Circuit City tests used video game sales

NEW YORK (CNNMoney.com) -- The hot-button topic of used video game sales is moving toward center stage once again, as Circuit City has begun selling previously-owned titles online and in select stores.

While consumers are always happy to find a lower-priced alternative, many video game makers are fervently opposed to used game sales, arguing the practice harms the industry. It is, if nothing else, a high profit business. Colin Sebastian, senior research analyst with Lazard Capital Markets, estimates that sales of used video game products generate over $1 billion in revenues per year in North America. Gross margins for those sales come in at nearly 50 percent.

Circuit City's (Charts) trial, which is being tested in select stores and on its Web site, is the second such effort by a major retailer. In 2005, Best Buy launched a pilot program of used game sales in Illinois and California. (Best Buy declined to comment on the status of that test, but there has not been an obvious expansion of the program.)

Traditionally, though, only one retailer - Gamestop (Charts) - has found success in this field. The reason's pretty simple: There are some substantial barriers to initiating a used video game business, including a separate inventory system and a specially trained sales team, which can evaluate the value and condition of trade-ins. Sebastian, in a note to investors, said he believed any Circuit City threat to Gamestop was minimal.

What's notably different with Circuit City's trial is the inclusion of online sales, something Best Buy (Charts) never attempted. Should the program take hold - and become a regular business practice - the store could be risking the ire of an influential segment of the video game industry.

Publishers rarely, if ever, see any revenue from the sale of used games. They do, however, contribute a significant amount for the promotion of those titles, which is where the frustration springs from.

Typically, marketing makes up 12-15 percent of a game's wholesale price. While some of that goes for magazine ads and television commercials, a significant portion goes for in-store promotions, such as posters and end-cap displays. Game makers also pay to promote titles in Sunday circulars for big box (and other) retailers.

Because game publishers and developers - including Microsoft (Charts), Nintendo and Sony (Charts) - have a symbiotic relationship with retailers, none was willing to speak publicly about the practice. However, each anonymously expressed outrage that such a significant player in the space would explore the sale of used games.

Jim Babb, a spokesperson for Circuit City, declined to address these concerns, saying the program was still a test and is being evaluated to determine if it will be expanded. In-store sales of used games started in the last few months. Online sales began earlier this week.

The used video game selection on circuitcity.com is fairly limited right now - with prices averaging $5 or so below the price of a new game. Gamestop prices tend to mirror that discount.

Of particular concern to game makers is the availability of recently published titles. While Circuit City's online test does not feature any games that were published in the last 30 days, it's quite common for dissatisfied (or particularly skilled) players to trade in new games soon after they are released. (More recent titles carry a higher exchange rate.)

That first month is prime selling time for publishers and developers - when the majority of sales income is typically generated. Having to compete against themselves on store shelves is a significant source of frustration.

While it's too early to know if Circuit City will expand the program, game makers are worried. If Best Buy and Circuit City are willing to test the sale of used video games, can Target (Charts) and Wal-Mart (Charts) be that far behind?

Morris is Director of Content Development for CNNMoney.com. Send him an email at chris.morris@turner.com.