Why Retail Game Stores Will Die Out

I’ve been working in a British retail game store for around a month now. It’s the store I’ve been going to since I was a kid and I always loved going there. Seeing all the different games and sections was always so much fun. It was like a library but not boring. However, since working their I feel more aware of the issues surrounding retail game sales.

It is becoming more and more apparent how damaging pre-owned games are for the industry and more specifically to the developers. For those of you unaware the reasoning for this is simple. When a store sells a pre-owned game the only cost for that product, excluding overhead costs such as electricity, is the price they bought it back for. Seeing as that’s usually less than a quarter of the selling price, it’s big profit. Let’s use The Last of Us as a demonstration. When they sell a new copy, a certain percentage of that goes back to the publisher, in this case Sony Computer Entertainment, which then pays its developer, Naughty Dog or has paid them in advance. The rest of the profits are shared between the console manufacturer (Sony), distribution, marketing, and of course, the retailer.

The Last of Us

However when selling a pre owned game all of the other shares in profit are cut out leaving it only for the retailer. This is in fact their greatest profit margins, making up approximately 40% of their gross icome. They are so dependent on the sales of pre owned, they have installed systems on their checkout counters informing the employee when there are pre-owned copies of the game the customer is attempting to buy and how much cheaper that is. When an uninformed customer hears “you can get this for £5 less” of course they’re going to grab that copy instead. The employees, i.e. me, also have a target for selling pre-owned instead of new, which stands at around 60%. This is high. If I do not meet these standard I can be given a warning which can lead to disciplinary action which can lead to termination.

That’s why you’ll often see signs encouraging you to trade in your brand spanking new game within a week or even a day. It’s because that copy can be sold at only a couple of pounds below the new price yet make them almost twice the profit. Normally this entire strategy would be deemed clever business planning, however when a company’s entire sales approach is damaging the supplier of their product, it creates an unhealthy relationship which cannot go on forever.

Trade in

All game publishers know this. That’s why Valve saw the opportunity and created Steam, a digital distribution platform for PC. If you are a PC gamer and are unaware of Steam, first of all where have you been for the last 5 years? And secondly you should definitely check it out, as Steam is living proof that digital games can be sold at a significant lower price than at retail. It also means your game and saved data are tied to your steam account instead of your PC. So if your PC dies, you still have all you need to carry on playing when you get a new one. These are easily transferable qualities to consoles and PlayStation Plus is a great example of this being implemented with their online storage using the cloud.

Steam's 2013 Summer Sale

Microsoft knows this. Sony knows this. Nintendo knows this. That’s why Microsoft tried to jump the gun with the Xbox One and make it necessary for you to authorise your game every 24 hours, which would subsequently cancel out used games functionality. However, this approach was premature, evidently from the sudden and, in my opinion, unexpected outcry from the public. On top of this, Microsoft would be shooting themselves in the foot as they do not yet have the distribution reach retailers have, to sell consoles. Sure, they are starting to enter the retail world with their own chain of Microsoft stores, but at a worldwide count of 43 stores, all of which are in North America, this would be a near impossible source of distribution. So why not Amazon? They sell consoles? True, but again worldwide they do not have the reach that all the retailers accumulated do. Amazon, for example does not have an Australian retail website.

This would be the main difficulty with cutting all ties to retailers. The future will undoubtedly be Amazon and self distribution but until that’s collectively large enough to supply the launch demand of consoles, retailers will still exist and games will not go fully digital. Sony knew this. That’s why they supported used games at their E3 press conference. They also know that this will eventually happen by itself. When PlayStation Network versions of games become cheaper comparatively to retail, gamers will switch to only digital downloads. Games should already be cheaper digitally. There are no distribution costs, fewer advertising costs, they do not have to pay the retailers for stock placement and for sales. It’s logical and good for business. Just not yet. Undercutting retail prices such as Gamestop’s would jeopardize their relationship before Sony is prepared to distribute consoles and get their message out without them. Sure the mom’s and pop’s and grandpop’s may be unaware of how to download games but as our world gets ever more computer literate, this problem will solve itself.

Some say what if they started a used car like scheme? I.e, you sell your copy of the game back to retailers who then ship it back to publishers, who then negotiate on pricing and sharing the profit. But this is a long, complicated and unnecessary process. Digital will ultimately get rid of all pre owned or even hard copies of games. Mobile and tablet games are already like this, as well as PC games with Steam. The only platforms still supporting retail sales are Playstation, Xbox and Nintendo consoles. My prediction, within 5 years, or halfway through the next console cycle, there will be a sudden shift in digital game prices, and thus sales.

Xbox One/PS4

What do you think? How do you see the gaming industry changing? Will digital take over or are people still in need of hard copies? Should Microsoft have stuck with their original message or did they have no option but to switch? Please comment below.

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