Could Microsoft Really Be This Crazy?

Don't do it, Microsoft  (NASDAQ: MSFT  ) .

The company's unveiling of the new Xbox One console answered some key questions for gamers and investors, but it also left a lot unsaid. One of the biggest mysteries remains the issue of digital rights management, or how Mr. Softy will handle the resale of used video games on the Xbox One.

Rumors have been swirling about a potential Microsoft crackdown on the used game market, and this latest one was enough to send GameStop (NYSE: GME  ) investors running for the exits. GameStop's shares fell by more than 10% on Friday, after reports that Microsoft is apparently considering taking a big cut of all sales of pre-owned Xbox One games.

They're my marbles
It must be a tempting prospect for Microsoft. After all, GameStop made $1.2 billion in profits from reselling used games last year. Microsoft would love to cut out the middle man this time around, and keep more of those dollars for itself and other publishers.

The company might be able to police the resale of games by requiring registration through its cloud service. Retailers like GameStop would have to notify the system that a game has been sold, and the rights would transfer from the seller to the buyer. Mr. Softy could take its cut at that point in the process.

That potential scenario is actually better than what some gamers feared. At least this way the resale and trade-in market still exists, rather than just a "no used games" policy. And that's a good thing considering many new titles begin at $60, while the price of previously owned games averages closer to $20.

Still, Microsoft is playing with fire here.

How to be worst
For a preview of what might go wrong, look at what happened to Electronic Arts (NASDAQ: EA  ) recently. The game publisher chose to require Internet connections for players of the latest installment of its beloved SimCity game -- and created a firestorm of customer complaints in the process.

Players were incensed at the idea that they were being policed through a digital rights management scheme. EA promised that it was doing no such thing, but users didn't buy it. Those complaints helped in getting EA voted "Worst Company in America" last month.

Does Microsoft want to go down that path, even just a little?

Save it for the next-gen
There's no doubt that the industry is moving toward digital and cloud-based gaming. There probably won't be retail video game discs in the next next-generation consoles. But as tens of millions of Americans still don't subscribe to broadband Internet, we're not at that digital nirvana just yet.

Sure, Microsoft might capture a bit more profit from retailers like GameStop by tightening control over its physical games to match the prevailing rules on digital product sales. But it risks hurting the consumer experience, and creating a gamer backlash at the same time. That's a poor trade that I think Microsoft should pass on.

Level up
While Activision and Microsoft have been taking the headlines when it comes to console gaming, investors following the gaming sector would do well to also keep tabs on Electronic Arts. We can help. The Motley Fool's special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.


Read/Post Comments (18) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On May 26, 2013, at 5:23 PM, brutalsun wrote:

    Let me put it into perspective.

    You buy a brand new car and pay it off. The money was payed to the manufacturer by the bank and you re-payed the bank.

    Now, let's say you purchase a used car from my neighbor. It's been payed of previously, but still holds value. Your only agreement is to pay with the bank (loan). What Microsoft is doing would be the equivalent of GM trying to take a 1/3 of the cost of a used car sale even though they have no right to the car anymore (as it was already purchased by first owner).

    It's a shameful practice, Punishing people for purchasing used games or even borrowing those games from friends is utter lunacy and whoever thought this was a good idea should be taken out behind the wood shed and beaten.

  • Report this Comment On May 26, 2013, at 6:28 PM, Petronilus wrote:

    Microsoft is just doing what others are already doing when it comes to apps sales in the cloud. I can't copy my Apple apps from my iPad or iPhone and sell them to my friends. It has been like that from the beginning in the Apple store and I don't hear anyone screaming.

    Now Xbox games are usually far more expensive and there is already a tradition in the gaming console market of owning the game as a piece of hardware. This started back in the days where a console game was an actual piece of memory cartridge.

    However, since games will not reside on hardware media in the future, there will be no need for a physical shop to sell games. Even Microsoft can technically allow a transfer of ownership with some means of business model, it's a transaction that eventually can be done between three parties: The original owner, the new owner and the online license managing service (e.g. Microsoft). There will be no need for any other middle-man selling used games in a store.

    My hope is that companies selling games like GameStop are smart enough to find a business model in the new world post physical game distribution, perhaps more focused on selling the hardware incl. Xbox, Playstation, Nintendo, Ouya and perhaps even making some solutions and accessories under their own brand. Another thing is that Microsoft's attempt to make convergence with Blu-Ray and Set Top Box integrated makes them an all-in-one supplier that needs new sorts of sales, support and service. Perhaps GameLoft should partner on more than just the gaming side. There are Time Warner, Cox Cable, Verizon etc. stores around, so why not stores supporting Microsoft's "complete convergence of entertainment for the living room"?

  • Report this Comment On May 26, 2013, at 6:37 PM, jqt1954 wrote:

    Microsoft Xbox is making a excellent revenue marketing move. And it will work and be effective

  • Report this Comment On May 26, 2013, at 7:12 PM, BobDabuilda wrote:

    Frankly I am glad gamestop is going to lose revenue. Buy a brand new game and after 5 months bring it back and all they can give me is 5bucks store credit...really? Then have the nerve to resell it at market value. You have better luck reselling your games on ebay. At least you'll have a better chance getting half back from what you paid. Now as for the rumors or even plans that console will crack on used games. I give it three months from the worldwide sale the system gets cracked and players are allow to play used games without this "check" the console system will do.

  • Report this Comment On May 26, 2013, at 8:12 PM, JoeLemon wrote:

    I don't see what the big deal is on used games. Gamestop sells them $5 cheaper then new. And used games do not average $20 unless they are old, the thing about games is 6 months after release they are half the price of new. But gamestop only carry's used games unless they are brand new.

  • Report this Comment On May 26, 2013, at 8:13 PM, BorisAardvark wrote:

    I don't buy only digital games I want a hard copy that I own free and clear and have rights to sell and trade as I choose. If the company can not do that I wont buy the game or system.It could be the end of an era for me but these things do happen perhaps i'll take up a different hobby.

  • Report this Comment On May 26, 2013, at 8:59 PM, rsg003 wrote:

    I cant believe that he is comparing Sim City and "Real Gamers" in the same sentence...lol

  • Report this Comment On May 26, 2013, at 9:11 PM, JoeLemon wrote:

    I meant to say that Gamestop doesn't carry new games unless it was just released. It is why people think used games as cheaper. It isn't that they are used it is that they are old.

  • Report this Comment On May 26, 2013, at 9:41 PM, Jjennings1990 wrote:

    I am a massive game fan and am actually a video game programmer myself so being a typical gamer and having watched the trends from merely a perspective of loving the industry has given me at least a little insight in purchasing practices in cases like this.

    I think the most important thing for investors to watch with the xbox one now is that it comes out with an extremely strong launch videogame line up or else those first months will be grueling.

    MS is posturing the device as all you will need in your living room but in a world where the xbox one is just trying to do everything tablets / laptops have been doing for years that is not the smart stance to take. Especially since the xbox one lacks portability which is important in today's get up and go society being confined to do things in one place after an elaborate set up is a minus not a plus.

    From a game standpoint no used games means the xbox one launch will look like the wii-us until games come out due to there being no back catalog, the xbox one just forced itself to start new and if it doesn't launch with GTA V or really an exclusive that pushes boundaries why would gamers drop 500 to make their current console redundant and chances are as usual early launch titles will be on the 360 and ps3 too. Where they CAN be bought used.

    I get that MS is trying to make the xbox into more than just a gaming device but as of now they are also making it not excel at the one area it has that differentiates it from mobile devices that being AAA games. I wouldn't invest because there is nothing about this console that screams it is an evolution or must have for new consumer experiences but lets see how the launch plays out

  • Report this Comment On May 26, 2013, at 11:06 PM, Efernal wrote:

    Comparing a $1 app to a $60 game is crazy talk. You paid 1 dollar for an app that is in digital form and locked to you account. You knew this when buying it and it has been this way since the tech was introduced.

    Video games have come in 2 forms console and PC. On the pc you knew that you had one code to play the game and to get updates you needed to register that code. That started around the time windows 95 was around.

    Consoles on the other hand were around since the 70's. People have grown used to the fact that they could sell or lend out a game without the need for a code or any form of account restrictions. Unlike a pc though you couldn't add mods to the game like you could with the pc version.

    You can get an expanded version of a game (Fable: the lost chapters) on the first xbox. And you can get DLC with the Xbox 360. You cant however get custom mods to add content that is not supported buy either the developers or publishers on a console.

    There are many Tradeoffs but a $1 dollar app that you knowingly bought with the restrictions that come with it is your problem. Knowing the restrictions that will come with used games on the new Xbox means many people wont buy the system and boycott those publishers that create a pay-wall on other systems.

    And when was last time a $1 app came in a dvd case with a booklet (user manual), map, poster, ads for other apps? If I buy something I can hold in my hands why shouldn't I be able to resell it? The Publisher gets all their profits from selling the games to retailers. If they think they are loosing a sale to a used game then maybe they need to lower their price to meet the price threshold of what a good used game goes for and mint more copy's for sale.

    IE price it right and everyone will buy it new when it comes out. Used games are around because people cant afford to keep on buying new games at $60 a pop. If I got to pick and choose I will buy many that are a little used and abused in order to get more bang for my buck.

    And how many apps did you buy that you said, " Well, That was a dollar or 2 wasted"? Guess what it happens with video games as well. The only difference is that with a game you can trade it in on a another new game that you might like and enjoy.

    Some people want to buy a used game cheap to see if they like it. And in some cases they will follow that game series and buy every one that comes out afterwards new. App makers are hoping that people will spread the word about their app to make money. Used games are basically free advertising in a game store that publishers don't have to pay for.

    Gamestop (as evil and greedy as they are) Could simply refuse to sell the console, games and accessories for it. Other retailers could follow suit. After all how many consoles does walmart, target, ect think they are going to sell if the biggest retailer of used games wont deal that that company. In essence they would be trying to sell a product that is useless out of the box and it doesn't want to fill it shelves with games that wont sell.

    Enjoy you $1 dollar digital dog chain.

  • Report this Comment On May 27, 2013, at 12:20 AM, MsLessa wrote:

    Let us also not forget that be able to play these games and to transfer the title rights like they are talking about takes an internet connection. I live in a very rural area, internet availability is limited and spotty.

    Using the model they are currently planning on implementing would require my Xbox to be live 24/7 and that's just not always an option for a lot of people. Internet connections may not be available or affordable to all Xbox users.

    Plus the ability to buy and sell used games is great when you have casual gamers in the household. I'm more willing to pick up a $15-$20 used game for my kids to fool around on than to shell out $60 for a game they may or may not like and then we're stuck with.

  • Report this Comment On May 27, 2013, at 3:20 AM, cubbiesfan50 wrote:

    Does anyone remember when all the tech companies were trying to be like microsoft? Now they're all trying to be like apple. Microsoft should just stick to open-source the way it was in the beginning. It's a dichotomous relationship between apple and microsoft and are now trying to turn it into a monolithic idea where privacy concerns, software, and the open-source ethos is swept under the rug. Neither companies are that good(ethically), but microsoft is shooting itself in the foot with this orwellian device (it has the capability to monitor citizens).

  • Report this Comment On May 27, 2013, at 5:53 AM, Richard233 wrote:

    This might be a good time to buy and Xbox,

    but the 360 not the new one. I see no reason to

    ever purchase a "license" rather than a game I

    can buy/sell/trade/loan/give away as I choose.

    This is the same problem I have with ebooks.

    Now if you make it significantly cheaper, that's

    a different story, you are just baking in what you

    are taking from me as part of the social contract.

    But, that's NOT what they are doing, so F-it.

    Eventually some congressman will run on a

    campaign to restore ownership rights to those

    people who have bought digital media, and they

    will win in a landslide.

  • Report this Comment On May 27, 2013, at 8:19 AM, ezmink wrote:

    As a loyal Xbox gamer since 2001 I feel the need to weigh in. I have 3 xbox 360's for myself and my children. I refuse to buy a system that has restrictions on used games. I'm supposed to buy multiple copies or pay multiple fees so we can all play the games we own? I think not. I am on a lot of gaming websites and I can tell everyone here this will lead to a massive gamer backlash. I will not be buying a new xbox. I will take my $1500 dollars for 3 systems and give it to Sony for the PS4's. This will hurt Microsoft and I say good. I am boycotting anything Microsoft from not on. I will switch to Apple for my next desktop also.

  • Report this Comment On May 27, 2013, at 9:43 AM, sd3614 wrote:

    Hmmmm I have always thought game stores screwed people on used games. So A+ on a change to that model. If you think about it MS IS CUTTING OUT THE MIDDLE MAN. I can give a person $10, MS $10 and get a game. We all win. This model is just copying STEAM pc gaming model. Not innovating, just copying.

  • Report this Comment On May 27, 2013, at 9:43 AM, Computerworgen wrote:

    What the Fools at Microsoft don't understand is that Many gamers use the sale of their old games to help buy new games. In their effort to destroy the Used game Market will cost them new game Sales as those who can't sell their old games, wont be able to buy as many new ones.

    Petronilus: Comparing a Cloud based AP you got for $1 against a $50+ Game shows that you are one of those foolish Apple Users who lacks a clue.

  • Report this Comment On May 27, 2013, at 11:34 AM, wgcross2 wrote:

    I'm not a gamer, my son is, however I want to weigh in on this 'cloud' nonsense. This attempt by many in the industry to force users (PCs, Laptops, and Consoles) to use the cloud and have to be tethered to the internet constantly, has got to stop. I have internet access and have wireless capabilities too. However, when I'm traveling with my laptop, I want , need and demand, all my software and data be local. I don't live and die for email. Any data I need to bring or bring back will easily fit on a memory stick. I want true mobility. When I stick in a DVD to watch, I DO NOT want to interact with the cloud. I'm not the least bit interested in streaming video on a phone or pad/tablet. Both are over-rated overpriced toys. I'm sure my son would prefer to plug in his game disk and be off and running without this other nonsense. And for years, we've leveraged the used game market.

    All that being said. Whether you're hardwired to the internet or stuck with a WiFi connection, upload speeds remain dismal. This alone is a non-starter. Plus with the cloud, there are always security, privacy and accessibility concerns. Using the cloud has niche application only. Backups, don't think so. Office 360, yeah right. Adobe, bye bye. DVD's, nope. The cloud is nothing more than another way to affect the bottom line and increase revenues. I suppose if you have to own a pad/tablet, you're inevitably stuck with the cloud.

    MS is really angering people across the board. Windows 8, touch screen emphasis, Office 360 and now their new console. I predict a backlash and what Ballmer, who remains clueless, fails to see is that there are viable alternatives to MS. Businesses, professionals and power users are already exploring the alternatives.

  • Report this Comment On May 27, 2013, at 12:40 PM, techy46 wrote:

    MS isn't going to take a cut on resale from original owner but they are going to take a cut from resellers like GME an d they are going to disable the orginal owners unwarranted rights to use the game if stored on cloud or local drive.

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