Xblog

The interesting thing here is the full impact of market speculators hitting the gaming market. Sure, we’ve seen speculators for game consoles since as long as eBay has been around. Normally though, the speculators can’t go wrong: the pre-release hype is so huge that for at least a short while after a new console comes out on the market, supply exceeds demand. At this point console makers count on it to generate additional hype, with news outlets quoting eBay auction prices for new consoles like box office weekend numbers.

Then the whole thing backfires (as it inevitably must): eBay auctions for PS3’s aren’t so hot any more. What’s interesting about this is the impact it’s having on retailers: they are getting returns.

And that’s what makes the gaming console market more interesting to me than traditional speculative markets. In a lot of ways the rules are rigged to favour speculators. They lay out the cash, buy the console, then try to sell it at a markup up. If they fail to, they can still return the console and get their money back from the retailer. Essentially all the risk is being absorbed by the retailer (in reality the absorption most likely goes further up the food chain to the distributor or manufacturer), and all the speculator risks is interest while their money is tied up (and given the average returns on consoles during debuts, it’s hardly a huge risk).

So, what happens when you reduce the risk out of speculating without reducing the reward? You get over speculation. So now rather than make the market more efficient, speculators actually make it less efficient. They don’t bother trying to predict demand, because they just lock in to every new console release for as many units as they can reserve, and they play all markets, because they can’t lose. So now retailers, distributors, and manufacturers see phantom demand and blowback when speculator market burns out. All this makes the whole system less efficient. Instead of speculators helping manufacturers, distributors, and retailers about demand, they create spasms of demand that result of misallocations. Retailers overstock, which leads distributors to overstock, and that leads manufacturers hold back release dates until their production levels can start to approach matching demand. Then when the speculators start returning units and suddenly you’ve got excess inventory coupled with excess orders coming down the supply chain.

If Gaming Moments is right (and what they are saying at least matches up with anecdotal evidence and a quick search on eBay), then it’s possible the PS3 missed the Christmas launch in Europe unnecessarily (they were having production problems, so it’s possible that alone made it impossible). Given the size of the gaming market, and the size of the bet Sony is playing with PS3, this would strike me as by far the biggest impact speculators have had on the consumer electronics market (perhaps retail market in general?) to date.

What is a manufacturer to do? Well, probably the best solution would be to have a “no-returns” policy during initial releases of consoles. That wouldn’t impress customers though. A “store credit return policy” approach would help somewhat, although this year it would just mean speculators would return the slow moving console and switch to the one that was still in high demand (Wii apparently), creating further distortions in the market.