The "dramatic" growth of the used game business is causing a major drain on video game software sales, says Cowen Group analyst Doug Creutz, who suggests "$10 wall" initiatives like EA's Online Pass may be a solution.
Although it's hard to pin down exactly to what extent used game sales cannibalize sales of new software, a significant share of the blame for weak sales this cycle can be pegged on the second-hand market, says one analyst. "In our view, GameStop has exploited the negligible difference between the value propositions of new and used games to capture a significant portion of the video game value chain," says Cowen Group analyst Doug Creutz. The biggest drain on industry revenues this cycle has been a decline in sales of PlayStation 3 and Xbox 360 software, says Creutz. Recent years' high console price points take part of the blame, but the "dramatic" growth of used games sales is a "significant" factor, he adds. But numerous publishers are exploring value-add "$10 wall" tactic -- Electronic Arts with its "Online Pass," and THQ by charging to play UFC online, for example. These initiatives offer key features only with new copies of a game, and require used players to pay additional money to unlock them. Such approaches are a "critical step in allowing publishers to re-capture value from the used market," says the analyst, who says that fully leveraging these initiatives could drive industry software margins higher in the next 18-24 months. In fact, there's room for publishers to be more aggressive, he suggests, in "cordoning off" more game experiences from used players. And there's little GameStop can do to prevent it, he adds. However, GameStop has publicly embraced initiatives like EA's, praising opportunities for its retail stores to be included in the sale of digital content. The company has said it sees little impact on its business from the shift, and in fact it expects to benefit positively from these moves toward "extending the life of titles and broadening the base of players." And the alternative, a "more aggressive" shift to digital distribution, would be even worse for the retailer, says Creutz. How will gamers respond? "We believe that consumers are likely to grudgingly accept a revised and evolving pricing strategy that reflects the value they receive outside of and in addition to the traditional single-player offline experience," predicts Creutz. "Against a backdrop of our expectation for improving growth in videogame software sales through the remainder of 2010, we believe that the evolution of these new pricing strategies give investors additional reason to become more constructive on the third party video game publishers," he concludes.
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