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Used CD Legislation Slows Used Game Sales

Stricter laws in Florida and Utah aim to hamper the sale of used merchandise such as CDs and video games, with similar legislation underway in Wisconsin and Rhode Island. Typical pawn shop laws require retailers to hold used merchandise for a set amount of days before selling it and to acquire some basic information on the person who sold it back. Such a process is meant to stem the trafficking of stolen goods and facilitate the ease with which authorities track thieves and return stolen items to owners.

Florida's new legislation goes well beyond the measures of a traditional pawn shop law. The state now requires all retailers selling second-hand CDs to acquire a permit and invest in a $10,000 security bond through the Department of Agriculture and Consumer Services. Stores must fingerprint individuals trading in CDs, copy their state identification, and pay them only in store credit; traded CDs must be held for 30 days before being resold. With the new legislation already in effect, at least one retailer is reported to have discontinued sales of used items as a result. Pawn shop laws in many other states, which tend to be less restrictive than those in Florida and Utah, often go unenforced.

The policy also affects the sale and trade of used video games and DVDs, though to a lesser degree. Video game retailers are not required to acquire a permit, and they only need hold traded games for 15 days before they can be sold. This 15 day buffer could theoretically boost the number of new copies sold.

Industry veteran Mike Russell, formerly of Ritual Entertainment, explained to Shacknews that used game sales are more potentially limiting to publishers and developer than used CD and DVD sales, as sales of new games at retail generally comprise the sole revenue stream for games. "It isn't hard to see the attraction that game retailers have for used games," he said. "With a new console game, their margin is usually under 10%, while their margin on a used game can be over 50%. There has been growing developer and publisher discontent with chains that sell used product. After all, the publishers [and most developers] are paying for ad circulars, shelf space, in-store contests and promotions, point-of-purchase advertising, subsidized special editions for certain chains, and more...just to bring a customer into their store who is going to buy a used copy and not help recoup any of that money."

Gearbox Software president Randy Pitchford echoed Russell's concerns. "Used game sales are an access point for many gamers and I think the industry should support that path," he noted, "but there is a problem right now in that used game sales are a market that does not provide revenue to the game maker. The entire used game sales market exists only to support and provide profit to the retailers. Healthy retailers are good for our industry, but looking at how GameStop is doing, I think they should be passing more value to the developers and publishers."

Across the 2006 fiscal year, GameStop saw a gross profit of $651.9 million as a result of $1.36 billion in used video game and hardware sales, with retail sales of new software and hardware achieving gross profits of $504.3 million on $3.09 billion in sales. While used games comprised 24.8% of total sales revenue during that time period, they were responsible for 48.8% of total profits.

Russell added, "While delaying used console game sales for two to four weeks after the initial release would help in a small way as far as the bottom line for game sales (especially since the first thirty days are most crucial for sales of any title), the percentage of sales ceded to used sales during the initial thirty days is severely muted by supply constraints...used games are more likely to significantly impact sales after the first trimester."

"Laws like the ones in Utah and Florida won't significantly impact sales of new or used product," he continued. "The most sure-fire way that publishers could 'stem the tide' of used sales would be to eliminate [advertising] support for chains that sell used product, but given the quantity of new product that goes through those outlets as well, that would be throwing the baby out with the bathwater."