The Business of Used Games and Online Passes

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The biggest problem I see is that a lot of people don't understand why there is a big fuss about used game sales and why online passes are in place from companies such as EA, Activision, or other game publishers. As a consumer, the most front-facing thing we notice is that if we buy a game used, we most likely have to buy a $10-$15 code to allow online play, which can instantly negate a discount we receive from buying the game used in the first place from a retail chain such as Best Buy or Gamestop.

So who is the blame for this? Who is taking away our discount and why does it even exist?

The entire onus has to do with the business model and market structure being capitalized on for used game sales from retailer companies like Gamestop, Amazon, Best Buy/Future Shop, and other major retailers. Plainly put, retailers have a very well-placed business plan that is entirely intended to circumvent profits from the business model of brand-new video game sales, which in turn directly affect the profits seen by the publisher and the revenue contract developer. So how does this work exactly? Let's back it up and bit and explain.

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Part of this business plan from retailers involve aggressive incentives to get you to trade-in your games for store credit, which lets them stock up on used game units to re-sell at a higher profit margin. It significantly costs a retailer less money to give an aggressive consumer incentive to trade-in, than it does to just purchase stock that is brand new and shrink-wrapped from a publisher and pushing to sell that instead.

If you've walked into a Gamestop, you immediately notice just how hard their aggressive incentives are, with them trying to get you to trade-in games with full $25 store credits on premium titles, or trading in 2 or 3 used premium titles for one brand-new premium title. With such high incentive for the customer, it floods the retail market with used game stock in all these retailers, causing the publisher to lose significant profits due to a much lower demand for a retailer to buy brand-new shrink-wrapped copies.

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On the consumer end, we don't really care about anything else if we see a game without an online pass system. All we see are games being sold at lower prices, and we buy them up because hey, who doesn't love a discount. There's nothing really wrong with this from the perspective of the consumer, and it was never an issue in the past because used games were not entirely common with the very limited incentive on trading in games back in the day. Other factors in contrast to the past include video game development costing significantly less back then, but I'm not here to discuss that. Speaking directly from a price point, renting video games was also a much larger business in the past during that time as well, but I'll speak a little more about that later.

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If I wanted to be more consumer friendly, I could easily say sure, used games are a good thing because as a consumer, we just reap the benefits of lowered prices on games, and directly see a benefit even if the retailer's pockets get full. However, I can't in the right mind say that it's entirely fair for the developers, who see no part of this retailer-only revenue from used games. Developers are only able to actualize profits if the publishers are able to sell more brand-new units (or on contractual DLC sales), and if retailers have a system in place to circumvent that demand for brand-new games because of their generation of demand for used game sales, developers end up on the short-end of the stick. As noted before, the costs of game development are significantly more expensive these days, and unless they receive a considerable amount from a publisher as an investment grant, the developer has to bite the pill on the costs of development until they can sell their game.

It's already hard enough in between a publisher and a developer, and I can't help but think used game sales cause them to bite that pill even harder than they need to. It's reasons like this which cause me to believe the online pass system is important. While it may cost us a extra couple bucks, it's a system intended to keep things fair in between the retailer, publisher, and the developer, and I'm totally okay with that.

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When talking about game rentals, the publishers contractually receive a large sum of money for their games which in part, the developers can see some revenue from, so that is not an issue. However, when speaking from a consumer's view, it does indeed sort of suck. To be fair however, the format of a video game simply has changed and evolved beyond the format it was when video game rentals were first conceptualized. Unfortunately, the business model and direction of video games have always been built with the intention of being bought at full price for an individual, and game rentals have always been an afterthought.

While I wouldn't know where to entirely point the finger, it's pretty easy to believe that the rental business like Blockbuster was simply not able to adapt to the changes in the business landscape of video games and the internet, much like they weren't business landscape of movies and the internet. It's the only real justification I have for this, but I think it makes sense. Either way, I really can't start pointing and wagging my finger at the publishers and developers until they start deciding to do something stupid like the locking up of offline content using an online pass, or something similar.

If there's one thing I want to set straight, it's that I'm never against consumer choice and straight up a hefty discount being offered to consumers is a good thing. Video games are a fair market item after it's been bought off the shelves, and has every right to be exchanged in a way that the first-hand consumer wishes. These are all good things which keep the prices of video games a little lower in rougher economical times. Where I have the dispute however, is the fact that used game sales is a hugely profitable business, where it is managed and fed solely by retailers, where they see all the revenues based on black hat marketing and feedback-loop sales techniques.

I don't expect anyone reading this to have a full understanding of how the business of retailing works, or even further back in the business chain on how games are decidedly sold from the perspective of the guys who wear the suit and ties, but hopefully this brings a little insight into a world that is beyond your $60; or less, plus the $10 or $15 if you buy a game used.

If you don’t feel like spending your money on online season passes, or trading in your used games for an insultingly small amount of cash, you can always get a better deal by checking out my personal blog at http://thedevilshaircut.wordpress.com/, or by following me on Twitter.

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