as eBay is, or Amazon is. We genuinely think that actually what it does is enable people to buy new product - and it allows them to trade-in previously-played product to get a credit and put that back into the games market. The way we've certainly geared our offer is that it's far more advantageous for the customer not to take cash, but to take a credit that's then used in buying another game.
The vast majority of our pre-owned sales are to support new releases.
Q: And if that facility wasn't available anywhere, and gamers held onto their game collections as a result, there's nothing going back into the industry in that situation either?
Simon Fox: That's what we think - and better for them to trade it in an environment where they're far more likely to buy another game than if they trade it in for a bit of cash and go to the pub.
Q: Do you think publishers are just making noise about this, or do they genuinely have an issue with it? I speak to senior execs and some seem to be realistic about consumer habits, while others are genuinely upset about the practice.
Simon Fox: I think, as you say, publishers are mixed. I've met both types - publishers that genuinely think what we're doing is wrong, or if it's not wrong that they should be benefiting from what we're doing. And others feel much more relaxed.
As a retailer we feel it is something that our customers want - we weren't first into this market, we were a late-comer. It's not a big part of our mix, but it is an important part of our mix - and what we do is, in some degree, part of the way of competing with supermarkets on pricing.
By providing a trade-in offer on a new release you can make that new release affordable, perhaps even cheaper than the supermarket price - but it's part of a deal. They bring something back, and in exchange they can have the latest product at a very competitive price.
Q: Remaining neutral, I think it's fair to say that if the pre-owned market suddenly disappeared, consumers wouldn't be happy.
Simon Fox: I think customers who have bought any product - whether that's a game or anything - believe it to be theirs. And once they've bought it, if they should wish to sell it, they have that right to sell it.
Q: Has it caused any problems with publisher relationships? Has it affected support?
Simon Fox: No, I don't believe it has.
Q: Maybe that's an indication that publishers are fairly realistic about it, then?
Simon Fox: I think for one or two it's a genuine issue, and I'm sure they'd prefer we weren't doing it. But with Tesco now moving in, Argos now moving in...
Q: Moving on to digital distribution - as a retailer, how do you view that direct-to-market route? So far it's not affected the console platforms so much - it's really taken off on the PC platform, which has maybe filled a gap as the amount of PC product in stores has diminished. But how do you appraise the threat?
Simon Fox: Well, it's a serious threat. I think the first thing is that we do believe that the file size of games is getting bigger and bigger and will only get bigger still. I think it's interesting to compare the file size of Call of Duty this year with that of last year. I don't know the exact numbers, but I believe it's immeasurably bigger. And as we see 3D in future years - which we definitely will - the file size will only get bigger again.
Frankly it's going to take many years for the broadband infrastructure in this country to keep pace, and it evidently isn't keeping pace at the moment.
Q: Despite political attempts at intervention.
Simon Fox: Yes - and it would be great if we had the fastest broadband networks in Europe - and maybe we will in time. But it's going to take quite some time.
A bit like motorways, you feel that the more capacity is put down, the greater the file size and the greater the usage. It's evident with iPlayer, Facebook and everything else, the demands on our network just get bigger and bigger.
So I think for quite some time, the big games will be most effectively delivered to customers pre-burned on a piece of plastic - and we will see a packaged software market for quite some time. Possibly in decline, but nonetheless of considerable size.
That doesn't answer the question though - how do we as a retailer take part in the growth of digital? I can't give you an answer to that today, because it's not straightforward. It's not that the technology isn't straightforward, it's that how you make money isn't straightforward.
We own 50 per cent of a company called 7digital - we think they are a terrific company. We have prioritised music and books in terms of getting offers up-and-running quickly, and we're pleased we've done that. We can see how those businesses are profitable.
As I've said before, we don't want to just offer me-too, white label services that are available anywhere else - we want to work out what our point of difference is in digital, and how we make money from it. Frankly it's not straightforward.
Q: Does that mean that increasing share in the existing packaged goods market is probably a higher priority then, in the short term, until such solutions become apparent?
Simon Fox: We pay our bills today out of the packaged software and hardware market, so as we look at the near term that remains critically important to us.
We fully understand the growth of digital, but it is easy to spend a great deal of money - either through start-up or acquisition - that ultimately isn't profitable.
Q: We had a couple of price cuts from Sony and Microsoft last year on hardware - was that an important step?
Simon Fox: Yes, very important. It made a big difference, and particularly in a tougher economic environment the price point of a console is massively price sensitive.
Q: Are you happy with the landscape in that respect at the moment?
Simon Fox: Yes, at the moment.
Q: Finally - you're looking forward to the 3DS?
Simon Fox: Yes - I think the 3DS is the first really new handheld that we've seen for a long time - and I think it's vitally important that there's a fight back on the handhelds. The market is going to the iPhone and digital, so to have a really exciting new handheld gaming machine - with the software that goes with it - we're very excited about that.
Q: And you anticipate a decent level of consumer interest?
Simon Fox: I think there'll be huge consumer interest. I think Nintendo always does a fantastic job of launching new products, so bring it on.
Simon Fox is CEO and MD of HMV UK & Ireland. Interview by Phil Elliott.