Following a short stint into the world of gamers and operating an website business involving video game rentals, my partner and I quickly realized it was not an attractivebusiness opportunity after all!
Initially, we thought we could swipe some market share from the 800 pound gorilla, Gamefly , and have a lucrativemembership operation to run. This all turned quickly went south when we burned through a copious amounts of money and could not get our heads above water and stay afloat! The main aspects with this business model that make it difficult to survive are as follows:
1) Dramatic Video Game Depreciation– The value of new games drops precipitously as soon as it is opened and rented. Resale of used games is updates accelerate the depreciation factor. Most games decrease in value 25% out of the gate and are worth 30 to 50 cents on the dollar within one year!
2) Stealing – The demographics of this market attracts a lot of “undesirables” and petty thieves who rent from multiple online rental businesses and claim the games get lost in the mail or use fraudulent credit cards, etc. The attrition approaches 5% in this industry and with the average cost of games being about fifty to sixty dollars, the write-offs ad up quickly.
3) Loss Games & Destruction – The post office’s automated sorting machines have the nasty effect of bending mail at right angles in the sorting procedure. While the video discs are reasonablyflexible, many of them end up customer. In addition, it is virtually impossible to determine actual loss within the postal service and employee theft. The games are packed in obvious reinforced envelopes with company logos printed clearly, so any unscrupulous worker would know what the item is and likely its value. Lost and damaged goods accounted for another 2-3% cost.
4) Cost Of Mail Increases Regularly – In the short time we operated the service over six we were confronted with a drastic change from the post office that would have shaved 10%off profits.
5) Speed Of Delivery – Dependence on the US Post Office to deliver games on time would inevitably lead to disappointed customers and cancellations. Competing against other services that had multiple distribution warehouses created a tough competitive wedge.
6) Duration Of Membership – normally 6 – 12 – but we never sustained it that long because of the first 5 problems! Hardly long enough to capture any meaningful profit from this derelict crowd.
7) Competitors – Customers who utilize these services are very impatient by nature and desire to receive new games as soon as possible. This equates that companies that don’t have a geographic presence on both coasts and in other locations will have slower delivery times for their customers. This typically necessitates more investment and employees to operate and compete with the bigger funded services or just stay focused on the regional geographic market and serve a limited customer base.
In closing, if you are thinking about starting a new game service you should think about the ramifications of the business model. Unless you have a brilliant software programmer that can accurately estimate new game demand, and perfect distribution set up with multiple locations for rapid delivery, and a pile of cash, then this business is probably not the best option for your investment.
