Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (5) | Ignore Thread Prev | Next
Author: GusSmed Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 216  
Subject: Re: Analyst comments Date: 4/1/2010 12:56 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 6
if rental is seen as more cost-efficient than buying by the target audience, then GME would certainly be impacted by a company using that business model.

I own shares in Gamestop, and I'm part of the target audience, but I rarely shop there.

Games are quite different from movies in their usage patterns. It takes one evening to view a movie. Games take a week or more to complete. Sometimes much longer, depending on the nature of the game. Strategy titles often have no definable upper limit on how long you want them, since it's a different experience each time you play, unlike a movie. Even for games which have a definite ending (which is most of them), many customers play through multiple times. Some games offer a "new game+" mode, a mode where a story-based game offers a different experience the second time you play.

On the other hand, quite often, the customer doesn't like the game. Then the "lifetime" of the game is one or two days. This is where rentals are particularly attractive, as a "try before you buy" solution.

Blockbuster rented games, but their selection and stock were terrible. They were simply not a viable alternative to purchasing, because they rarely had the title you wanted to play in stock. Often, they might not carry it at all.

I've used Gamefly. Gamefly has the same virtue as Netflix compared to your local movie store, they have a catalog that includes everything. However, they also have stock problems. I stopped subscribing to Gamefly after I ran through the back catalog, and the latest, most interesting titles were perpetually "long wait." That works very poorly with a monthly cost, rather than a per-title rental fee.

This is largely due to the demand curve, which is also different from movies. While movie viewers do prefer new releases, the surge in demand for current games is far more pronounced, and it drops off more dramatically with time. A few select games maintain their retail price for 6 months to a year, but most start dropping within a few months. Modern Warfare 2, which was the hot game for Christmas, is now 70% of the original price five months after release. Wolfenstein, which had a lukewarm reception, is now 20% of the original price, 8 months after release. By contrast, movies don't hit the bargain bit anywhere near as fast.

Since the demand has such a sharp peak, a rental company has to maintain a very large inventory of a hot new title, an inventory which rapidly loses its value. They have to under-stock it compared to initial demand, or they title won't recoup its purchase price in rentals. Since purchase is $60 and rental income is around $20 a month, they need to stock roughly the number of rental demands they'll get in 3-4 months time, not the demand during release week. This is true of the entire rental market, no matter how many companies divide it.

Contrast this with movies. A DVD costs $20 to purchase, and generates $1-$3 per day in rental income. A movie easily recoups its purchase price in rental income in 8-20 days. Netflix gets by with a model that generates about $7-$8 per movie per month.

Of course I'm using retail purchase costs rather than wholesale production costs of discs, but the game and movie manufacturers still want their cut, and I'm neglecting overhead for the rental companies.

This means there's always a large segment that will purchase games, because their desire is not met by the rental supply. This of course further reduces the rental demand. With most games, the customers do exhaust it in a week or a month of playing. Gamestop taps into this by purchasing these games, which the customer now sees as having little or no value to them, and re-selling them.

So why don't I shop at Gamestop?

Their prices for used games aren't very good. Often it's just a few dollars less than new for something current. While they have a policy of including manuals with used games sold online, there's no guarantee that games purchased in stores will, and they frequently don't. One game I purchased used from them had a big chunk bitten out of the manual's corner.

I don't sell to them because their trade-in prices are terrible, usually 50% or less of the real used market value. That's how they make their money. You can do much better re-selling a game on eBay, but that requires far more effort, hassle, and uncertainty than most game purchasers are willing to endure.

I do resell my games through Goozex, which is an aftermarket system for buying and selling used games using an artificial currency. It's very low hassle, but it's slow. It isn't a threat to Gamestop, because typically it takes 2-3 months to get a current title this way. Gamestop's customers want it a lot sooner than that.

In short, there are good reasons why Gamestop's used game business is not much threatened by a rental model. The real threat would be from another company adopting a used game re-selling approach, and doing it better.

This is what Amazon is doing. They're offering free shipping on the used games you sell to them, and their standard shipping deals on used games: free for $25 or more, or free with Prime. Their trade-in offers are below market price, but slightly higher than Gamestop's. I think - I can't be absolutely sure what Gamestop's offers are, since they don't publish them.

Of course, Gamestop has brick-and-mortar stores, which have considerable overhead, but offer immediate satisfaction for local customers. While Netflix managed to largely destroy Blockbuster, I don't really see that happening to Gamestop. Netflix had considerable advantages over Blockbuster, in business model and convenience. Gamestop's business model doesn't have anything like the rental return deadlines and late fees that hobbled Blockbuster.

- Gus
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (5) | Ignore Thread Prev | Next

Announcements

Post of the Day:
TMFDeej's CAPS Blog

Activist Investors Unlocking Value at LSB Industries?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement