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Retailers Play Harder on Secondhand Sales

Secondhand shopping might be good for consumers, but it's forcing big retailers into a game of catch-up.
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Editor's Note: This is the third in a series called Secondhand Nation, which takes a closer look at how thrift stores, garage sales and secondhand shops have fared during the recession and what the future holds for the frugal consumer.

One of the easiest ways for consumers to save is to buy used instead of new. But while that strategy is great for customers and bargain-hunters, can the people who make products survive when no one buys new anymore?

To find the answer, look no further than the video game market, where resale has been around for a while. For many in the gaming industry, it's hard to remember a time game developers and the resale market weren't at odds.

Ben Noel, executive director of the Florida Interactive Entertainment Academy at the University of Central Florida, worked as a vice president at Electronic Arts (ERTS) in the late 90s and early 2000s, a time "video games were just becoming a real market," he says. "There was legislation that worked in the favor of the 'Blockbusters' of the world for leasing products, and then the aftermarket became an issue for the publishers, starting about 10 or 15 years ago," Noel says. "It was tough to negotiate with those specialty stores, but obviously publishers would like to have value in their property that gets resold."

The price of resold video games, while great for consumers, is costing game developers billions of dollars each year, according to Scott Steinberg, CEO and lead analyst for the video game consulting firm Tech Savvy Global. "The bulk of the dollars go for the retailer's pocket," Steinberg says, and "the developer is not seeing a penny from that second transaction."

Like Hollywood films, video games cost money. Beyond the fees paid to top-notch designers and artists for concepts, publishers such as EA also have marketing, distribution, stocking and shipping fees to worry about -- not to mention the bulk of revenue national distributors such as Wal-Mart (WMT) - Get Walmart Inc. Report get at the point of sale.

"Games cost as much to make as independent films," says Steinberg, and gamers' demand for visually rich, high-tech content is making "the bets higher and everything riskier" for developers.

Game publishers are feeling the pressure to produce better games not just from consumers, but also from their own need to stay competitive. "Quality is going up across the board," Steinberg says. "We're training players that every year you're going to get better products, and that takes time and money, manpower and resources to create."

A push for better quality in a recession is tough, though, especially when consumers want an inexpensive product. And where do customers turn for the same quality at a lower price? Resellers.

Activision's soon-to-be-released Call of Duty: Black Ops, for example, will cost gamers $60 if they buy it new, but in as little as a week, resellers such as GameStop (GME) - Get GameStop Corp. Class A Report can flip the product for a fraction of that. The savings for the consumer are obvious, but their impact on the gaming industry is another matter.

GameStop's resale strategy has been lucrative for the company, which bases nearly 80% of its bricks-and-mortar business on trade-ins. But for game developers and firsthand retailers now elbowing their way into the resale market, the business of secondhand goods raises questions about who gets hurt and who suffers a significant loss of income.
GAME CHANGERS For years, the gaming demographic has been expanding. It's no longer predominantly teenage and male; seniors and female toddlers -- who play dress-up with Barbie (MAT) - Get Mattel, Inc. Report dolls online -- are getting into the game.

"Compared to 10 or 12 years ago, the market was more male and it was in the 17-35 demographic," Noel says. That change means fewer avid gamers, who are more likely to buy a new game, and more cost-conscious users. Steinberg says the latter group is "more frugal and just looking for a title on a box and are the ones more likely to look around and wait a week or two because they don't have to have it that second."

It's these cost-conscious shoppers that have publishers worried, but they're cooking up ways to strike back.

According to Christopher Swain, director of the University of Southern California's Games Institute, "the companies that are the most involved -- Electronic Arts, Activision Blizzard (ATVI) - Get Activision Blizzard, Inc. Report, Disney (DIS) - Get Walt Disney Company Report and Nintendo -- recognize that their games are getting sold and they're not making any money," he says. "They're adopting new strategies, imbuing their games with bonus content that encourages you to be the first one to buy it versus the second one, or when gamers pre-order, they get exclusive market player characters. Even if you buy at the store you won't get them, and you won't get them if you buy secondhand."

Steinberg, the analyst, confirms the trend. "The pressure is so crippling, many publishers are trying to find ancillary means and testing out pilot programs that can generate revenue. Think of EA's online pass program that charges $10 for titles like Madden NFL or other downloadable content online."

Also, Steinberg says, "rather than push the bar higher" in terms of creating compelling content, publishers will often work with what they have, producing games called "minimum viable products" that boast fewer extra features but still draw an audience. Grand Theft Auto 4, Fallout Three, Mass Effect and Farmville are some examples, he says, and the idea is to get gamers to spend $4 or $0.99 here and there, which can add up. Virtual add-ons have also taken off, as have virtual universes such as Lord of The Rings, which offer unlimited play for a monthly subscription.

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Swain sees more publishers adopting these strategies "because the economics are so much better," he says. "The more they distribute online, the higher the margin goes. They don't have to print, ship, deal with problems or pay the retailers taking a cut." Another perk: "You can get more creative with what you do," Swain says. "Selling the stuff online increases innovation and you can justify trying something more risky and oddball."

RESALE GOES MAINSTREAM While developers wrestle with their own problems, such big name retailers as Target (Stock Quote: TGT) and Best Buy (Stock Quote: BBY) are also cashing in on America's secondhand craze. Target announced in August that it would begin doing trade-ins online, and just a day later Best Buy announced it would do the same thing, expanding its online service to nearly 600 stores, with the remaining 1,089 stores coming online this month.

"Last year, used video games generated close to $2 billion in the U.S.," explains Ed Woo, a retail analyst with Wedbush, a Los Angeles financial services and investment firm. "It's an area that's still growing rapidly, as used games grew 10% and will probably grow this year."

Toys R Us and other chains' plans for secondhand video game sales comes down to brand appeal. "At the end of the day, these retailers want to be known as the place to get games, and you see it with the pushing of electronics," Woo says. "They're trying to have better selection, pricing, customer service and support so that they're known as the place to go to get these products."

Not that shelf space for games is a bad thing. "We need the resellers and retailers to keep that space whether they're selling old or new," Noel says. "A kid goes to Best Buy, tries something with his buddies, there's a certain amount of product that gets purchased from those people as well."

ECONOMIC IMPLICATIONS The reliance on secondhand shopping has some economists concerned that our prolonged thrifty behavior could hurt our country's long-term growth. But Dian Chu, an economist and market analyst based in Houston, begs to differ.

"Americans are historically not good at saving," Chu says, "We're spenders. I don't believe that saving behavior will change or last long enough to have a significant impact on our economy." And compared with Japan, a country that has been fighting deflation for more than a decade, what Americans fear and feel today "is just a temporary thing because of the recession and the jobs market."

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