Crispy Gamer

Fair Trade: The Simple Economics of Why Game Developers Should Shut Up About Used Games, Part 1

Attention game developers:

You may not like it, but I am going to trade in my used games for new games. There's nothing you can do to stop me and I am going to laugh all the way to the bank.

I am sorry that you feel that I am ripping you off, robbing you of the fruits of your labors, and kicking you in your creative loins. It makes me sad that it makes you sad. But you've got to admit that paying $30 for Gears of War 2 sure beats paying $60!

Maybe it doesn't seem fair to you that GameStop brought in over $2 billion selling used games last year while you are watching your game scores tank at Metacritic. But man, I gotta make my gaming dollar go as far as it can in this economy. Money doesn't grow on trees! So, used games it is.

It's not that I don't care. It's something else and I think we need to talk. There's something you need to hear. So let's start at the beginning.

Fair Trade: The Simple Economics of Why Game Developers Should Shut Up About Used GamesWhy buy those full-priced games when you can clip coupons for used games, just like Mom?

Remember back in school, when you were designing D&D modules during economics class? Well, I was paying attention. And when you sprinkle a little Econ 101 on the subject of used games, you'll find out that used-game sales are good for the industry and, in the long run, good for you.

That's right, used games are good for me and good for you. Heck, used games are good for the entire videogame industry.

I know, I know. But just calm down and listen. If you don't agree when I am done explaining my side of things, then I'll listen to you. I care, I really do care.

So take a deep breath and hear me out. My story, like so many, starts with supply and demand...

Making our demands clear: the price of fun

Here's something you don't need to go to business school to figure out:

The reason the game industry exists is because gamers want to play games.

It seems kind of obvious. But it's the key to understanding the entire game market.

Now, as rabid as game fans can be, they aren't, by and large, stupid. So your average game fan would just as soon pay as little as possible for a game. If you want to play Rock Band, for example, and your friend is, let's say, heading off to jail, and he offers to give you his rig while he's doing three to 15 years of hard time, then you say "OK." You want to play Rock Band and maybe you'd be willing to pay up to $200 for the chance in any other circumstance. But here you are -- someone will give you the game for free. Why pay more? Even though it's worth $200 to you to own the game, getting it for free means that's $200 more dollars you can spend on something else.

See, it's not science. It's just common sense.

Fair Trade: The Simple Economics of Why Game Developers Should Shut Up About Used GamesThe logic of this flier is baffling. But Mario is cute!

Game makers may make games for the love of it. But the game business exists solely because gamers are willing to pay more than zero for games. And under normal circumstances, where convicted felons are not offering their cool games for free to their friends, gamers optimize by spending as little as necessary to get what they want. Or, to put it into more pop-cultural terms, you can always get what you want; it's just a matter of negotiating the best price possible.

And price happens to be the most wonderful Mexican standoff known to the free market. A game developer tries to charge as much as they can for their precious product, and the game buyer tries to spend as little as possible. In practice this is as poetic as a John Woo gun battle.

Here's how it works.

In the Rock Band example, you want to play the game so bad that you would be willing to pay $200 for the opportunity. The game, however, is $179 in the store and your friend will give it to you for free. What's the game worth? Zero? $179? $200? Something else?

Of course, it depends.

We can guess that EA, as the publisher, sets the price of Rock Band at $179 for one of two main reasons:

1. It knows that there are a range of prices that it could charge. Some players would probably pay $300 or more. Others are cheap and won't buy the game for more than $100. EA crunches the math and figures that it will make the most money by splitting the difference, and comes up with $179. It doesn't know how much an individual gamer will pay -- because what any one person will pay depends on a lot of things, like how much money they need each month for rent or porn, or if they will just use their parents' money and don't care how much it costs. Gamers, it turns out, are a diverse bunch. So the game publisher more or less guesses the highest amount that the most people are willing to pay.

2. The game costs less than $179 to manufacture and sell. In most cases, it probably costs a lot less than this to make the plastic and put the box on a truck to your local Target.

So they put a sticker on it that reads $179 and everyone figures this is what is worth, even though it's just an educated guess about what people are willing to pay.

@@

And that's the little piece of creative imagination that used games run smack into, making developers sad and publishers mad. Because all we can say in this example is that EA won't sell plastic guitars for less than it costs to physically make and distribute them, and gamers won't pay more than some number they have in their head, and certainly would like to pay less.

This is the not-so-secret in the secret formula that allows GameStop to rake in the dough on used-game sales.

Fair Trade: The Simple Economics of Why Game Developers Should Shut Up About Used GamesLook! Now you can buy used gaming to go with your used games!

The price of a game is, at the end of the day, exactly the balance point between what someone is willing to pay and what someone is willing to sell. Once you buy your Rock Band package, EA takes your money and you take home your plastic. It's no longer worth $179. It's worth exactly the amount you are willing to charge for it, and the amount someone is willing to pay for it. And companies like GameStop are always willing to pay you something more than zero if you are willing to sell.

The trouble is, the publisher wants back in on the deal, and goes out of its way to convince you that it still owns a piece of that junk you bought from it. Or, as online game-trading site Switchgames.com co-founder Jason Crawford puts it:

"Gamers are looking at their games as movie tickets right now. When I go to the movies I rent a seat and I watch the movie and I leave because I don't own it.

"But that's not what games are. Games are like a bicycle that you own, anything that you own. You have equity in that, there's value there," he explains. "That's part of the education here. Gamers have to start looking at their games as equity and stop looking at them as movie tickets."

Ripping off the Man (Or, who is the Man anyway?)

If you listen to the average game maker who's against used games, the argument goes like this.

I sell my game -- let's call it Tears of War 2 -- new for $60.

You buy it, play it, trade it in at GameStop for $20 and they turn around and sell it to some other guy for $55.

Fair Trade: The Simple Economics of Why Game Developers Should Shut Up About Used GamesMark Rein has shed a few tears of his own over used-game sales of his popular titles.

GameStop makes $35 on this transaction for its trouble, and my baby Tears of War 2 nets me squat.

No fair.

Or is it?

The logic here assumes two things. First of all, the argument claims that GameStop, or whoever is selling your used product, isn't providing a service when it clearly is. A merchant has to go through the trouble of heating and cooling a store, paying game dorks to mill around in red shirts and answer your question with as little attitude as they can muster, check the condition of incoming used games, place them on a rack where others can see them, and more or less guarantee the whole thing. In a word, they make moving used games around convenient. And for this, they charge the princely sum of $55.

So it is true that the game maker doesn't get paid on the bounce of the used game from one gamer to the next.

Or does it?

Let's take GameStop out of the question for a second. And let's just say that you bought Tears of War 2 full price, and then you loan it to a buddy. Then let's say that buddy gives it to another buddy. This is called pass-along -- and the GameStop-doesn't-deserve-the-money argument is really the same as the one-gamer-shouldn't-be-giving-our-game-to-others-if-we-don't-get-paid argument.

Fair Trade: The Simple Economics of Why Game Developers Should Shut Up About Used Games
David Perry is one smart dude. That's why he doesn't worry about used games.

So, is pass-along fair?

Game legend and generally smart businessman David Perry of online-game maker Acclaim Games thinks so:

"I think gamers should be able to sell their used games anytime, anywhere they like. I take it to an extreme, and say they should be able to also 'share' (not copy) them with anyone they like, whenever they like (which some define as piracy), but that's a different discussion."

When you get back down into the economics of it, you can see there's a sense to this idea of letting people buy, share, and sell media.

If Tears of War 2 is -- for the sake of argument -- getting played by three different gamers, and the publisher thinks it should get $60 every time someone plays the game, then it should just charge $180 from the get-go. The first guy buys it, plays it, and then sells it to the next guy for $120; the next guy plays it and sells it for $60, and so on. After the game has been passed along three times, each player has spent the fair $60 that the publisher picked up at the front end of the deal. Everyone is happy.

Sound ridiculous? It's not because that's exactly what happens. But instead of charging $180 for the game, the publisher charges $60. Because when you sit down to do the guesswork math that turns hours of art and programming into a game, you figure how many people will buy your game, and you put enough effort in so that when you sell your game at $60 a pop, you end up making enough money to pay everyone and turn a little profit. The pass-along, or the used market, is a part of the price guess in the first place.

Of course, it's more complicated than that in practice. Dating is a lot more than picking out a good bottle of wine at dinner and going to the right kinds of movies. But in both cases, the most interesting part of the story isn't that complicated. Economic price theory tells you that things like pass-along, or the likelihood that the entire shipment of games will sink in a tsunami into the Pacific, or even the extent of software piracy, are factored into the price of a game. The people that make the decisions about games aren't stupid and they know this. A lot of times, though, they are awfully optimistic.

Read Part 2 of this feature.

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