Anatomy of a $60 video game

[Xelloss]

Ok here is a copy paste from a guy who posted a comment on Kotaku. I can say from what I know, this guy is 100% correct so I thought it worth a report over here.

Note this was originally posted by http://kotaku.com/people/woggerman/ over at Kotaku, and not by me.

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woggerman:

Ok here is how the video game retail industry works. As I said before I was a buyer for many years. If you need to know where, it was EB Games.
Retailer buys X copies of a $60 game at $48-$50 per copy for a margin of anywhere between 15%-20%.

Lets say the company sells half of the games in the first couple weeks and sales slow to a crawl. The retailer either fights with the publisher to return as many unopened copies in their warehouse or asks for a price protection(A credit on their invoice for each copy they have left in stock to bring the average cost down.) This allows them to retain a margin(though it may now be around 10%) while pricing the game lower to move the remaining units. This continues until the game is sold out and in most cases the retailer takes a hit to get rid of the last of the copies.
This brings me to the second point which is preowned games and why they are so important.
Average cost plays into this as well. Let's say the they take back 100 copies of a game at $35 trade-in value, but the game drops to $39.99 retail. As more people beat the game , more will trade it in. Now the trade-in value is $15. Let's say 900 copies get traded in at the lower value.
There are now 1000 copies of the game traded in and the average cost has now gone down to $17(100x$35=$3500, 900x$15=$13500, $13500+$3500=$17000/1000=$17)
As long as that trade in value stays low and they hit the 50% target Margin on preowns, they are golden.

I can tell you from experience, New games generally do not turn a profit unless they sell out right away. Otherwise both the retailer and publisher need to find a way to both get out of it with minimal exposure. Retailers have a great way to compensate for that with trade-ins. Publishers do not. Not yet anyway. Not until digital downloads become more mainstream. The system is flawed for the publisher and developer