Green Man's Gian Luzio & Paul Sulyok
New distribution start-up explains how pre-owned digital sales can work
As a new digital games retail business, Green Man Gaming might not have received as much attention as it did last week had it not casually dropped the news that will be the first retailer of its kind to offer customers the option of buying pre-owned digital titles.
The term pre-owned is, of course, synonymous with the games industry. There are few other markets in which a retailer displays new and used products side-by-side, yet in games retail pre-owned sales contribute significantly to the profits of high street giants such as HMV, GAME and Gamestop.
During the first half of 2009, a quarter of GAME's profit came from pre-owned sales – a 12 per cent rise on the year prior. GameStop made an estimated $2 billion from sales of pre-owned games in 2008. It's a market that continues to grow while others struggle – new boxed software sales dropped 12 per cent in the UK in 2009 by comparison, while boxed PC software sales were down 26 per cent.
But pre-owned has not, to date, been a term associated with digitally downloaded sales. The nature of the install process and – particularly with PC games – the DRM systems protecting the software appear incompatible with such a model. Importantly, why would game publishers want to partner with any company offering to act as a middle man to such transactions when the move would surely cannibalise its more lucrative new product sales?
According to Green Man Gaming there's a simple reason – by distributing PC titles through its service, and allowing customers the option of trading those titles back in once they've finished with them, publishers will continue to earn money from their games long after the initial sale.
Green Man plans to offer publishers a percentage of the profit from every resale – a solution that it says taps into the 'grey market' currently comprised of price sensitive customers obtaining second hand PC games through eBay and BitTorrent sites.
And not only will its model ensure publishers benefit from sales that it otherwise would never have obtained a penny from, it will also re-energise the PC gaming market, encouraging existing gamers to try games they might have otherwise faltered before handing over their money for, it adds.
"We're not aiming at cannibalising the new game market," the company's CEO Paul Sulyok told GamesIndustry.biz. "If I am a price sensitive customer, if I've got £20 to buy a £34.99 game, I will get that game for £20 be it on eBay or be it on a BitTorrent website. What we're doing is targeting the second hand grey market."
"It's using a very simple high street retail model – we're just going to apply that into the digital build," added COO Gian Luzio.
How the system works is simple – at least for the consumer. The site offers games for sale as other digital retailer does, with the difference being that as soon as a game is purchased, the consumer can see how much that game would be worth to them - at that moment - as a trade-in.
"We sit in the middle as a market maker and we always offer a price on the game. We always allow people to sell it back to us," explains Sulyok.
That price is calculated using a patent pending algorithm which works on location pricing and demand. As with traditional retail, that price is likely to remain high as long as the game is new, then drop as more second hand product becomes available. Once a customer has traded in a game, its sale price is credited to their account, and can be used against the price of subsequent games whenever they choose.
And importantly, at least in terms of getting publishers to sign up with the company, a percentage from each resale of a game – and research has shown the average console game is traded 6-7 times during its lifespan – goes to the publisher.
That means, says Sulyok, publishers can expect to generate an estimated 194 per cent in additional revenue per SKU.
Using an average £34.99 game that is resold twice per quarter as an example, Sulyok says that while the traditional retail model would earn the publisher approximately £22.74, the additional revenue Green Man would generate for the game would be £44.10 - £66.84 in total – over a three year period (accounting for the game's drop in resale value).
Furthermore, the argument that those sales would be to the detriment of new digital product sales doesn't hold true, says Luzio.
"When a new game title comes out you'll see a massive spike in the number of games that are being returned to people like GAME and HMV, and publishers still make money on the new game sales," he says.
"Despite the unhappiness that they're not getting money on the trade in, they are making money on the new game's sales because it's allowing customers to go in. Those customers are going to be price sensitive customers – they're not going to be rich and they do want to play all the latest games.
"The problem that digital has so far had is that you've got to be very particular about what you buy – you won't just give it a shot – which is stifling digital sales. Once you've bought it, it's worth nothing. Unless we can get over that, digital sales will always be second to physical sales because you'll only be going for a very niche market and what we need to do is encourage a larger, wider audience. We want PC gaming to go out to the masses."
Publishers understand that, says Luzio, adding that the company has distribution agreements with the majority of them.
A further incentive for them is Green Man's ability to deliver CRM data on how their games are being played. Specific information – such as the length of time a game has been played before being traded in – will be fed back to the publisher by the company.
Indeed getting them onboard hasn't actually been the difficult part, adds Sulyok – the tricky bit was ensuring compatibility with the company's technology and the DRM of the products it will be selling.
With that tackled, the site is set to launch towards the end of March in the UK, shortly followed by Europe, then North America a little later. The products offered between Europe and the US will vary depending on the licence agreement it has with a publisher, admits Sulyok, but, theoretically, it could roll out worldwide in the future.
On launch day the site will offer over 400 games, with the names of those games and their publishers due to be announced in the coming weeks. A significant marketing strategy is also set to kick off – targeted at the hardcore gaming audience and casual market alike.
The client consumers will download to use the service will be discreet, promises Sulyok. Unlike other clients, it will enable games to be played offline as well as online.
Overall, it's a service that could benefit the flagging PC games market as a whole, he continues.
"It's going to massively grow the current PC market. It's not coming from a technical standpoint – it's coming from a how do we grow this in order to get more people playing PC games. We know there are all those PCs out there – so how can we engage with those customers? We know they've got broadband, so we want to get it out there and get it to people and encourage them to try new games."
And it's one that will also compete with giants like Steam, he adds – not just because of its pre-owned business model, but by providing a good overall experience for its customers.
"We will have products and some will be the same as Steam and some won't," says Luzio. "We hope that our customer service – people will be able to speak to someone technical personally – there will be a number of unique selling points as well as trading in games. Just as Steam is one retailer, there are other retailers such as Get Games and Metaboli and every one of them delivers a unique customer experience. They've got their business model and we've got ours."
It's simple logic, according to Luzio – the business model is already working for traditional retail and is one of the key factors holding back the digital market.
"Our solution is is to make sure publishers get their slice of the pre-owned action while, at the same time, encouraging gamers to buy new games and try new games in different genres and not feel like they're throwing their money away."