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Best Buy tests used video game sales
Pilot program might appeal to customers, but could alienate game makers.
September 30, 2005: 4:56 PM EDT
Game Over is a weekly column by Chris Morris
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NEW YORK (CNN/Money) - Best Buy is walking a thin line with its latest in-store test -- one that might thrill cost-conscious consumers, but earn the ire of video game publishers and developers.

The retailer confirmed it has quietly started testing the sale of used video games in select markets, but declined to give details. An analyst note said four stores in Illinois and California are currently involved in the test.

Best Buy doesn't appear to be wading into this half-hearted, though. One of the test stores has over 5,000 used games available, according to Piper Jaffray's Anthony Gikas. Credits earned from traded-in games can be used for other Best Buy merchandise, he wrote.

Previously, big box retailers have avoided selling used games, leaving that market (estimated to be worth $800 million) to specialty stores like Gamestop and Electronics Boutique (Research). Gikas, though, thinks the tide may be turning.

"We think it is likely that [Best Buy] will test more broadly as the project takes hold," he wrote. "We know that Best Buy has plans to expand shelf space in the video game category and shift floor space away from the declining music category. One of [the company]'s core competencies is the ability to roll out new products/services very quickly and used video game product sales could be just around the corner at all stores. ... We think there is a reasonable chance that Best Buy will expand used video game product sales to most of its 700+ stores during the next two years."

If so, that's going to raise the hackles of certain game makers.

Mark Rein, vice president of Epic Games, creators of the "Unreal" franchise as well as the upcoming Xbox 360 game "Gears of War," has vociferously argued against retail sales of used games in the past. The expansion of a major retailer into the field, he said, is disheartening.

"We pay to be in Best Buy's flyers," he said. "We pay market development funds. Publishers drive gaming traffic to these stores. To have them resell the games, with developers having no participation, that's just wrong. That's just fleecing us."

The appeal for consumers is obvious. GameStop (Research) currently sells new copies of "Halo 2" for $38. Used copies are $25. More recent titles typically sell at less of a discount ($45 instead of $50, for example).

In either case, though, retailers see vastly higher profits from the sale of used games. Gross margins on used game sales are typically 40 percent or higher, according to Mike Wallace of UBS Securities.

The ironic part of this is that by buying used games at a lower price, consumers could be contributing to higher game prices. Developers and publishers don't see any revenue from the sale of used games, but they do have to handle the additional customer service calls from people who buy used games only to find the authorization keys (a security feature used by PC games to avoid piracy) don't work or their game is scratched and will not run. Those extra man-hours add up quickly.

A substantial rise in used game sales may lead to the expansion of digital distribution -- in other words, downloading games rather than buying a disc. Valve Software saw tremendous success with this model for "Half-Life 2" last year. The game was sold two ways: Through traditional retail channels and via a proprietary digital distribution system called Steam. While Valve consistently declines to give hard numbers for Steam sales, founder Gabe Newell has said that digital distribution is responsible for half of Valve's revenues from the game.

There's also an interesting double standard to consider. Why are used game software sales fine at a retail level, while the same isn't true for copies of Windows or business software?

"Are they going to sell used copies of Microsoft Office -- and if not, why not?," asked Rein. "Why is that Microsoft (Research) has no objections to you reselling a copy of 'Halo,' but if you try it with Office, they'll come down on you like a ton on bricks?"

Best Buy (Research) declined to comment on the issue.

Right now, Best Buy is the only big box retailer considering used game sales -- but if the test proves successful, don't be surprised if other retailers follow suit.

"Given that the margins are that high, it's probably going to be a trend that continues," said Hal Halpin, president of the Interactive Entertainment Merchants Association.  Top of page

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