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GameStop's Hubris Problem: Handicapping The Used Video-Game Market

This story was written by Tameka Kee.
GameStop brought in about $2 billion in revenue from used-game sales last year, but those numbers will be far lower this year if *Amazon*, *Best Buy* and Toys R Us have their way. Last week, the three retailers staked claims to their own slices of the market by launching used-games programs. While Best Buy and Toys R Us' initiatives were trials, Amazon (NSDQ: AMZN) launched its games trade-in plan in full force.

So who poses the greatest threat to GameStop? GameStop didn't address Best Buy or Toys R Us' efforts directly, but CEO Dan DeMatteo did tell Edge Online that he gave the probability of Amazon's program thriving a "zero." That didn't stop the company's stock from tumbling by almost 14 percent the day Amazon entered the market.

Here is how the companies stack up in some key areas:

Location, location, location: Toys R Us loses out big here. You'd be hard-pressed to find a group of self-respecting gamers between the ages of 13 and 24 that would willingly go to the toy retailer to trade-in their gameslet alone hang out. In contrast, GameStop caters to that demographic in particular. "GameStop encourages them to hang out," Wedbush Morgan analyst Michael Pachter said. "That's not going to fly at Toys R Us, Target or Best Buy." Beyond just the inventory, GameStop offers the whole package: the staff is knowledgeable and they have huge events tied to pre-orders and new game releases. The company also chooses its locations wisely, with mall stores attracting tons of traffic.

More after the jump.

Supply and demand: GameSpot's status as a hangout gives it a definite advantage: it has a steady supply of trades coming in. Younger gamers don't often have jobs, but they have stacks of old games to use as currency. "Everybody buys used games, but only boys 13 to 18 really trade them in," Pachter said. Toys R Us' lack of "coolness" will contribute to supply issues, and Amazon has attempted to make the mail-in trades appealing, since users don't pay for shipping on games they trade-in or buy. Still, the question of whether the online retailer will a have enough used copies of the latest blockbuster "on hand" when demand spikes is still up in the air.

Less than instant-gratification: Meanwhile, Amazon's biggest disadvantage is that gamers can't get their hands on a new title right when they want it, but the online retailer makes up for it by letting gamers trade-in their games for whatever they want. This flexibility would work in Best Buy's interest as well, according to Michael Cai, VP of video games at Interpret. "There's a big overlap between tech enthusiasts and core gamers, so they could attract a wider audience for trade-ins if they let gamers get credit for DVDs, music and other electronics in exchange," he said.

The Verdict: Breaking down the pros and cons leaves GameStop with a clear lead over its rivalswhich is likely what contributed to DeMatteo's assessment that the newcomers don't pose a threat. But it's that underestimation of the competition that might be GameStop's worst enemy. "GameStop's core audience is going to continue to flock there, ut these new programs are about going after other demosthe moms and gifting parents, the older gamersand that's where the impact will be more obvious," Cai said. Pachter agreed: "It's about the 24-year-olds that have jobs and shelves full of games they don't play. If I want to buy my girlfriend a $200 iPod, and I have $100 bucks and 10 gamesAmazon is going to get them. And as Amazon starts getting more inventory, they're going to really compete with GameStop for used game buyers, which is where they start making money."

Photo Credit: Ryanrules

By Tameka Kee