Used Game Sales

A preamble, since this seems to be missed: most of my posts are written quickly, in minutes of free time.  They are therefore not heavily reasoned, carefully formed essays designed for peer review.  I would have weeks of time, plus editorial input if they were.  Instead, treat my posts as germs of ideas, vaguely formed, generally written rapidly with very little editing on my part.

The last post I made was one such; this one is another.

So, to the topic at hand: penny-arcade’s most recent post is about a THQ dev saying he has no sympathy for used game players…because the dev is being cheated (I guess out of rightful profit).

This is precisely the same simplification as used by media creators about piracy.  The problem is that it overly simplifies the interplay of the various market forces involved: a used sale is not a game sale the dev/publisher/retailer would have gotten if only there hadn’t been a used copy competing.  Generally, I consider these sorts of statements problematic on a variety of levels.  First, they’re incorrect due to the over-simplification (yes, I realize I simplify, too.  In my defense, I know I’m doing that and rarely believe anything I say.  It’s your fault for believing me).  So if they believe their own words, they’re being ignorant.  Second, they’re demonizing their audience, which seems like it’d be…awkward.  Look, if you feel there’s a market for crippled games at a lower price point, why not just sell those directly?  Microsoft does that with most of their products (windows home, pro, ultimate; Visual Studio Express/Pro/Enterprise, etc.).  Of course, Microsoft does its level best to lock the software to a computer.

Then again, games have a somewhat shorter average span of utility.  I’m relatively certain very few games have enjoyed quite the longevity of use that Windows XP has.

Here’s an analogy that actually works for me.  In Eve, an industrialist spends an exorbitant amount of time and effort to build a ship.  Battleships and Capital ships don’t spring out of nowhere; some player put that shit together.  If I buy that ship, turn around and resell it for more, I’ve cheated them out of that sale?  Or if I buy it, use it to run some missions, then resell it for slightly less than they are, did I cheat them out of a sale?  That feels…silly.

Or here’s another example of a thriving secondary market in digital products: Magic: the Gathering Online.  MTGO costs $10 to start an account, which gets you some starter cards and lets you play.  There’s no additional charges to play.  To participate in events on MTGO, you must use event tickets, which can be purchased from WotC for $1 a piece.  Once you’ve started up an account, you’ll probably want to pick up more cards, and there exist two methods for doing this: buying booster packs from WotC at MSRP ($4) or purchasing cards on the secondary market, which is de facto denominated in event tickets.

Now, event tickets can be re-sold for money (usually below par value, so <$1), meaning it’s possible for a savvy MTGO card trader to make a profit on second-hand sales.  Now, to some extent, WotC takes a cut of the secondhand market because you have to buy tickets through them, but bear in mind these have a market value themselves: you can cash out your event tickets, meaning someone else is buying them at a lower price than WotC sells them, effectively cutting in to Wizards’  potential sales.

Why does WotC allow this?  After all, I see distinct parallels with the used game market here, where sales move into a parallel economy which generates no direct profit for Wizards.  In fact, it constitutes a cost, as most of these sales are made on their servers, incrementally increasing the cost of maintaining the MTGO service.  So why tolerate it?  Because the useful life of a card is limited.  Without the ability to exchange them down the line, whether that option is exercised or not, the perceived price of the card increases.  That means the cost of entry and the cost of continued play increases, meaning the number of people who can become invested in MTGO would decline…which would mean the secondary sellers would have a smaller market, and would be less likely to fund purchases of new cards, or event tickets (which constitutes the money supply in this little parallel economy).  Cutting out this secondary market will reduce certain types of sales for WotC.  The question, then, is would there be sufficient increases in other sales to make up for this loss?  And that’s leaving aside the question of the intangible value of customer goodwill.

Now when I buy a game new, it intrinsically has a resale value.  This value changes over time, initially declining until, somewhere down the road, it begins to climb again (as games have been demonstrated to have what might be called ‘collectible value’).  I vividly recall the price of Chrono Trigger, used, sticking at $30 for YEARS.  Looks like simply the chrono trigger cartridge, no box, manuals, etc., will set you back $40 on ebay right now.  And that’s knowing you can pick the game up for the DS or PSOne.  If you remove that resale value (assume no secondary market for the sake of argument), then the perceived value of the game declines relative to if there were a resale value.  That implies a decline in demand.

Now, we’re talking about aggregate game sales.  We can assume that the total demand for games is consistent whether there’s a secondary market or not (we’ll assume that there’re no losses due to the lack of price granularity, though I’d argue that might be an issue (by price granularity, I mean if I have $80 I can spend on games, but games cost $60, I am inclined to simply save the $20 extra, since there aren’t any game options at $20)).  The existence of a secondary market implies that perceived price of a game is lower, meaning that demand with a secondary market will be higher at any given point in time.  By this we mean if I can resell a game for $10, and buy it for $50, the perceived price will be around $40 (if we want to really get into it, inflation could be a factor, but over the time horizons we’re talking here, that’s not a terribly large factor), so demand will be somewhat magnified for new games at any point.  However, used game sales will be pulling demand from new games.

Let’s assume $1000 video game demand and new games are $50, with or without a secondary market.  All of that demand is exhausted on new game sales, so $1000 of new games are purchased.  Now, assume a used game market.  We use an average of $10 in resale value and games are resold only once.  The $1000 in video game demand must now be split between the secondary market and the new game market.  We assume that there is a need to fund initial purchases in order to supply games to be resold.  Not all of that can go to the secondary market, or there would be no games to be sold on the secondary market.  Further, the value of all games is increased by their resale price, so we can increase the demand by that ratio (in our case 10/50, or 20%), meaning there’s n0w $1200 in demand available (yeah, there are a metric shit ton of simplifications going on in that previous bit alone, but I don’t really want to get into resale velocity or cash flow analyses, which would mean demand would have to be categorized as a flow, rather than set amount, and yadda yadda.  No deal, I think this is enough to demonstrate my point).  This implies that if $200 of that demand is spent on used game sales, that means the secondary market has (roughly) no impact on new game sales.  So, if more than 17% of sales are used game sales, new game sales suffer.  On the other hand, if the resale value is greater than 20%, more sales of used games can be supported without affecting new game sales.

A quick check of ebay suggests that resale prices are higher than 20%.  Red Dead Redemption seems to be hitting 67% and Final Fantasy XIII is at 33%.  Further, if we believe this venture beat article quoted analyst, 20% of GameStop revenue is based on used game sales, implying less than 20% of game sales are used (I’m basing this educated guess on the fact that games are sold out of places that do not also sell used copies, such as Walmart, Best Buy, or Toys r us.  Also, GameStop is apparently recognized as basing a huge portion of their revenue on used games, meaning they’d push that as hard as they could).

So I guess my point is that an awful lot is being made out of this, and I don’t really get it.  I don’t buy the ethical argument: if I buy a game, I can sell it.  I don’t owe the developer any more money for that, and I’m not taking anything from them (and yeah, I”m a game dev, not that it matters).  If I’m allowed to sell it, someone else is allowed to buy it, and the only person they owe money to is…me.  This is how property law works.  This is regardless of degradation of quality or lack thereof.  Additionally, I’m not convinced used game sales are hurting anything.  I’ve at least come up with a reasonable model that shows them having no impact (and, potentially, a beneficial impact).  I may be wrong, but at the very least I see my model to be just as convincing as any other presented, with no real way to choose between them.   It’s all hand waving and cries of “OMG that’s not FAIR, obviously they are THIEVES!!”.  I’m not really the type given to accepting that sort of ad hoc argument.