Best Buy tests used game sales

In a move that could pose competition to specialty stores GameStop and EB Games, one of the nation's biggest retailers is toying with the idea of selling used video games.

In a memo sent to investors and media today, PiperJaffray analyst Tony Gikas reported on the still-under-wraps test being conducted by the retailer at select stores in the California and Illinois markets.

According to Gikas, Best Buy, which has 700-plus stores nationwide, is testing the new business model in four stores. Gikas says the likelihood Best Buy (ticker: BBY) will roll out the new service is very high.

And if Best Buy does decide to roll out the sale of used games across its entire network of stores, Gikas views the move as a "modest competitive threat" to GameStop's business model, long-term.

"BBY is already the number three US retailer of video game products, with roughly 14 percent US market share," Gikas says. In addition, "BBY has ample capacity (and plans) to expand category shelf space. Used video game products would enhance category margins (new software holds 20 percent gross margins over used software, which holds 40-50 percent gross margins, and hardware holds 50 percent gross margins. [And] video game product sales are expected to accelerate in CY06 (8 percent growth) ... the introduction of a preowned program could be very powerful to their business."

While the test is limited to only four stores today, according to Gikas, he sees the test expanding more broadly.