What the Gaming Industry can Learn From Sneakers

Really struggled for a related image on this one! 

Really struggled for a related image on this one! 

 

Did you know that there’s a huge second hand market for trainers - especially Nikes? I did. What I didn’t know was that there are often astronomical markups that can turn a $250 pair of trainers into $650 pure profit.

There is a whole world of people, often teenage boys, who have turned reselling Nikes into a business. This includes Benjamin Kickz whose sly sneaker dealings have turned him into a sneaker dealer to the stars, and Chase Reed who opened a pawnshop exclusively for trainers. It’s a rabbit hole topic, that you could research for days and still not understand in whole. What really interests me about this cult culture though, is how the manufactures view and handle this secondary market.

Nike appears to particularly adept at creating the exclusivity and hype that fuels a specific type of sneaker to do well on secondary(resale) markets. This is furthered by their ability to precisely forecast demand for any given style to it the primary market (retail), allowing just 1-4% of the release to ever hit the resale market. Small retail releases, known as ‘drops’ may sell out instantly, allowing resellers to charge huge premiums where Nike could have done a larger run and made more retail sales. So, why doesn’t Nike just make more shoes or raise the price even? By balancing their shoe production so well, Nike actually feeds both the retail and resale markets - continuing to court both the casual fans and cult followers. This is brilliant marketing. It’s also brilliant forethought on Nike’s part to experiment and find a way to work with the secondary market to make a huge profit, rather than against that market at what would be a huge loss - not just in revenue but in public perception as well. What’s more, is that the buying tastes of the secondary market have started to inform production of new runs, allowing Nike to continue to turn a profit through the resale market.

Looking at the gaming industry, we see a completely different model

The US video game market has been estimated to be worth 25.4 billion in 2016, with a worldwide worth of 99.6 billion. Video game designer Denis Dyack was quoted in 2012 as saying “I would argue, and I’ve said this before, that used games are cannibalizing the industry.” Which, really, is kinda odd since the gaming industry has been growing year on year, at an exponential rate. Just 10 years ago the US market was worth just 9.5 billion.

Over the past few years, we’ve seen a rise in companies working to limit (or eliminate) the second hand market through various means. Playstation maker Sony removed backwards compatibility from their most recent console, the PS4. Microsoft also removed backwards compatibility with their console line and announced that their newest offering, the XBox One, would have DRM which would make trading games between consoles impossible. This caused such public outcry, Sony received a standing ovation at the 2013 E3 when announcing they would not implement any constraints on used game use. Microsoft later backpedaled, announcing the ‘feature’ would be removed before release.  Even so, this hurt the console’s sales significantly. The XBox One has sold only 19 million units in comparison to the 40 million PS4 units sold - a stark difference. More recently, the move towards digital distribution has been more successful. This model does have disadvantages for the consumer, however. Due to the lack of physical media, games can been ‘shipped’ before completion - leaving the consumer stuck with an incomplete and underwhelming product.

So why does the gaming industry demonize their second hand market?

The prevalent opinion among gaming companies is that the post-sale market is threat to business. The industry view is that when a game is bought second hand it represents revenue that the primary companies - creator, publisher and distributor - aren’t getting.

In fact, Sony has even privatized playing PS3 games on the PS4, by charging monthly for the right to do so - via PSNow, an additional fee on top of PS Plus membership that gives players access to a wide variety of previous-gen content. The more recent move away from physical copies of games, towards digital content has proved a more successful DRM tactic while raising new issues of it’s own.

It’s difficult to discuss second hand games without discussing the “Grey Market” - reselling game keys, some of which may have been acquired via stolen credit cards or other unethical sources. However, the origin of these keys is often kept from potential buyers, making customer awareness almost impossible. Some grey market companies recognise this, and are taking steps to make their practices as transparent as possible - but most are still obscuring what could be illegal acts.

While I personally have conflicting views of the grey market, I see it as a symptom of a larger problem within the gaming industry - the industry’s attitude towards resale game purchases and those that purchase them.

The fact is that a healthy resale market actually boosts retail sales by making primary purchase more attractive to consumers. Buying a new game is less of a financial risk to consumers when they know they can turn around and sell it on if it isn’t their cup of tea. To put it another way, secondary sales enable consumers to pursue a more risky purchasing behavior.  A healthy resale market also allows those who are priced out of the retail market to still purchase and play games as and when they become available on the resale market. It is often the case that those who buy second hand games would be unable to buy them any other way. While sites like Humble Bundle are working with developers to provide steep discounts on games, supporting charity to boot, this solution is still really only an option for the PC and mobile gaming markets. For low-income console gamers, resale is their primary market.

By reducing and trying to control the second-hand market, companies are allowing themselves to make the same mistakes they have been for years. Often games which have a yearly entry (Call of Duty, FIFA/Madden, etc) are the most commonly available in resale. These games are designed with a short shelf-life - little to no replay value, perhaps some minor differences between installments to keep things “fresh” - so that the games will be obsolete and unplayed by the time the new ones come out. Conversely, large open-world games such as Skyrim, Fallout and any Final Fantasy game are rarities in the resale market, selling for near retail price. When these games are in stock they move pretty quickly; even years after their release. This difference brings to mind a quote from the late Satoru Iwata - The best possible countermeasure against people buying used product is making the kind of product that people never want to sell. Taking as an example Mario Kart or Smash Bros., even though you might think, ‘I’ve done enough with this,’ you’ll still have second thoughts. ‘Wait a minute. If one of my friends comes over, I might need this again.’ You’re never going to want to sell these games. That’s something that always occupies our minds. We need to make software that players don’t want to sell.

As games move swiftly into digital only content, we are beginning to see the cost of games-as-a-service. Companies are releasing unfinished games for $60 a pop, a DLC season pass for $49 with further DLC packs at prices ranging from $5 for a new outfit to $25 for additional characters (each of which can have a second outfit for another $5). No wonder gamers are looking for cheaper ways to engage with their hobby of choice. In fact there was a study done in 2012 that showed if the resale market vanished without game prices going down, there would be a 10% hit to profits.

Instead of tracking sales statistics of second-hand games, to see which old titles to either reprint or to give an updated re-release, thus increasing their revenue while providing the customer with what they want to pay for, video game companies instead try and remove what they perceive as a threat and simply produce the same old games which sell less and less with each successive iteration. Imagine the ways that big data could interrogate resale information; It’s already fundamentally changed how we look at medicine, how we look at privacy and how Nike looks at shoes - The game industry could be revolutionized.

Could these companies learn from Nike? Judging by Nike’s profits and the goodwill of both casual and cult purchasers, they certainly could.
 

Tiberius Hefflin

Portland, Oregon 97204