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.
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.