Seth Schiesel in the New York Times looks into the hot second-hand gaming software market, and finds the big game publishers (ERTS, ATVI, THQI) are losing out entirely to companies like GameStop (GME):
After Electronic Arts, the No. 1 video game publisher, announces [today] what it has forecast will be disappointing results for the recent holiday quarter, expect a lot of hand-wringing about the future of the video game business...
In explaining the current woes, many executives and analysts will point to the obvious culprit: Microsoft, which has failed to meet demand for its Xbox 360 game machine.... But the bigger picture for investors is that game publishers in the United States are still almost entirely in the same business they have been in for 20 years: selling new games at retail. As a result, the big publicly traded domestic publishers are not participating in any meaningful way in two of the hottest parts of the global video game industry: subscription-based online gaming and trade-ins of used games...
the used games business does not sound exciting until you look at the numbers. GameStop, which recently acquired Electronics Boutique to become the No. 2 video game retailer behind Wal-Mart, has made used games one of its pillars and that is a big reason its shares are up 89 percent since the beginning of last year; Electronic Arts shares are down 11 percent over the period.Over all, GameStop appears on track to generate about $3 billion in revenue this year. Of that, it looks like $800 million to $1 billion will come from the sale of used software, hardware and accessories. Just how profitable that segment is has only recently become clear to investors.
The quarter that ended in October was the most recent with GameStop results and was the first in which the company broke out results for its used segment. They were eye-popping. Used products made up almost 32 percent of the company's total retail sales and almost 44 percent of gross profit. Even more impressive, while GameStop's gross profit margin on new hardware sales in the quarter was less than 11 percent, and on new software less than 25 percent, the company generated a whopping 45 percent profit margin in its used segment.
For GameStop, the beauty of the used business is that it acquires most of its inventory not by paying cash but by giving gamers credit that they then spend in the stores anyway. GameStop then sells the used disks and cartridges, which usually function just as well as new disks and cartridges, for about 20 percent less than the new versions of the same games sitting an aisle or two away.
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