Amazon starts game trades in challenge to GameStop

A gamer plays a videogame at the HP booth at the E for All video game expo in Los Angeles, California October 19, 2007.

NEW YORK (Reuters) - Amazon.com Inc will allow shoppers to trade in used video games for store credit, a move that may challenge a core driver of profitability for No. 1 U.S. game retailer GameStop Corp.

GameStop shares fell 13 percent on Thursday, after Amazon set the trial launch of "Amazon Video Games Trade-In." Users can mail in used games and get varying amounts of Amazon.com credit, including a 10 percent bonus toward items in Amazon's online video games store.

Amazon's move (www.amazon.com/tradeingames), which includes free shipping, comes on the heels of reports that big-box retailers Best Buy Inc and Toys-R-Us are testing the trading of used games.

Credit Suisse analyst Gary Balter called the Amazon development "disconcerting," suggesting that it chips into a kind of monopoly that GameStop has on used games, albeit one too small for game trade-in competition from Amazon to have much impact on the specialty retailer's profits.

GameStop profit margins have benefited from an active trade-in system in which shoppers return used games for a fraction of the purchase price or store credit. The returned games are sold at a higher profit margin than new games.

Balter suggested that GameStop can withstand near-term encroachment from physical retailers.

"That (Toys R Us testing) in many ways is less of a threat, as GameStop's advantage of 10 times as many locations and selection seem to make them less vulnerable," he said. "Best Buy and others have tested it for some time but have not been as successful."

Shares of GameStop had risen 35 percent in the past three months as sales of video game consoles by Nintendo Co Ltd, Sony Corp and Microsoft Corp remained robust, driving consumers into GameStop stores to buy software for their systems.

Analyst Ben Schachter of UBS said investor reaction to Amazon's move may be overblown, since online sales are a small fraction of GameStop's business. Game enthusiasts, he said, prefer to go to a store, drop off a game, and grab a new one.

"We believe the "instant gratification" of the trade-in process at physical stores remains a key advantage for GameStop," Schachter said in note to clients. "The bottom line is that Amazon is a formidable competitor, but we don't see any meaningful near-term risk, and online used just isn't a particularly big market."

Shares of GameStop fell $3.47 to $23.83, while Amazon shares rose 19 cents to $65.91.

(Reporting by Franklin Paul; Editing by Tim Dobbyn and Gerald E. McCormick)