Used Video Games: The New Software Piracy: Part Two

Part One: Introduction
Part Two: Becoming the Stop For Games
Part Three: The Feeling of Being Used
Part Four: A Programmed Response
Part Five: A Conclusion on Distribution; Corrections

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Part Two: Becoming the Stop For Games

Howard Lincoln said that video-game rental was “nothing less than commerical rape. I can spend thousands of hours and millions of dollars creating a game,” he says. “I expect, therefore, to be compensated every time the thing sells. All of a sudden, out of the blue, comes a system that distributes my game to thousands of people and I get no royalty. The video-rental companies exploit the thing–renting it out over and over again, hundreds and even thousands of times–and I get nothing. The guy who developed the game and Nintendo get screwed. What does the guy who’s renting the cartridge contribute? What does he pay in terms of a royalty for the commercial exploitation of copyrighted work? Zip.”

– David Sheff, as written in “Game Over”; first-edition published in 1993.*

As early as the mid-to-late eighties, the matter of video game resale was already waged on a similar front. In conjunction with the Japan-based Association of Copyright for Computer Software, the major Japanese video game publishers and developers had already worked and prevailed to ban video game rental in their home country, a matter whose acceptance and legality in Japan remain nebulous, depending on which way the political wind is blowing. This battle soon made a landing in the United States. Obviously, the American movie rental companies stated they were providing a service, allowing players to “sample” the games at a cheaper price. It also provided a welcome reprieve to the parents of needy kids, as Nintendo’s manic control of distribution led to the infamous supply shortage of Nintendo cartridges leading in and through the summer of 1988. In this combination of short supply and intense demand, video game rental became a lucrative market.

Of course, Nintendo didn’t like that. Rental not only posed a threat to their unquestioned control of game distribution, but the company believed the rental market could devalue the consumer perception of what a game should be worth. Maintaining firm knowledge of the 1983 crash and its deflation of software prices, Nintendo built the American market around a fixed pricing model, threatening retailers who dared to drop the prices of their games even by a couple of dollars. So when companies began offering the chance to rent a fifty-dollar game for four dollars, Nintendo made a quick decision that they would have to respond. In August of 1989, the company would go after Blockbuster, the largest movie and video game rental chain in the country. Nintendo won a preliminary injunction against Blockbuster for their use of photocopied manuals, presumably a matter of copyright infringement. After Blockbuster and other companies replaced the photocopied manuals with generic instruction booklets, the venture would accomplish little for Nintendo.* Nintendo of America chairman Howard Lincoln knew that the company didn’t have much of a case. As most people in the States are familiar with, rental in the United States was and continues to be protected by the “first sale doctrine”, the century-old limitation that allows one to sell, lend, re-use, or give away a copyrighted work without the permission of the copyright holder. Much to Nintendo’s chagrin, the market for renting video games was affirmed.

From there, the origins of the market for American video game resale becomes pretty clear, with companies and entities of varying capital all competing to get back in a market they had written off as a “fad” in the early eighties. In this march to attract new customers, some of the biggest brick-and-mortar video game stores of the early 1990s would build their empires around video game resale. That’s correct: The history of North American used video games began long before companies said they had a problem with it.

The paper trail that has written the modern history of American game retail began in 1988, with the ambitions of Minnesota resident David Pomije. To this point in his young life, the free market had not been kind to him. His successful resale of Commodore computers would subsequently subsidize a failure of a mail-order catalogue business. So what next? Much as the rental companies looked at the market for Nintendo games and reacted accordingly, Pomije played his own resale game. Pomije took out a loan to purchase and resell 1,100 units of the Nintendo Entertainment System, a number of which came with Nintendo cartridges. Left with over a thousand game cartridges, he parlayed the software into a supply chain for video game rental stores. And with this, Funco was born.*

It was a solid venture for Pomije, but it was unsustainable. By 1989, in spite of the demand for Nintendo products, Pomije’s inventory had become old news. He solicited for input from those already in the video game resale business, a platoon of entrepreneurs who pushed their goods through magazine and newspaper advertisements. His conclusion? The first mail-order business may have failed, but this one wouldn’t. Pomije didn’t merely believe he could make money selling used video games, he thought that he could do it better.*

Running the business out of his house, the venture proved popular enough that his neighbors started calling the cops on him, as children were visiting the house around the clock to get some of that sweet video game candy. The growth was fast and it was immense. In 1990, Pomije moved the operations to a warehouse, and in that same year, he would open the first two FuncoLand retail video game stores. Fronting used video games as the company’s selling point, the stores would combine for 200,000 dollars in sales during their first year. By 1992, Pomije had ten stores and needed the capital to continue expanding. He took the company public. David Pomije was not the first man to sell a used video game, but he was the first to turn it into a mass-market business venture.*

It’s not hard to understand why the business took off. Pomije felt that the market was pricing out younger players that were relying on adults to finance the video game habit. He was correct. Adjusting for inflation, the Xbox 360 and PlayStation 3 price point of sixty dollars had nothing on the early-to-mid 1990s. Those pieces of plastic were not cheap. In the early years of the Super Nintendo life cycle, most games went for fifty or sixty dollars. If you were aiming for a thirty-two-megabit gaming event such as Super Metroid or Chrono Trigger, you could expect to pay as much as eighty dollars. The popularity of the Sega Genesis in the North American market and the United States’ investigation into whether Nintendo business practices constituted a monopoly (lol!) had forced Nintendo to ease off most of their restrictions, namely the price fixing. That still didn’t stop the retailers from charging what they thought would sell. The market for price relief was almost too obvious, and the newspapers of the day concurred.

One important aspect of buying games for consumers has been the price. Two years ago when consumers wanted to buy a game they were stuck with that game whether they were finished with it or not at a price usually around $40-$60. Today, a game owner can trade in a game and buy a new or used game for between $20 or $45.

Roger Webster, manager of Games to Go at 4399 First Avenue S.E., said the need for used games stores was overwhelming.
“Everybody sells new games all over the place, but there’s not a whole lot of people that sell used games,” said Webster. “People were tired of paying the price of a new game which is sometimes as high as $70.”

Marion Times; published December 9, 1993.

It was a win for everybody. Consumers got cheap video games and more entertainment for their money. Game developers now had a model where consumers could put old video games towards the purchase of new video games. No doubt that the retailers made out the best. Not only did the fair and reduced pricing endear them to their customers, but under normal circumstances, video game retailers earned a small cut from the sale of a new video game. Today, that commission is usually in the range of about ten dollars. If you were buying old video games and marking up the price, you were pocketing the difference. The retailers had turned video games into their own commodity market, earning a far more lucrative profit margin on the used games. Pomije knew that used game sales were the crux of the business. Their 1994 holiday ads showed it.

(How much has retail changed? Look at the bottom of the ad: “All products listed are previously played and include a 90 day replacement warranty.” Today, GameStop won’t give you a refund on the Xbox if it explodes at your birthday party. At least not until you get the guts off of the damn console.)

What’s important to remember is that FuncoLand was in no way “one used game retailer to rule them all”. Canadian retailer Microplay Video Games would also make used games the focus of their business operations. Both Electronics Boutique and Babbage’s (one of the two companies that would merge and form a company by the name of GameStop) would make used games a portion of their in-store catalogues. By the mid-1990s, most major video game retailers in North America were employing used games as a means to attract customers and pay the bills. Funco would continue to figurehead the philosophy. The company and its competitors would take some scrapes in the middle of the decade. No doubt that a wretched run of game consoles took its toll, where the Sega CD, Sega 32X, Atari Jaguar, and 3DO muddled the end of the Super Nintendo and Sega Genesis life cycle. During this time, the game retailers became involved in an intense pricing war with the mega-marts. But soon after, with the Nintendo 64 and Sony PlayStation firmly established as the new kings of the market, the fiscal year of 1997 proved a panacea for FuncoLand. Seven years removed from selling video games out of his house, David Pomije was the proprietor of a 120-million-dollar-a-year business built out of roughly 200 retail stores and its related apparatus.* Business was good.

So what’s the deal? Pomije is selling used video games through mass-market retail and he’s making millions doing it. Ever since Nintendo’s attack on the rental market and the Blockbuster debacle, developers and publishers were silent on the matter of used video games in the American video game market. Pomije’s success changed nothing. As it concerns the American and European video game industry, it’s rather easy to understand why: The console video game market was still dominated by the Japanese. Western developers were carving out their meal ticket on personal computers. Their pressing issue was software piracy. Through the pursuit of slaying that beast, game manufacturers built their games for online multiplayer. Yeah, you could still play these games offline. Computer games were still being shipped with compelling single-player components. However, the major online gaming services would require an authentic product key. Given the nature of product keys, there was no guarantee that if you could even find a used copy of StarCraft at a retailer, that buying it would yield you full ownership of that product key. For most American developers, used games had already been busted. And through the firm dominance of digital distribution services such as Steam, which lock your game licenses to a single account, used computer games remain busted.

On the other end of the Pacific Ocean, the Japanese had other ideas. Working by a different set of laws and the knowledge that they had already defeated rental in their home country, the Japanese video game industry decided to go all-in. In June of 1998, Capcom, Konami, Namco, Sony, and Square filed a joint suit in Japanese court to prohibit the resale of video games within the country.* The argument was simple: Under Japan’s copyright laws, movie companies are given full control over the distribution of their works. From there, the video game industry would argue that video games are “movies”. Therefore, “fuck used game sales”. You have to give some credit to the Japanese game makers. The publishers of Final Fantasy and Metal Gear Solid were admitting their games were movies long before their customers did. But even in the universe of Japanese copyright law, “games are movies” was a pretty ridiculous argument. After four years of fighting legal battles, the publishers lost.* “But what does that have to do with the American video game market?” It shows acceptance. Even the companies willing to fight for a video game resale ban in their home country saw no recourse for the “first sale doctrine” in the United States. They accepted it as a necessary evil for doing business in the largest game market on the planet.

Of course, that occurred in Japan. Who cares about them? What have they done for video games? Focus, people. What was FuncoLand up to? Oh, they were just continuing their rapid expansion. From 188 stores in March of 1997, FuncoLand had expanded to its 300th store by November of 1998.* However, the times were changing. Deregulation of American markets leading through the eighties and nineties was accelerating the rate of mergers. This consolidation was possibly exacerbated by a looming technology bubble, the rapid investment of capital into anything vaguely related to technology.* In the case of the video game industry, the mergers came from a need to finance more expensive games that were taking cues from summer movie blockbusters. In an American market quickly becoming “consume or be consumed”, FuncoLand was too big to ignore and too small to save itself. And by “save itself”, I mean “save itself for a buyout that’s appealing to Pomije and his shareholders”. By 2000, a merger was inevitable. After rejecting an offer from Electronics Boutique, FuncoLand was purchased by bookseller Barnes and Noble.* Sound weird? The plan was to assimilate the FuncoLand store locations under a Barnes and Noble subsidiary by the name of GameStop. Pretty sure you guys know how this one turned out.

Changes came very quickly. Most of the FuncoLand stores would be chewed up and rebranded under the GameStop label. The focus of the stores would remain on resale. Just like FuncoLand, the GameStop business model was built around video game resale. But while most FuncoLand software was reasonably priced, GameStop chose to invoke the power of the free market. GameStop became the manifestation of “that one store” in most Japanese Role-Playing Games, the one that buys your items for a quarter of market value and marks them ten-fold. While long-time FuncoLand customers where rightly perturbed at the change in policy and pricing by the new shape of management, most consumers didn’t care, much in the way those who play online games for free balk at the monthly subscription fee for Xbox Live. For a new audience of video game players that were brought into the video game market by the Sony PlayStation, it wasn’t about the audacity of paying forty-five dollars for a used video game. It was the satisfaction of saving five dollars off the new game asking price.

Where’s the publishers? What do they have to say about GameStop? They still don’t have a problem with this. Most of them maintained their silence. GameStop wasn’t the Wal-Mart of video game retail quite yet, and the existing narrative continued: Trade-ins put more money in the hands of the consumer, and that money went towards new video games. Publishers weren’t speaking out against used video game sales. In-fact, they were speaking in favor of them. In 2002, syndicated newspaper columnist Linda Cobb was prompted by a reader on where they could find a copy of Lode Runner for the Nintendo Entertainment System. Tactfully ignoring that the Nintendo port of Lode Runner was a terrible video game, Linda provided her advice.

Because [Nintendo doesn’t] make new games for [the system] anymore, you’re going to need to go with a pre-owned version. Nintendo suggests a store called Gamestop.

…

When I checked their Web site [sic] (www. gamestop.com), they did have Lode Runner for the NES. It costs $4.99 plus shipping and handling.

Frederick News-Post; published December 1, 2002

The same year, Sega “vice president of strategic planning and corporate affairs” Charles Bellfield affirmed that his company had no problem with used games. According to him, developers and publishers thought it was a great thing.

“Obviously, there isn’t significant cannibalization going on at the moment, because otherwise we would see that in our numbers,” he said. “I think it gets consumers in the market. You may experience a different range of content, which makes you go out and buy new product.”

The Frederick News-Post (from The Dallas Morning News); published December 16, 2002.

(I know you want to ask the question: “Sega and Nintendo speaking out in favor of used games? I thought you said that Japanese game makers hated the things?” Note that Sega and Nintendo did not put their names forward in the 1998 fight against used game sales in Japan. It’s not surprising, actually. Both of those companies had a second revenue stream in 1998. They were both selling hardware. Nintendo still is. Keep that in mind.)

Quite honestly, nobody cared if GameStop executives were doing backflips into the money bin. The truth is, most of the industry was doing well. The Sony PlayStation tapped adult markets that the Sega Genesis could only scratch. And thanks to the ridiculous number of mergers leading into the dawn of the 21st century, the riches to be found in the console video game industry were secured by a handful of giants and a few dozen smaller publishers. If there was growth to be found, those companies would reap the rewards. The American video game market would grow by thirty percent from 2000 to 2004.

Source: The Electronic Software Association’s 2008 “Essential Facts” Guide, data
acquired from The NPD Group.* (Note: This is software sales. No hardware involved.)

It wasn’t just Japanese companies selling their games for the lucrative consoles. For the first time since the early 1980s, Western developers were calling the shots in the North American market. Thanks to the success of Halo: Combat Evolved, Microsoft’s Xbox became the first successful American foray into game consoles since the Atari 2600. Even as the Sony PlayStation 2 ran away with the so-called “sixth generation”, the market was now big enough for three competing video game consoles. As far as console hardware was concerned, the Japanese were still dominating, but their stranglehold on the world’s most profitable video game franchises was drying up. The crown of “Biggest Gaming Event of the American Year” was ceded to both the Grand Theft Auto and Halo franchises. Even an impenetrable rhythm game market dominated by Konami began to show cracks, as developer Harmonix unveiled surprise hit Guitar Hero in 2005.

But speaking of 2005, 2005 happened. Coming to the end of the sixth generation console cycle (with the Nintendo GameCube and Microsoft Xbox mostly irrelevant), software sales dipped roughly three percent from 2004. This time, stagnation came with far less appealing conditions. The looming seventh generation of game consoles (launched with the November 2005 release of the Xbox 360) only promised more expensive games that would become a larger risk in the retail market. The monster budgets that once provided appealing returns had backfired. Consumers now demanded “production values”. With a good year for a major video game publisher usually earning a ten-percent return on investment, these companies would either have to cut corners or new revenue streams would have to be secured. If only there was a company that was profiting handsomely from the expansion of the video game market…

Over all, GameStop appears on track to generate about $3 billion in revenue this year. Of that, it looks like $800 million to $1 billion will come from the sale of used software, hardware and accessories. Just how profitable that segment is has only recently become clear to investors.

The quarter that ended in October was the most recent with GameStop results and was the first in which the company broke out results for its used segment. They were eye-popping. Used products made up almost 32 percent of the company’s total retail sales and almost 44 percent of gross profit. Even more impressive, while GameStop’s gross profit margin on new hardware sales in the quarter was less than 11 percent, and on new software less than 25 percent, the company generated a whopping 45 percent profit margin in its used segment.

Seth Schiesel, “A Bright Spot in the Dim Video Game Picture” New York Times; published February 2, 2006.*

The same year that video game sales went stagnant, GameStop reported a sixty-seven-percent increase in sales for the 2005 fiscal year.* That same year, GameStop would buy out its remaining competitor and merge with Electronics Boutique,* a mere six years after E.B. sought to merge with the FuncoLand that would eventually merge with GameStop. Every major video game retailer in the United States now operated under GameStop corporate, leaving the American video game retail market to operate under the iron fists of GameStop and monster market chain Wal-Mart. But in spite of middling attempts by Best Buy and Circuit City to begin resale initiatives,* GameStop ruled and continues to rule the retail used video game market. Back in 1990, David Pomije wanted to give younger gamers the freedom of economic choice in making purchases of video games. By 2005, he was the C.E.O. of the most important video game retailer on the planet. The question was no longer about cheaper video games or choosing which retailer to visit. It was about choosing the GameStop that was closest to your house. And when those people walked in a GameStop, they were greeted by walls of “PRE-OWNED” video games.

For most of the decade, GameStop was just one of many companies making money in a video game industry that was doing really well for themselves. So long as developers and publishers were making money, they had no reason to care about the retailer. In that same New York Times article, author Seth Schiesel prodded Take-Two spokesman Jim Ankner on how the video game industry felt about the “new-found success” of GameStop. Standard answer, right? Used games put more money in the market, right?

“We would prefer that retailers only sold new games,” he said, “but we’ve learned to make peace with it.”

Peace, indeed. The war would soon be on.

Continue to Part Three: The Feeling of Being Used