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Video Games' Second Life

Sales of used products grew from $212.5 million, or 16% of revenue, in fiscal 2003 to $419.9 million, or 21% of revenue in fiscal 2005, which ended in January.

Through the first nine months of this year, GameStop has sold $458.8 million worth of used products, representing about 32% of total revenue, up from $355.2 million, or 31% of revenue in the same period last year.

For retailers, the attraction of the used business is high profit margins. In the third quarter, for instance, GameStop saw a gross margin of 45% on sales of used products, compared with about 25% on new software sales and just 11% on new hardware.

And though the company's sales of new software outpaced that of used products, GameStop saw more gross profit dollars from the used business.

Those kinds of numbers are drawing new entrants into the space. Best Buy (BBY - Get Report), according to published reports, has started testing the market for used games in some of its stores.

The growing demand for used games comes amid a cyclical transition in the video-game industry. Microsoft's new Xbox 360 game console is only the first of three next-generation game machines expected to debut in the next year.

Such transitions have typically been tough for video-game software publishers because they often result in slumping or stagnant sales -- and increased costs.

The rising costs have to do with development expenses for next-generation games. Analysts expect such costs to rise to as much as two times for games played on current-generation consoles.

Meanwhile, analysts often chalk up poor sales to a number of factors, including the link between game and hardware sales and an installed base of console owners. That it can take up to a year or two before a particular console reaches a mass audience puts a limit on sales of games for the device.

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