The Trader's Dilemma

There has been an attempt in recent months to portray the whole question of the second-hand market for videogames in extremely simplistic terms. As the development and publishing sectors rail against second-hand, the narrative has been uncompromisingly black and white.

Retailers - the parasites at the end of the value chain - make huge profits from second-hand sales. Developers - the creative minds at the start of the chain - suffer major financial setbacks as a consequence. Looming over it all is the spectre of digital distribution, which publishers wave like an admonishing finger, muttering darkly about how the end of High Street sales - and our new, second-hand bereft future - is coming sooner than anyone expects.

As so often happens when the industry decides to gaze upon the navel that is its own value chain, there's something missing from this picture - consumers. You can have whatever value chain you like, but it doesn't matter a damn unless there are consumers sitting at the very end of the chain and feeding their hard-earned cash into the system.

For consumers, the second-hand "loop" at the bottom of the value chain isn't just a convenience or, as some in the industry have rather foolishly commented, a system that makes them into little better than pirates. In fact, for many, it's a vital part of their experience of the videogames industry.

Two key factors influence the success of second-hand gaming. The first is price - where it could be argued that videogames have priced themselves out of some of the markets in which they'd like to be successful, especially the youth markets. The converse argument is that many consumers actually find videogames to be great value for money at their present price point, and that certainly holds true for some games - especially multiplayer games and RPGs, where the dollars-per-hour value is immense.

The second factor, related to the first, is longevity. Consumers don't trade in games they're still playing, and they often don't mind paying full price for games they'll play for a very long time. Again, lengthy RPGs and strategy games, along with popular multiplayer games, are key beneficiaries of this factor.

On the reverse side of the same argument, however, lies the fact that extremely short games - those clocking in at under eight hours or so - are perceived as poor value, and consumers will often try to reclaim value from these titles either by buying them cheaply, or by selling them on second-hand.

If anything, the second-hand market plays a vital role in creating a flexible pricing structure for consumers. It allows those with less disposable income to participate in the market. It allows everyone to take chances on software which may have low perceived value (longevity) or quality. However, it also allows quality software with good longevity to maintain its market value and first-hand sales strength.

This suggests that there are really important lessons about product design to be learned from how the second-hand market works - but of course, for those further up the value chain, the fact still remains that they're not actually seeing any revenue from these transactions. Some sales of DLC may have crept up in recent years, but by and large, this is a financial loop where money changes hands between consumer and retailer over and over again, with the retailer picking up a chunk of profit each time.

Indeed, while utterly rejecting the concept of the retailer as a parasite at the end of the value chain, it's hard not to sympathise with developers who see companies like GameStop and GAME profiting multiple times from the sale of individual games - while the developers themselves only see revenue from the very first sale.

However, GameStop CEO Dan DeMatteo threw an extremely important figure onto the table in an interview with Gamasutra this week - $800,000,000. That's the amount of store credit which GameStop hands out to to consumers trading in their old games. When the firm hands out cash for old games, some of it probably re-enters the industry ecosystem at some point - but when it's store credit, almost every cent goes straight back into videogame products.

So what would happen if somehow, overnight, that $800,000,000 was wiped out of the pockets of consumers? Given the mark-ups in play, you'd remove well over $1 billion in second-hand software from the shelves. So that's a billion dollars more of new software sales for the industry, right?

Wrong. The reality is that for all their gesticulating and spluttering, there isn't a single person in the videogames industry who knows exactly what consumers would do if second-hand software wasn't an option, but we can make some educated guesses. The number of second-hand sales which would convert overnight into new software sales could be immense - but it's far more likely to be extremely low.

Equally, you've just taken $800 million of credit tagged for videogames purchases out of the cash of another group of consumers. Rough paper napkin calculations suggest that far from generating $1 billion or so of new software sales, you'd probably lose the better part of $2 billion in turnover for GameStop, including hundreds of millions of dollars of new software sales. Best of all, you'd probably drive former consumers of second-hand games either to eBay - where they won't even see new software to catch their eye - or to BitTorrent. Talk about cutting your nose off to spite your face.

So what about the threat of digital distribution? It's coming, we're told, and it's coming faster than we'd expected (except those of us who expected it to be here three or four years ago, but saw the adoption held up by the industry's initial slavish devotion to the whims of High Street retail - oh, how the worm has turned!). In the digitally distributed future, forget the second hand market - there'll be no physical product to pass on, and no second hand sales as a consequence.

There are two possible consequences of this, assuming that the industry is dead set on maintaining its present pricing structures. One is that second-hand sales continue to breathe life into High Street retail long after its day should have passed, forcing companies to maintain physical production, inventory and distribution for much longer than they'd hoped.

The other is that publishers get brave and move to online-only distribution rapidly - cue an enormous upswing in piracy and the single largest contraction of software sales that the market has seen, as countless consumers suddenly find that their hobby has become vastly more expensive overnight.

The market will vote with its feet and its wallet. Second-hand sales make gaming affordable for a huge swathe of consumers, they pump revenue back into the industry, and they form a crucial part of the present retail mix. Take that out of the mix, and those consumers will just walk away. Whether they walk away to the embracing arms of BitTorrent or simply to find a hobby that isn't so intent on turning the thumbscrews on them is another matter entirely.

So what's the alternative, if we're already committed to this shining future of digital distribution? Quite simply, the videogames industry needs to bite down hard on a stick to contain its pain, and start recognising that Right of First Sale is an intrinsic part of the copyright systems which allow it to make a living out of media in the first place.

If you sell something to a consumer, it belongs to them, and they are entitled to sell it on. This is a right which has been eroded in some jurisdictions in recent years, but it's still there - and consumers are becoming more and more vocal about re-establishing it at the heart of their dealings with media businesses.

What the industry needs, as much as it argues that it needs nothing of the sort, is a system whereby digitally purchased content can have its ownership transferred. If it wants to keep its consumer base and avoid falling foul of the law in many territories which are starting to listen to consumers' voices rather than the industry's demands, it needs to make second-hand work online.

Yet, as painful as that may look, it's also a golden opportunity. Online, the publisher owns the distribution method. Having looked with envious eyes for years at the revenues GameStop, GAME et al. are making from second-hand sales, publishers suddenly have the possibility of taking over those revenues online by directly providing the trade-in and re-sale systems consumers are used to offline.

Instead, they're seemingly determined to slaughter the goose the lays the golden eggs. While this attitude persists, GameStop and its cohorts will continue laughing all the way to the bank.