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