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Rentailers Still in the Game

29 Sep, 2005 By: John Gaudiosi

While the video industry worries about the possibility of two HD formats, the video game industry has been handling multiple formats for some time — and it's going to get even more complicated.

Three next-generation consoles will launch over the next 15 months, adding to existing business for PlayStation 2, Xbox and GameCube as well as new handheld devices such a PSP, Nintendo DS and Game Boy Micro.

While this presents a challenge for rentailers, it also will open new opportunities.

“Rental is a large part of any hardware launch, even if the game companies don't recognize it,” said Ted Engen, president of the Video Buyers Group. “Consumers have a huge library of current-generation games to choose from, and rental allows them to decide whether to buy a new console now or wait.”

While many DVDs are priced under $10, games remain relatively expensive, fueling rentals. In fact, game rental has picked up on current-generation consoles because titles are still $49, according to P.J. McNealy, video game analyst for American Technology Research. The expected higher price points for the next-generation games could boost rentals as well, he said.

Video game manufacturers and publishers have rarely embraced or promoted game rental. One home video rental chain executive, who asked to remain anonymous, said game rental is a “necessary evil” in the eyes of game companies.

Next-Gen Rental Lags
Hardware availability is limited with each new console launch, including the Nov. 22 Xbox 360 rollout, and plenty of hardcore gamers and early adopters willingly pay almost any price to be the first to own a new system.

Rental does not become a key influencer in game hardware or software purchases until those avid gamers' appetites have been satiated and the game makers turn to the more mainstream audience.

“Next-gen software sales and rentals for most titles will lag behind the market for current platforms until penetration of Xbox 360, PlayStation 3 and Nintendo Revolution approach 5 million in North America,” said Billy Pidgeon, video game analyst for Go Play Research. “Brick-and-mortar rental outlets could increase revenue by renting next-gen consoles, as well as games.”

But Scott Madia, manager of 12 Game Cage stores within Bradley Video of California, said getting those consoles in a rental chain is not easy. Sellthrough retailers get first dibs on any new console.

“We plan on renting Xbox 360, once Microsoft decides how many units will ship and who can get them,” Madia said. “We'd like to have one to three consoles per store and three to six of the hot games, and one to three of the games we think people will want to play.”

Engen, who has watched the launches of many new consoles over the past few decades, believes that Sony tends to be more proactive with the rental pipeline than Microsoft and Nintendo. He added that while Microsoft has come a long way over the past four years, Nintendo has always been, and remains, resistant.

Core Consoles, Not Handheld
The core business for game rental remains consoles. Despite the popularity of PSP movie and game sales, many rental chains do not rent UMD titles. Steve Lundeen, VP of multimedia for Movie Gallery, said that when he was VP of interactive merchandising at Blockbuster Video, they tried three times unsuccessfully to establish Game Boy Advance rental with customers.

“Sony's done a fantastic job with the PSP so far, but portable software doesn't lend itself to rental,” Lundeen said. “PSP movies are a plus for us, and we'll watch that business closely going forward.”

Madia said that historically customers have had trouble with the smaller handheld cartridges. They're too small and susceptible to damage. It's hard to charge a customer for a broken cartridge if they say it was broken when they rented it, he said.

While brick-and-mortar game rentailers dominate, there is a small subscription online rental business, with the dominant player being Gamefly. Some believe subscriptions such as the online game rental business will grow but will face some threats. Pidgeon believes online and wireless targeted games and viral distribution could shift power back to game publishers and console manufacturers.

“Game retail and rental outlets will eventually have to migrate to these distribution methods to thrive,” said Pidgeon, who believes the digital distribution of game content will grow with each new console release.

One continuing bright spot is the used games business, which has been around since the 8-Bit days, which could play an event bigger role with next-generation games, Engen said.

“Used game sales often provide consumers with the cash to rent and buy new games. The used game market is very important,” agreed Dave Hodess, CEO of GameFly.

Still, the game rental business is likely to remain a smaller player in the industry.

“In the overall scheme of things, rental will not be more than 10 percent of game industry sales,” Movie Gallery's Lundeen said.

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