When a bad manager spurred @purplecar to examine GameStop

I have never met Christine Cavalier - I first encountered her in the comments section of a Loren Feldman Google+ thread - but she appears to be an intelligent person. However, like most of us, when presented with a purchasing opportunity, she does not spend countless hours of time analyzing the opportunity before purchase.

But in one case, she analyzed the purchasing opportunity AFTER purchase, and clued me in on something in the process.

On Wednesday, Cavalier and her son went to their local GameStop to buy something with her son's gift card. After selecting a new title, they went to the counter to make the purchase. As Cavalier recounts, the store manager volunteered to get a used version of the game, did so without asking, and practically argued with Cavalier to tell her that she really wanted the used version, and not the new version, because it's so much cheaper.

Cavalier ended up getting the used game, but something stuck in her craw:

On the short drive home, I began to wonder why the manager “helped” me so much. His insistence on the used game bordered on weird. The fact that I left the store feeling bamboozled into buying an inferior product started to anger me.

As lunch was cooking, I remembered my basic capitalism education: there is a reason behind every sell. What could the reason be here? Why sell these used games so strongly? It must be profit margin. That was the only logical choice.

Cavalier consulted an online human-staffed research service - Twitter - and confirmed her suspicions. She then did the math - see her post here. (In case you haven't figured it out, I want you to read her entire post.)

While consulting an online non-staffed research service - Google - I found additional evidence to confirm GameStop's business model. Keith at Boesky.com, while primarily concerned with the impact that GameStop has on original game developers, discussed GameStop's business model himself:

It is time to for Gamestop to fess up and acknowledge their real business. Relative margins reveal Gamestop's actual business to be the collection and resale of used games. New game and accessory sales revenue may equal or exceed the used game revenue, but they do not come close to matching the profit.

Why not? Because, as Keith points out (yeah, I want you to read Keith's post also):

Gamestop profits from multiple sales of the game.

According to Keith, here's what is about to happen to Cavalier (who pays $16 a year to be a GameStop member):

To ensure return of the games, consumers who buy a games are bombarded with offers to turn them back in for credit. Each turned in game builds the used inventory, at no cost to Gamestop.To ensure return of the games, consumers who buy a games are bombarded with offers to turn them back in for credit. Each turned in game builds the used inventory, at no cost to Gamestop.

I don't know how long it will take, but GameStop is going to start encouraging Cavalier to turn her son's game back in - he's tired of it now, isn't he? - and get some credit. That credit can then be used for the purchase of another used game, continuing the cycle.

Cavalier herself noted that the manager was effectively pushing this strategy. When Cavalier was still trying to buy a new game rather than a used one, the manager threw this at her:

“Well, have him try the used game and if he doesn’t like it, you can exchange it and you haven’t bought the new one.”

Unfortunately, the manager's insistence on the used sale resulted in a customer who took to Twitter about her concerns, and who wrote a blog post about her concerns - a blog post that concluded as follows:

My friends tell me Amazon is a decent alternative to GameStop. We are GameStop members (pay $16 bucks a year for discounts, but guess what, only on USED GAMES) but I’m going to pursue the Amazon option. I predict GameStop will go out of business if they don’t insist on selling decent-looking used games for a better value than 80% of the new game price (and that was with my discount!).

Oh, and Cavalier also added this comment:

(Their email and print flyers are so male-oriented that I don’t even read them. I unsubbed today).

You see, Cavalier's son isn't the only gamer in the house. Cavalier's daughter is also a gamer. And, incidentally, it's Cavalier herself who pays for the games, or at a minimum takes the kids to the store to buy them. Not any more.

However, the bigger damage to GameStop may not be the angry customers. It may be the angry game publishers. I already noted that Keith's post primarily concentrates on GameStop's adverse impact on original game developers. As Keith notes, the game developers pay all of the costs for game development, pay GameStop for various promotional tasks, and then enjoy the profits from the sales of one game - a game that, as mentioned before, GameStop sells over and over and over.

So, what can potentially happen when entertainment content developers believe that people are stealing their content? As we've seen from the continuing SOPA/PIPA/ACTA brouhaha, I wouldn't be surprised if the game developers are meeting with Lamar Smith right now and informing him of the terrible dangers of a rogue game market. ("Rogue games could be infected with viruses, and since people are now using game machines to surf the 'Net, this could allow terrorists to cripple the Internet in the U.S.!")

I wonder if the savvy investors are going to start avoiding GME long-term.