During my web browsing I saw a posting about DVDEmpire.com and how it was closing its video games division due to it not being a profitable venture for the company. The thing that was interesting was how they posted up details explaining why they could not sustain a video games division anymore and they did it without holding back it seems as they basically blasted and criticized on how video game manufacturers only care about large companies. Here was the message that was posted on the site for its customers:
We are closing our video games division?
We are sad to say that we are closing down our video games division. We also feel we owe our customers an explanation:
1. Video Game Industry Does Not Care:
The video game industry only cares about mass merchandisers like Toys-R-Us, Wal-Mart, Best Buy, etc. They completely ignore the needs and wants of the medium to small game retailers. Below is how they do it.
2. Can’t Make Money:
You may not care whether or not we make money, but we cannot continue to pay to sell video games. It is impossible for us to make money selling video games. Video Game Manufacturers set the price using what is called MSRP (Manufacturers Standard Retail Price). Here is an example of the video gaming industry greed: they set the retail price at just $5 above the product cost (buy it for $54.99, sell it for $59.99). When we sell a game we make on average 8.3% gross margin. That does not take into account any of the cost to store the video game or labor to receive/ship an item. The only way we can make a profit on an item is to sell it over the MSRP, but unfortunately we are not allowed to do this. Take a $400 console; we only make $5 on the sale—that is a .01% gross margin (note the decimal point). The game companies make their profit selling to us. We make no profit selling to you.
3. No Price Protection + Games Prices Drop Quickly:
Surprise, Surprise….we do not receive price protection. Price protection is a way to decrease the risk of purchasing a product that may not sell. It puts the responsibility of producing a quality product in the hands of the manufacturer. When something doesn’t sell, the manufacturer reduces the MSRP. If the MSRP falls, price protection would give us our initial investment back. Again, we are not big enough to receive it. We all know how fast games devalue in prices; this is due to the fact that 80% of the games created are crap. So take the fact that we only make $5, now if the price of a game drops $20, we are now losing $15 every sale.
4. No Product Returns:
This one blows our minds; we are not big enough to return products. The game industry releases many bad games, and word of mouth spreads fast to the consumer. All of those bunk games sit on our shelves. If we do end up selling them, we lose more money, due to the lack of price protection. They won’t let us return the bombs. So if we buy a bad title, we are stuck on an industry-induced money losing ride through the land of price drops. Of course, if the video game industry produced quality games, we wouldn’t have this issue.
5. Distribution is Dumb:
Since we are not one of the top game retailers we have to buy through a middle man or distributor. First off, this obviously raises the cost of the product, and second, distribution is horrendous for new releases. We get them 3-4 days after street date. You can buy it from the store before we can ship it to you. This is completely unacceptable to the customers that pre-order games from us.
6. Games Are Better Suited for Brick and Mortar Retailers:
There is not a huge selection of games; it is a new release industry (majority of sales are in the first two weeks of release). Large retailers make money on other products after they get you in the door. We do not; most people come to a website to purchase a video game, not a video game and a bunch of movies. There is also no game catalog market, if you wanted to buy an old copy you would buy it used. So retailers are able to stock all new games, and they can return the ones that don’t sell. Games bring in great foot traffic for physical retailers and they make money elsewhere. EB Games/Gamestop relies heavily on their used business. It is very difficult for online retailers to have an advantage, except for convenience.
7. The Final Reason:
The final reason we killed our video games division is the industry does not let us provide the same level of service that we do with DVDs. We cannot continue to have our good name tarnished when we cannot control how we receive the product. We do not want to lose potential long-term customers due to a poor experience with a video game that is outside of our control. We attempted for the past five years to make it work but decided to call it quits. It breaks our hearts. Everyone at DVD Empire is a huge fan of pc and video games, and we are truly sad to see this division go.
While this does release some interesting behind the scenes information, I’m not sure if this was exactly a great thing to do. With quotes such as “We all know how fast games devalue in prices; this is due to the fact that 80% of the games created are crap†this makes me wonder if the people in charge of the games division ultimately played a bigger role in its demise. For example, I don’t think anyone is forcing them to carry a certain product and they could easily do some research to determine what the market will want ahead of time. Not only that, but the line where they say “Take a $400 console; we only make $5 on the sale—that is a .01% gross margin (note the decimal point)†makes me wonder what kind math they are using in the company. I don’t think that was a typo either as they emphasized the decimal point.
It’s usually easier to complain that a certain company has this or that and so there is nothing one can do, but the funny thing is I’ve actually never really seen this to be true as I’ve seen many times on how companies have been able to turn things around by simply getting people who have the right attitude and creativity to make things happen. Even in reading all that it doesn’t sound like they are taking any accountability at all in what they could have done better to make the games division of their business profitable. I’d say it was definitely possible to turn things around though.
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