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Gamestop selling used digital games - not gonna happen

Despite a recent EU court decision, Gamestop's plan to sell 'used' digital games will never get off the ground.

The EU Court Ruling

Recently, a European Union court decided that Oracle could not collect damages from a German company that was buying used Oracle software product keys, and then reselling those keys to new users.
What this means is that in the EU, when you buy software digitally, you have the same right to resell that product as if you bought it on a physical medium, such as a DVD.  

A reasonable interpretation of the decision is that it forces a company like Microsoft to enable/facilitate the sale of a downloaded game from one Xbox 360 user to another.  

You can read the ruling here:

Gamestop's Plan

This ruling has fueled speculation that videogame retailer Gamestop will extend its used game business to include digitally downloaded games - those purchased via either the Xbox Live service or The Playstation Network.  Legally, at least in the EU, it seems like they will be able to.

Currently Gamestop makes the vast majority of its profits off of used game sales.  Gamestop typically pays a small amount for a used games it buys from a customer - much less than it pays game publishers for new copies.  It then sells the used copy for nearly the same price as a new one.

This works great for Gamestop, but probably not so great for publishers.  The above transaction gives money to the used game seller and Gamestop, but not the people who created the game.  

Whether console manufacturers lose out on Gamestop's used game business is a subject of debate.  Obviously console manufacturers don't get a cut of the money spent on used games.  Then again, trading in used games forces a customer to visit Gamestop, where they're likely to buy another game.

In any case, console manufacturers have had the technology to stop the used game market cold for awhile.  For instance, Sony contemplated tying new Blu-ray games to individual PS3 consoles, thereby preventing resale of the game to another player.

So far, console manufacturers have resisted implementing this type of technology because customers really, really like the used games market.  If Sony put a stop to it on their system, customers would buy Xbox instead.  

The Numbers Don't Work

The problem for Gamestop is that the economics don't work out.

As far as the sale of physical used games go, Gamestop has a huge competitive advantage.  They own thousands of stores in the United States.  They have the infrastructure for warehousing and distributing these used game discs all around the country.

This advantage disappears when we're talking about digital downloads.  There's nothing stopping Amazon, Best Buy, or any enterprising soul from setting up its own used digital game exchange and offering better rates.  Gamestop's physical infrastructure is a needless expense.  

Really though, by far Gamestop's biggest competitor in the used digital game business will be the console manufacturers themselves.  This is the reason their plan will never get off the ground.

Imagine two scenarios:

Scenario 1: Gamestop buys a used digital game from Bob for $5.  Gamestop then resells this used digital game to Bill for $10.  Gamestop makes $5.

Scenario 2: Microsoft buys a used digital game from Bob by giving Bob a $5 rebate off the purchase of another digital game.  Microsoft then resells this used digital game to Bill for $10.  Microsoft makes $10.

Gamestop loses here because it has to purchase its digital inventory, whereas Microsoft doesn't.  It already owns it.   

But Microsoft wins in this scenario even more.  

Let's say the used digital game that Bob traded in for $5, and Bill bought for $10, sells for $15 new.  

When Microsoft gives Bob his $5 rebate, there's no reason to resell his used game to Bill for $10.  Instead, Microsoft can just 'throw away' Bob's copy, forcing Bill to buy a new copy for the original $15.  It's all the same for Bob.  He doesn't know Bill nor does he care how much Bill pays for videogames.

So in Scenario 2, Microsoft is really making $15, since it's eliminating a used copy of the digital game from the world.

Since Microsoft makes $15 off the transaction and Gamestop only makes $5, Microsoft can afford to give Bob a much bigger rebate than Gamestop could ever match with cash.  

So unless Bob is sure he is not going to spend that money on another Xbox game, he has no incentive to deal with Gamestop.    

The same scenario plays out with Steam + PC Game Publishers vs Gamestop.  

Nice Try Gamestop
As digital distribution gradually takes over the videogame industry, Gamestop's decline seems inevitable.  

If the EU decision somehow makes its way accross the world, there's still no place for a middleman like Gamestop to take a cut on used games.

It's not gonna happen.  




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