GameStop Corp. (GME), Microsoft Corporation (MSFT): The Used Video Game Problem

Used video game sales make up about a quarter of GameStop Corp. (NYSE:GME)’s business. It’s an important part of the industry that the internet is slowly destroying.

The Used Game Market

GameStop Corp. (NYSE:GME) is the largest video game retailer in the world. It has over 6,500 stores in 15 countries. It competes with retail giants like Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) in the video game market and, impressively, holds its own. Part of that success is the company’s willingness to accept old games and game systems as trade ins.

This is such an important part of the business, in fact, that GameStop Corp. (NYSE:GME) has gone on the offensive with game and console makers. The company discussed this effort at a Goldman Sach’s conference, in which it highlighted that only a small percentage of new games are traded in within the first three months of release (used games are, thus, not a competitive threat to new games), that trade ins provide customers a means to purchase new games, and that customer research suggests that customers want to own physical copies of their games.

Technology is Changing

None of this, however, changes the fact that technology is making downloading games much easier. So, Sony Corporation (ADR) (NYSE:SNE)’s PlayStation 4 and Microsoft Corporation (NASDAQ:MSFT)’s Xbox One will both offer enhanced downloading capabilities. GameStop Corp. (NYSE:GME) offers downloadable content too, but clearly the game and console makers would prefer to cut out the middle man.

That said, GameStop Corp. (NYSE:GME) should see a big boost in sales toward the end of the year as the new game consoles come out. The ability to trade in older game systems will be a huge selling point for customers looking to upgrade. Any bounce should last well into next year, so GameStop Corp. (NYSE:GME) shares could extend their recent run, and fiscal 2013’s top line drop should be easily reversed even if sales are weak until the consoles hit store shelves.

Self Inflicted Wounds

Microsoft Corporation (NASDAQ:MSFT), meanwhile, had originally planned to limit the ability of customers to trade and sell games. That turned off its core customers, who view buying and selling physical copies of a game as a right, not a privilege. The company quickly backpedaled on that decision, but the gaff, and a $100 price premium over Sony Corporation (ADR) (NYSE:SNE)’s PlayStation 4, may lead gamers to prefer the less costly console.