Xbox One Won’t Kill Used Games

The restrictions of second-hand games for the Xbox One are draconian, pointless hurdles, but perhaps we’re overreacting about its potential to eliminate used games. The fears that the used-games market will be crippled are too extreme and don’t necessarily hold up to an economic outlook.

Now that Microsoft has (finally) explained the Xbox One, let’s quickly review how the restrictions work:
  • Games are tied to the account that first installs them.
  • One can trade-in a game by giving up one’s right to play it on your console
  • It is up to each individual publisher whether to charge fees to re-install a game onto a second console. Microsoft, for its part, will not.
  • Games can be lent to friends, providing that they’ve been on your friends list for 30 days. Also, they can only be given once. (Whatever that means)
The way I see it, not much will change. The market for used games might shrink, but the cost of buying them won’t change. Instead, the difference will be who you pay, not how much.

There’s always the possibility that publishers will choose to completely block used game sales, but it’s improbable. As Gamestop has repeatedly pointed out 17% of ‘new’ purchases are funded by trade-ins of older games. Out of all trade-in credit Gamestop awards – $1.2 billion in 2011 – 70% is used towards the purchase of new games. A flourishing used games market is what allows Gamestop to give $840 million annually to publishers.

used-games

A segment of consumers who buy games for the full $60 do so because they know it can be traded in later for $25 or $30. Any publisher who bans second-hand sales of their games would alienate this demographic. Again, from common sense and self-interest, it’s unlikely that any publisher would cut themselves off at the knees and ban used game sales. Otherwise, a lot of gamers would stop buying $60 games, and that company would invite a boycott.

Since banning used games is unfeasible, the only remaining option is an industry-wide adoption of EA’s Project Ten Dollar, a.k.a. the Online Passes for accessing competitive multiplayer, but applied to the entire game instead.

Let’s take a generic game that’ll be on the Xbox One: Call of Duty: Ghosts, and see what would happen with a fee. It’ll be $60 at retail for a new copy, just as games are now. A person will buy it, play it, maybe lend it to a friend, etc, and then trade it in.

Let’s assume that Activision charges a used-game fee. Say, $15. That only has two immediate consequences: First, Gamestop must lower its used game price by the amount of the fee ($15), in order to attract customers for the used market. Second, Gamestop must then decrease the trade-in value of games by $15 as well, meaning that there’s less trade-in credit to sink back into new games (and trade-in credit helps fund 17% of current new game sales.)

DT_2

If Ghosts would’ve had a trade-in value of $25, it’s now $10. If a used copy would’ve been $45, the price for Ghosts is now $30. After all, Gamestop (or any used seller) must maintain the price differential that makes used games attractive. So Gamestop makes $15 less on each copy. That money instead goes to the publisher. Ergo, there’s no change in what one pays, merely who and how.

Now, if you’re a person who trades in Ghosts to buy a new copy of a different game, (for example, Assassin’s Creed IV) you’re getting the short end of the stick. You are being forced to pay more out-of-pocket, and all publishers suffer for this.

Less trade-in credit → 70% of credit is a smaller number → fewer new game sales

If every publisher agreed to not charge fees for used games, then nothing would change from the current market, except for draconian restrictions on sharing games with friends. And there’s several reasons for why they won’t charge fees; the most prominent is Bank of America.

Bank_of_America_Logo5

Back in late 2011, Bank of America announced that it would begin assessing a $5 monthly fee for all customers who used debit cards. Needless to say, the backlash was immediate from consumer groups and the media, and it set off a chain-reaction of other big banks sending out press releases that they would not be copying BofA’s move, and still others dropped their already-existing fees. Bank of America lost hundreds of thousands of customers, and within a month, they changed course.

BoA Debit Fee

No publisher would willingly put itself in that same position.

Besides, few publishers have the clout necessary to make Project Ten Dollar an industry-wide reality, even though ‘price leadership’. The videogame industry is an oligopoly. There is a distinct tier of multi-billion-dollar publishers that have the sway to affect others, followed by a tier of one-billion-dollar companies that largely follow the trends.

The 3rd party publishers with significant financial muscle? EA, Activision, Namco Bandai, Sega, and Konami. EA just learned its lesson from Online Passes, and is now discontinuing them. Neither Namco nor Sega nor Konami has shown any inclination towards imposing fees.

And Activision? They benefit enormously from the positive externalities of used games. By having millions of gamers playing online multiplayer in Call of Duty and other games, they maintain pole position in the industry while simultaneously denying those players to competing games. All online multiplayer games have network externalities, where it’s beneficial to have tons of people using it; those who buy it used create a better experience for those who bought it new and boost market share. No publisher whose games have online components should be considering imposing fees.(Which is basically all of them)

Moreover, imposing fees on used-games could enlarge the used-games market at the direct expense of new game sales.

DT_1

Let’s go back to the Ghosts example. Before, you got $25 for trading in. If fees exist, you’ll only get $10. Because people who trade-in would receive less for their games, they have a direct incentive to buy fewer games ‘new’ and more games ‘used’. 70% of trade-in credit to new games? 17% of all new games being funded by trade-in credit? Those statistics would crumble, cutting into the industry’s main way of generating revenue. At the same time, it has the potential to cripple the size of the used market; publishers wouldn’t be able to make up for that lost revenue by charging $15 per second-hand install, because the number of copies in circulation would have contracted.

It’s uncertain whether the decreased games in circulation would overweigh the greater demand for used games in the case of fees, but neither scenario would be particularly helpful for publishers.

They would net $15 when a gamer pays to install the game, but new copies generate $40-$45 in revenue. In other words, one would need 3 second-hand installs just to compensate for a new copy that won’t be sold…and used games don’t change hands three times.

The result? Publishers would be trading new game sales for used game licenses that won’t makeup for the reduced sales.

The Xbox One has setup a variation of the prisoner’s dilemma, where every publisher will need to decide whether they’re charging fees, and if so, how much. They won’t have the opportunity to revisit those choices for at least several years. There’s the potential for a trainwreck, but publishers should realize that it’s in their best interest to avoid it.

If all goes well, the used games market should survive the Xbox One relatively unscathed. We’ll see how things unfold at E3 and in the run-up to the console releases this fall, but the fears over used games may be steeped in more fear than fact.

Advertisements

One response to “Xbox One Won’t Kill Used Games

  1. Pingback: Publishers Rejoice: No More Xbox One DRM | Mental Gaming·

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s