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Used video game firm thrives in rough economy

In a rare case of a company's going public in a tough market, Game Trading last week raised $3.9 million from investors - money it will use to expand.

BALTIMORE - Even a down economy presents opportunities.

That's what executives at Game Trading Technologies Inc., a Hunt Valley-based startup, are counting on. The company has built a business model on buying and selling used video games and consoles, and revenue doubled to $36.7 million last year as recession-weary gamers hunted for deals.

In a rare case of a Maryland company's going public in a tough market, Game Trading last week raised $3.9 million from investors - money it will use to expand.

"We're just growing like a weed," said Todd Hays, the company's president and chief executive.

Only a handful of companies - mainly financial firms and real estate investment trusts in need of capital - have gone public in Maryland over the past couple of years, according to an analysis by Douglas M. Schmidt, CEO of ChessieCap Securities Inc., an investment bank focused on the Mid-Atlantic region.

The company's market debut also further solidifies Baltimore County's reputation as a hub for the video-game industry. Several video game development firms rely in part on young talent coming out of the University of Maryland-Baltimore County, which started a formal academic track in game development a few years ago.

Game Trading's sales have climbed as consumers have been eager to trade in used games and consoles for money or store credit in order to buy newer products. It is a secondary market that retailers GameStop Inc., and others are also targeting as consumers seek to trade in - and trade up - games on the Sony PlayStation, Microsoft Xbox, Nintendo Wii and other systems.

As part of a complex stock swap deal, Game Trading's shares are now offered on the OTC Bulletin Board under the ticker symbol GMTD.

Game Trading makes money by offering other retailers the use of its proprietary "market making" software and algorithm technology, which helps retailers obtain real-time price quotes on used games, consoles and accessories. Its partners include GameStop, Wal-Mart, Best Buy, Blockbuster and eBay. As part of its service, Game Trading guarantees the buy-back of all the used items that it prices.

Game Trading's path to becoming a public company was a rocky one. Founded in 2003, the company operated 11 retail locations in the Baltimore area, but closed them four years ago because of poor performance. "We figured out we're not retailers," said Hays. "So we turned ourselves into a service provider."

Hays previously ran a company in the area called InterAct Accessories, which specialized in video game peripherals, that he sold in the mid-1990s. Hays, a Penn State University graduate, runs Game Trading with his brother, John Hays, vice president of Internet operations, and uncle, Tom Hays, vice president of sales.

Game Trading posted a $1.7 million profit last year, compared with $325,000 in 2008.

Last year, Game Trading bought 1.1 million games from Blockbuster, Hays said, some of them new but many used. Rather than going through a liquidator, Blockbuster partnered with Game Trading and was able to get more money for the sale of its game inventory, Hays said. "Our whole business model is based on offering people a market price," he said.

But another obstacle looming for the resale market is the video game manufacturers, who are increasingly angry that they're not getting a cut of the profits in the secondary market, said Sean McGowan, analyst and managing director of Needham & Co. in New York City.

"They feel like they're being robbed," McGowan said. "On the other hand, the used car market supports the new car market because people feel better about buying a new car if they feel like they can sell it used. I don't think all these (video-game) publishers would be doing well if not for the used market."

Arvind Bhatia, an analyst with Sterne Agee & Leach in Dallas, said used video games can offer a 45 percent to 50 percent profit margin, while new games might offer only a 20 percent margin.

That used market for now is Game Trading's specialty. The firm has a 33,000-square-foot facility in Hunt Valley where 68 employees refurbish video games and consoles. Game Trading says it can process 500,000 games a month and can store up to 1.3 million units.

Game Trading estimates that more than 3.4 billion units of video games have been sold to consumers by manufacturers over the past decade, making the secondary sales market potentially huge. "Eighty percent of the time, when people trade in their old games, they buy new games," said Hays.

In the long term, industry experts said, Game Trading could be hurt as the market for video games is expected to shift to an online, digital distribution model that's similar to music - one that would make reselling games on compact discs obsolete.

"Is there going to be a day when there's no reason to have a physical copy of the digital goods?" McGowan asked.

But in the short term, there is money to be made in the used market, analysts said.

"This business is going to be around for years to come," said Bhatia, the analyst. "For now, it's a good lucrative business."

(c) 2010, The Baltimore Sun.

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