Pre-Owned: How GameStop Would Kill The Movie Industry

This post is inspired by this article on “Pre-owned crackdown is a poor excuse for business innovation”.

I think it shows a fundamental lack of insight into the economics of creating and selling experiences. And the crackdown isn’t about business innovation, it’s about righting a wrong.

The author calls reselling pre-owned games “normal consumer behavior”. And it sure is. But the reason why this has become “normal consumer behavior” is that the console makers did not take steps to prevent their retail partners from undermining their entire business model in the most egregious way imaginable.

Quick recap: A second hand sale of a game is basically – from the developers or publishers financial standpoint – the same as having your game pirated. That means that the people who funded and made the game does not get a dime. The only people making money in the pre-owned transaction is the retailer.

I’ve heard the argument that “well, that is true of every other merchandise”. And it’s true – you can resell your dining room table, and IKEA wont get a cut of the action. That’s the only way the world worked up until the age of intellectual property.

The problem is, that it’s simply not a reasonable comparison in this new world where the invention of something can be amazingly expensive, while the mass production of it can be nearly free.

When you buy a table, you pay for materials, work time, wear and tear on machines plus overhead. The R&D that needs recouping is fairly small, so there’s a very direct relation between the cost of the production of the table and the price you pay for it. You have never paid $50 for a table that cost 100 million dollars to design, and $0.5 to physically make.

There is absolutely no connection between the cost of the physical media of the game and how much it cost to make the game. Comparisons to normal goods are pointless – the economics work in entirely different ways. It doesn’t degrade with use, and you don’t lose anything of physical value when you resell it, because – like movies – games are mostly just consumed once.

Medicine is another field where there are staggering R&D costs which have to be paid for by subsequently selling fairly cheaply produced meds for a price that has little to do with the physical thing you are buying. Lucky for the medicinal industry, you can’t eat a pill and then sell it back to the pharmacy who can resell it at 30% under the “new pill” price right at the point of sale by cutting out Pfizer’s profit.

People seem to have trouble grasping that they aren’t paying $50 for the plastic disc – they are paying $0.5 for the disc and $49.50 to partake in an experience that someone spent a truck full of money to create for them. Once a person absorbs this experience, the creators of it have an – in my eyes reasonable – expectation of being compensated for that absorbtion, even if the delivery mechanism can be reused ad infinitum.

It seems that the heart of this debate is simply that people have a hard time adjusting their sense of fairness to the economics of non-physical goods like experiences. Most existing experience based markets have fortunate built-in mechanics that don’t give the creators the same problems as the games industry has – books are cheap to write, music is kept to be experienced again and again, and so on.

Movies are probably the closest and easiest comparison to games with regards to being expensive to make and cheap to disseminate, so let’s examine the business model of hollywood movies for a second.

Fast and Furious 6 cost $160 million to produce. Add the same on top for marketing (wild guess), and you have youself a $320 million dollar movie.
It made around $100 million on it’s opening weekend at domestic theaters alone and after a week out it has made around $400 million internationally. Recoup in one week in the primary market for big budget movies : Movie theaters.

Once the theaters have played out, the creators can continue making money on TV, in-flight entertainment, cable licensing and other markets, and – of course – DVD/BluRay releases. By the time the movie makes it to BluRay, and thereby also to second hand markets for BluRay, the movie has usually already made it’s money back.

There is no movie theater market for games. There is only the disc market, which makes pre-owned sales possible a day after release, right at the point of sale for new games. It’s like if the entire movie market was only straight-to-DVD, but with consumers having an expectation of Hollywood summer blockbuster production budgets. I’m betting that would not be a viable business.

To understand how destructive pre-owned sales at GameStop is to game developers and publishers, imagine if it was legal to resell your movie ticket when you were done with it, without paying the people who made the movie.

If movie theaters were driven by GameStop, they would buy your used ticket back for half of what you paid for it, then resell it at 70% of the new price to the next guest, cutting out the movie producers of the profit for all subsequent viewings on that ticket, until it was too badly mangled to use any more, or until someone decided to bring it home as a souvenir.

More profit for the theater. And they even get to look like the good guy, because they just found a way to sell you a cheaper ticket.

Most movies would die. The next Inception or Batman Begins would never get made.

Obviously, the metaphor is not perfect, but the general idea holds true: The only reason why movies can exist, is because their primary market is one where each person pays a premium to consume the movie once – an experience they can only share with people, if those people also pay for their experience. And there is no equivalent “pre-owned safe” market for expensive games. Except the ones people are bitching about as “anti consumer” – Steam, App Stores and the future consoles. The ones without a pre-owned option.

Games are the same. And the systemic problem that the author of the above article is alluding to is the pre-owned market, among other factors. The fact that it was ever allowed to exist is unfortunate, because it made a whole generation of gamers feel entitled to a fundamentally unsustainable business model, like sucking oil out of the ground and burning it for energy.

And yes, it’s a pity that the author can’t go halfsies on the next Call of Duty with his buddy or lend a game to a friend, but that’s just too bad. Blame GameStop for painfully showing the games industry what an unscalable idea it was to allow that in the first place.

Buyers of games simply can’t have their cake and eat it too – if they want high budget games and the existence of a pre-owned market, they will also have to accept the existence of an unlikely, preposterous new market like a movie theaters for games: A place where you go and pay for a $30-$40 ticket plus $10 popcorn to sit down and play the game once on a great rig, and then you have to wait 3 months for a release that you can pay for again and play at home as much as you want. Which you are free to resell to others, or give to a friend.

Hey, there’s an idea for your next gaming startup.

Good luck with that.