The gaming industry’s leading brick and mortar retailer has an intriguing plan to take advantage of the growing digital distribution field.

GameStop COO Paul Raines, speaking at the BMO Capital Markets entertainment conference today, detailed plans for the company to install kiosks in its stores next year, letting people buy digital add-ons for titles as they buy the retail game.

In other words, as you buy a game, you’ll also be able to purchase add-ons for Xbox Live and your PS3 and have them waiting when you get home.

It’s a unique take on digital, but there is a method in what some may see as madness. GameStop plans to leverage the relationship its store clerks have with customers to upsell add-on packs – boosting the bottom line for them, publishers and console manufacturers.

“We believe we can convert a significant portion of our in-store traffic to digital downloads for publishers,” said Raines.

For hardcore gamers, there is an upside here. You’ll be able to use your trade-in credits for add-on content.

GameStop will begin in-store testing the concept in the first quarter of next year.

Oh – and as for full game downloads? The company still isn’t too worried about those.

“We believe a large market for full game downloads is not imminent in the near future,” said Raines.

Toys R Us, which has been testing a used game initiative in select markets, is rolling the program out nationwide, letting gamers exchange their old titles for in-store credit.

It’s the first big box/brick and mortar company to expand the program nationwide, competing with GameStop on a head to head level. (Best Buy, Wal-Mart and others are also conducting pilot programs at select stores – and Amazon.com is encouraging game trade-ins to all of its users.)

Toys R Us is being a bit more open than other companies in what it will accept. The retailer says it will take games from more than 25 systems, including all current models and game machines as far back as the Atari 2600 and Intellivision. They simply have to be in their original cases, with original artwork and in working order.

Rather than trying to get a piece of the extremely lucrative used game business, Toys R Us seems to be using the program as an incentive to get people into stores. It will not stock used games on its shelves, selling them instead to a third party that refurbishes them for sale. Credits earned from trades can be used on any merchandise in the store.

It’s a very similar model to the one that Amazon is using – except Amazon is offering incentives for traders to use their credit on new games.

Used games are still very much a hot button item in the game industry – but their popularity among consumers has never been higher. It’s interesting to observe the hostile, near-rabid reaction of game developers and publisher to the practice and compare it to the shoulder shrugging that’s more prevalent in Hollywood when it comes to used DVD sales.

It’s a bit of an apples and oranges comparison, of course. But this is one of those instances where the immaturity (age-wise, not attitude-wise) of the gaming industry is very much on display. 

You know that recession thing we've been going through? It hasn't been hurting GameStop. The nation's largest specialty video games retailer recently announced sales in 2008 were up a whopping 24% and profits rose 33%.

So why did its stock fall 14% today? Because somebody is about to kill the geese that lays GameStop's golden egg. Or rather, squeeze its margins.

Much of GameStop's profit growth comes from used games.Consumers like them because they're cheaper. GameStop loves them because the profit margin on buying a used game from some kid and then re-selling it is much higher than buying a new game from Microsoft or Activision and then selling it at a set $60 or $50. How much higher? Used game sales represent 44% of the company's gross profits, but only about 22% of its total revenue, according to Credit Suisse analyst Gary Balter.

Amazon.com's move today to start buying used video games is a major blow to GameStop's profit machine. Not because of the sales competition. There are already lots of used games for sale on Amazon.com through third parties. And it's not even clear yet whether the mega-etailer plans to sell the games itself on its site or wholesale them to others.

The problem is on the buying end. Amazon.com is offering higher prices to consumers than GameStop, or GameCrazy. As CNET News helpfully compiled, the difference ranges from $1.50 for "Mario Kart DS" ($16.50 vs $15) all the way to $2.75 for "Fallout 3" ($25.50 vs $22.75) and "LittleBigPlanet" ($29 vs $26.25).

That means one of two problems for GameStop: Either it will buy, and thus sell, fewer used games because more of us with games we want to get rid of will use Amazon. Or it will have to raise its purchase price for used games in order to compete, thus squeezing its profits.

It may not have to raise prices all the way to match Amazon, since consumers still there is a significant convenience factor to going to your nearby story. But it'll have to raise them some if it wants to stay competitive.

That's a win for consumers, a loss for GameStop, and further evidence for video game publishers that they have to come up with new features, like social play and downloadable content, that can keep the burgeoning used games market from destroying their business model.

Update: Analyst Ben Schachter of UBS thinks the market is overreacting, arguing that online trade-ins are very different from in-store. "Online game sales currently comprise less than 2% of GME’s [GameStop's stock ticker] total business (via the gamestop.com website)  and we estimate well-less than 10% of industry game sales," he wrote in a research note today. "We believe the 'instant gratification' of the trade-in process at physical stores remains a key advantage for GME, and we note that GME once offered online/mail-in trade-ins but stopped after issues w/product quality/shipping expenses. 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."

Even if you haven't been in a Blockbuster store in a while, you probably remember the importance of that "new release" outer wall. I know when I was a kid, before Netflix and before Xbox Live video downloads (the two ways I rent movies today), going to Blockbuster on a Friday and scanning the outer walls for anything new and exciting to bring home and watch that weekend was always a big and exciting event (surmise what you will of my social life as a child).

That's why it's a pretty big deal for gamers -- albeit not nearly as big a deal as it would have been a decade ago -- that Blockbuster Video is adding videogames to that valuable "new releases" real estate on the outer wall. During an interview I did with Blockbuster CEO Jim Keyes about "GTA IV," he confirmed to me that his troubled chain is using the game to launch video games on the "new release" outer walls:

The magnitude of the "GTA IV" launch is a real springboard for us in some ways. Based on the huge expected popularity of this game, we made the decision to use it as the centerpiece for our move to the wall. This is a big event for Blockbuster. The new release wall is sacred ground for us. With the introduction of "GTA IV," we are going to launch a new release section of the wall with all three major platforms represented. We think that's going to attract a lot of people to our game offerings.

Blockbuster, of course, has been struggling in the face of intense competition from Netflix, online downloads (legal and illegal), the big box stores, and a general slowdown of the homevideo market. It's attempting to buy Circuit City in a bid to gets its hands on more digital devices that are used to distribute and watch movies at home.

In that context, the videogame biz, with its 50%-plus growth rates, has got to be mightily attractive. So while Blockbuster putting videogames on the new releases wall should result in greater respect for and consumption of games in the mass market, it's even more a sign of how badly the traditional entertainment industry wants a piece of the fast growing videogame coin.