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Microsoft's Next Mistake?

Buzz is building for Microsoft's (Nasdaq: MSFT  ) next Xbox, even though the initial reports claim that the new console won't hit the market until late 2013.

However, there may be something unique about the Xbox 720 that publishers will love but gamers, GameStop (NYSE: GME  ) , and video game rental will loathe.

Video game enthusiast website Kotaku is reporting that the powerful new gaming system may spit out used discs.

"I've heard from one reliable industry source that Microsoft intends to incorporate some sort of anti-used game system as part of their so-called Xbox 720," writes Stephen Totilo.


Whether the authentication process is seamless or we're talking about the Microsoft model where a unique code applies to each disc, this could be disastrous if this is true.

I'm not just thinking of GameStop, whose high-margin business of buying and reselling used games would be crushed. I'm not just thinking about Gamefly, Blockbuster, or Coinstar's (Nasdaq: CSTR  ) Redbox -- the three leaders of used video game rentals that would see that niche dry up. I'm not even thinking about eBay (Nasdaq: EBAY  ) , though one can imagine video game sales drying up and buyers hesitant to buy a used game being passed off as new.

What about the gamers? Don't they have a say? Do you think they'll want to fork over $60 for a game that they can't trade with a friend or for retailer credit? Obviously video game publishers would love it if the gaming community ate this up. They only cash in on the initial sale, forgoing any piece of the action on rentals or used game sales.

However, it would seem outrageous that Microsoft -- after finally clawing its way to the top among the three console makers in 2011 -- would throw it all away to please publishers.

It can't be. Can it?

Allow me to throw one more log in this conspiracy fire.

During last night's earnings call, Netflix (Nasdaq: NFLX  ) revealed that it will definitely not be entering the video game rental market. This was expected, though the company had always opened up the possibility after announcing back in September that video game rentals would be part of the since nixed Qwikster offering.

Why is this worth noting? Well, Netflix CEO Reed Hastings just happens to sit on Microsoft's board of directors. If he was on the fence about offering video game rentals, anything that he may have heard at Microsoft of the Xbox 720's rumored features may have made it an easy decision to nip video game rentals in the bud.

Regardless of the chatter, my money is on this not happening. GameStop and Redbox can go back to worrying about the demise of physical distribution. Now that's the real threat. If Microsoft were to somehow be stupid enough to tempt legalities and the patience of fickle gamers with a feature that would spit out used games the Xbox 720 will be as good as dead.

It won't happen. Microsoft is smarter than that.

I've been covering Microsoft since the 1990s, and I've generally had a lukewarm opinion as an investor. However, I entered a bullish CAPScall on Microsoft in Motley Fool CAPS earlier this month, reversing my earlier bearish pick.

If you haven't read about the two words that's giving Bill Gates and Steve Ballmer fits, it's a free report so you as may well check it out now.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Netflix. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of Microsoft and GameStop. Motley Fool newsletter services have recommended buying shares of Microsoft, Netflix, Coinstar, and eBay. Motley Fool newsletter services have recommended writing covered calls in GameStop. Motley Fool newsletter services have recommended writing puts in eBay. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 26, 2012, at 12:09 PM, jdwelch62 wrote:

    Won't happen, Rick. Redmond is smarter than that. I chalk this up as just another rumor out of Asia...

  • Report this Comment On January 26, 2012, at 12:18 PM, lucasmonger wrote:

    I would contend that with Apple's very successful IOS and Mac App stores, we might see Microsoft eliminate the media reader altogether and use broadband downloading so gamers can purchase games on the fly, or even play in pay-as-you-go games (Halo meets Farmville). In that type of scenario, once you buy the game, there's no reselling it (just like all the free and $0.99 cent IOS games cannot be resold). By eliminating the media, they eliminate some of the cost for packaging, distribution, shelf space, etc. and can maybe then lower the price to get greater adoption. Microsoft, Sony, and Nintendo all need to face the fact that as networks become faster, locking in gamers to DVD/Bluray media needs to change

  • Report this Comment On January 26, 2012, at 1:44 PM, CMFStan8331 wrote:

    Any model that relies on deploying restrictions on how customers can use their purchases to keep prices artificially elevated is doomed, by competitors who offer more customer-friendly practices and/or by piracy.

    If you want to take away the option to resell your products, you had better be prepared to dramatically lower the purchase price or you'll end up as just more roadkill on the technology superspeedway.

  • Report this Comment On January 26, 2012, at 2:35 PM, bbbooobbb wrote:

    If this were a "feature", you can expect it to get hacked off of there in about 5 seconds after the console is released. Right of first sale is still in existence and games are one of the few places with a healthy and thriving used market. To kill it off will draw the ire of everyone from Congress to business owners to consumers.

  • Report this Comment On January 26, 2012, at 10:30 PM, Andy3468 wrote:

    I am dissapointed that you would take the time to add to a rumor that surfaces from the unreliable Kotaku each system launch. To think if the rumor was true that a friend couldnt even bring a game over to play. Even though your anti Gamestop on everything ; which makes most of your articles unbelievable and potentially brings other companies you comment on questionable. Straighten up FOOLS and just posts the facts.

  • Report this Comment On January 27, 2012, at 11:08 AM, BrianDW99 wrote:

    A "reliable industry source" indeed. Probably a janitor at a Microsoft satellite office who inhales too much industrial product. This rumor is pure doggerel.

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