Sony Has Microsoft's Xbox One in Its Crosshairs

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On Monday night, Sony (NYSE: SNE  ) held a major event to show off its new PlayStation 4 game console before the E3 gaming conference officially kicked off on Tuesday. It's clear from the event that Sony is going for the jugular in its battle with console rivals Nintendo and Microsoft (NASDAQ: MSFT  ) .

Nintendo has already been struggling with poor sales of its new Wii U console, which was released last fall, and Microsoft is facing a backlash from fans over its use of digital rights management technology. With its announcement on Monday, Sony undercut the Xbox One's price by $100 while emphasizing that the PS4 will not incorporate new DRM restrictions. With these two moves, Sony has positioned itself to become the clear winner in this generation of video game consoles. Meanwhile, Microsoft finds itself on the defensive, as it needs to justify both draconian DRM restrictions and a high price tag.

Battle of the consoles
Last month, after Microsoft revealed the Xbox One -- the successor to its highly successful Xbox 360 game console -- many gamers were outraged by the implementation of digital rights management for the new console. While very few details were given, it was clear that users would not be able to freely trade or resell used games.

As the uproar about Xbox One's DRM policies grew, Sony was suspiciously quiet. The company had revealed its PlayStation 4 console back in February, but had provided even fewer details than Microsoft. This led many to believe that PS4 would also incorporate DRM, causing fans to launch a social media campaign encouraging Sony not to do so.

Last week, Microsoft finally clarified its DRM policy for Xbox One. Xbox One consoles will need to connect to the Internet at least once a day for games to work, and users will be able to trade in or lend out games only if the publisher consents. While Microsoft will apparently allow trade-ins for its first-party games, other developers could potentially choose to disallow any sort of used market for their games. As one commenter put it, the DRM policies are "just as bad as we expected."

The new DRM policy could also be bad for GameStop's (NYSE: GME  ) business model, which relies heavily on trade-ins; used games offer high resale margins and also put cash in the hands of customers to buy more games at GameStop. However, the impact on Xbox One sales was clearly going to depend on whether Sony adopted the same restrictions. If Xbox One and PS4 had similar DRM policies, plenty of gamers would have given in and accepted the restrictions. For GameStop, not all is lost... yet.

PS4 to the rescue
That's where Sony comes back into the equation. As it turns out, Sony never intended to use DRM but decided not to rebut last month's rumors in order to build suspense. This allowed it to deliver a potential knockout punch with its "no DRM" announcement on Monday. Sony made sure to take a swipe at Microsoft's confusing DRM policy whenever possible in order to build loyalty to the PlayStation platform. This included a big slide emphasizing user freedom. PS4 users who buy a game will have four options: "trade in games at retail, sell it to another person, lend it to a friend, or keep it forever."

Moreover, both Microsoft and Sony came out with starting prices this week. While Microsoft announced a surprisingly high price of $499 for the Xbox One, Sony is starting PS4 pricing at $399 (pricing outside the U.S. is similar). With this move, Sony solidified PS4's position as the console to beat for this generation. Wii U sales have been disappointing so far, and Sony has now undercut Microsoft on price while providing significantly more customer friendly policies (the PS4 device specs are also slightly higher than Xbox One's). For most hardcore gamers -- but also for many casual users -- PS4 looks like the obvious choice right now.

Foolish conclusion
Sony's double announcement -- that PS4 would not incorporate DRM and would be priced $100 below the Xbox One -- has crippled Xbox One's momentum. While Xbox is not a major contributor to Microsoft's profitability, the company has been hoping to use it as a platform to win the "battle of the living room." However, the Xbox One's new TV-oriented features will not matter much if most people buy a PS4 instead!

For Microsoft, this is just another blow to a company that has probably seen its best days. Xbox has been one of the few bright spots for the company, as Bing has never become a money-maker like Google's search engine, and the Windows platform has been undercut by the mobile revolution. Unfortunately, it looks like Xbox may not provide the growth that Microsoft investors are hoping for, either.

It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In a new premium report on Microsoft, a Motley Fool analyst explains that while the opportunity is huge, so are the challenges. The report includes regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

Read/Post Comments (21) | Recommend This Article (2)

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 June 12, 2013, at 10:35 AM, LucifersHammer wrote:

    Microsoft needs to fire everyone in their marketing department immediately! It also appears that some room needs to be made in their R&D as well.

    They have consistently over the last few years made the most arrogant, stubborn, and boneheaded decisions while continually thumbing their collective noses at the people who make them money. Namely: the consumer!

  • Report this Comment On June 12, 2013, at 10:37 AM, Gamer1977 wrote:

    Xbox has already said if you want offline capabilities get the Xbox 360. If that is a spit in the face to its consumers I don't know what is.

  • Report this Comment On June 12, 2013, at 11:07 AM, ltlgrnfroggy wrote:

    mmmmm....did no one see Sony's interview yesterday. They have the same policy for DRM as xbox one (they are leaving it up to the game makers). The only difference is that xbox has a way to work with it. I point you to this link:

    Add to that the problem with places like Game Stop, who are just holding on by the skin of their teeth now, and will most likely not be in business in the next 5 years. (think about it, if you had the choice of digitally getting a game or going to the store and picking it up, which will be your choice). Add that to the fact that you get your used games on xbox, how can game stop stay in business, when they have no trade-in stock or new xbox game sales? That is half their income gone. That is why books stores are going out of business/closing stores due to things like the kindle and nook, think boarders people. It is the same thing. So where are you going to get your used games from?

    And the people having a fit about the internet. there is only a small percentage of people who don't have high speed internet (the only people who have the right to complain are our soldiers). Which you have to have to play multiplayer on the PS4, and if you have it, who unplugs it and plugs it in every time you play. And if you are worried about the government then trash your phones people bc they can gps track you all day long and every time you take a pic your phone saves the gps location of when and where to took the pic. Hello people there is something call the Patriot Act.

    In the end it comes down to the games. Do you like the games produced by PS4 or Xbox 1. Yes, the xbox 1 in $100 more. But there is always the possibility that the xbox 1 games would be cheaper because it is digital (think the PC games), and if that is the case then you can make up the difference between the two in no time.

  • Report this Comment On June 12, 2013, at 11:08 AM, Vincent911 wrote:

    Bulls get fed. Bears get fed. Pigs get slaughtered. Microsoft has gotten piggish with use restrictions and will pay the price.

  • Report this Comment On June 12, 2013, at 11:14 AM, josh995 wrote:

    ltlgrnfroggy - You are not telling the whole story, which is typical for a fanboy.

    Microsoft requires you to be xbox live friends with someone for 30 days before you can sell/give/trade games with them.

    Also, that game you give/sell/trade them, and the game they give/sell/trade you can only be given/sold/traded ONE TIME.

    Sony has no such policy with the PS4.

  • Report this Comment On June 12, 2013, at 11:18 AM, hendricks1 wrote:

    I believe ill just stick with my Xbox 360 and my PS3, but if i have to pick one i guess it will be the PS4. Im torn between the 2 but after reading the comments above i still dont know what to do.

  • Report this Comment On June 12, 2013, at 11:20 AM, hendricks1 wrote:

    ok josh995 just made my decision for me it is PS4

  • Report this Comment On June 12, 2013, at 11:23 AM, Wingeddamnation wrote:

    If DRM was affecting Microsoft from the get go, I'm sure Sony would have let us know their publishers were messing with them too. Since I don't see any problems so far, I'm guessing it's just Microsoft getting shafted? I don't believe it's a publishers absolute fault for all this nonsense. MS is just throwing the blame game.

  • Report this Comment On June 12, 2013, at 11:27 AM, ltlgrnfroggy wrote:

    Mr. Josh...How many people though trade games with friend vs trade them into places like Game Stop (thus only a one time deal anyway). I know almost no one.

    And as I said, I really think it will come down to the games produced. Do you like PS4 games or xbox 1 games better? Yes, PS4 will have more sales to began with, but if one does not like the games they are going to end up buying the xbox 1 anyways. I know many friends who had both the PS3 and 360 and the PS3 never got played bc of the games produced. I don't want to buy 2 systems to save $100 when I know that I like the xbox games better and will never play PS4 games.

    And, please don't always assume it is a boy writing these, that is kinda sexiest.

  • Report this Comment On June 12, 2013, at 11:29 AM, kihaju wrote:

    ltlgrnfroggy - obviously XBox fanboy

    If you reread the article YOU posted, Sony is allowing free trade of game discs. However, third party publishers of ONLINE games can still limit ONLINE use of their games - which is not a new concept. If you're a gamer you should be familiar with 'CD Keys' or 'Activation Keys' for online multiplayer.

  • Report this Comment On June 12, 2013, at 11:32 AM, kihaju wrote:

    fangirl...excuse me

  • Report this Comment On June 12, 2013, at 11:36 AM, whocares119 wrote:

    what i am still interested in is the price. it has already been stated some where that PS4 starts out at 399. To get the Sony Eye You have to pay an Addtional 60 Bucks. So already your looking at 459 for the PS4 and they didnt even state if the 399 is just for the basic or if that is for the whole package Xbox One 499 is for every thing. But still way to early to know for sure.

  • Report this Comment On June 12, 2013, at 11:42 AM, jagz5586 wrote:

    Froggy PS4 drm is the exact same policy as PS3 nothin is changing, x1 is changing and taking it too a whole other level.

  • Report this Comment On June 12, 2013, at 11:43 AM, lightningboy03 wrote:

    ltlgrnfroggy---Fanboy is a term to describe a person who in really into something like gaming. it does not mean that you are male. Look it up.

    Also thank you for your comment about the soldiers missing out on Xbox One. I am in the Air Force currently deployed overseas. we do not have internet that we can hook up to Xbox's or PSs so after years of waiting for the new Xbox I get to miss it

  • Report this Comment On June 12, 2013, at 11:44 AM, TJarrod wrote:

    I'd be fine with the DRM on the XBox even with the loss of the used games market if they could leverage that by getting the price point for new games back to the $40-$50 range instead of $60-$70.

  • Report this Comment On June 12, 2013, at 11:53 AM, lurch9081 wrote:

    i own both ps3 and i sold it i still got my 360 they had better games nevery had a proble with my 360 black slim with 250gb hard drive and kinect my ps3 i had to get it fix 3 times and herly every played it now to the games i dont care much for halo so eather systom will work for me halo make no sense i play it on line but story mode boards me ps4 if you got free live i love that part i thank mosoft should go with free live we pay top doller for new games why not give us a free live to play them and if i got to have live to play a xbox game count me to ps4 am not a sony fan i allways had xbox hate sony controlers i love the kinect on xbox 360 for sports game only

  • Report this Comment On June 12, 2013, at 11:56 AM, lurch9081 wrote:

    i thank i set back play my 360 for a while not no big hurry to by a new systom with a lot of problems wait at least 4 to 6 months so i can see what people say abouit the systoms i hate gettting a systom and a day later have a problem with it over heating or 3 rings of deth so i wait and see what you got too say befor i buy one and play it wall mart see for my self wich one i like the best

  • Report this Comment On June 12, 2013, at 11:56 AM, ltlgrnfroggy wrote:

    Thank you for serving lightningboy03. It seems as if you men/women are getting the short end of the stick for everything and it not right.

    As for Fanboy, I understand it, I still just don't like it.

  • Report this Comment On June 12, 2013, at 1:32 PM, josh995 wrote:

    ltlgrnfroggy - First, fanGIRL* Second, ARE YOU KIDDING? Sorry for caps, but I am totally surprised by your comment along the lines of "Who trades games with friends rather than Gamestop"

    Have you checked eBay, Craigslist, Bookoo, and all the other sites that let you sell things? And me personally, I can think of 10 people off the top of my head who I trade games with or let them borrow a game or they let me borrow a game, and some of them aren't my xbox live friends.

    Not to mention, Gamestop gives you like 25% of what you could sell a game for on Craigslist/eBay.

    Microsofts used games policy goes WAY beyond where it should. You should be able to let as many friends as you want borrow YOUR game that you paid money for.

    So would it be alright for Ford to say, "Ok, this car can only be sold once, and if you want to let your friend borrow it, you have to have known him/her for a certain amount of time. Oh, and we're going to check up on your every so often to make sure you are following our rules."

    NO! Microsofts new policy is VERY anti-consumer, and very much pro-corporation.

    This is why I am getting rid of my current xbox 360's, will not be buying xbox one, even though I have been a very loyal xbox customer for years now, and will NEVER buy a Microsoft product again. I am voting with my wallet!

    Congratulations, Microsoft. You just lost a customer with a very nice disposable income, young enough to spend money on gaming for many years to come. I'm sure I'm not the only one.

  • Report this Comment On June 12, 2013, at 2:06 PM, MarcusC69 wrote:

    Microsoft has been pretty vague regarding the fine details. One of the reasons people are so suspicious is due to the fact that. EA discontinued its controversial Online Pass just days before its significant role in the Xbox One announcement. The system allowed EA to profit from second-hand game sales using a form of DRM restricting multiplayer and online functionality without a specific EA code. If that code had already been used, another one would need to be purchased for around $10.

    So what is at stake here is a whole new policy. The gamer will no longer be able to own the games he or she buys. They will only be able to buy the rights to play it. If this is the case then Microsoft will suffer a backlash because of this and all the people that Sony lost due to forcing everyone to buy a blue ray player with a gaming system will be regained. Apparently Microsoft has not learned anything from Sony’s mistake.

    If this is not the case then everyone in Microsoft’s PR department should be fired! It is the lack of fine details that has me concerned. If I purchase a game over the internet and downloaded it then why is it essential that my system connects to the internet in order for the system itself to work? Why do you need to have the connect device hooked to the system in order for the system to work even though the game may not require it? And given Microsoft’s role with the controversial Prism program do we really trust Microsoft in keeping personal data secret? I know I don’t.

    This is not just about DRM restrictions. It is about a connect device photographing me recording me and keeping files on me so it can upload the content without my knowledge once a day to the internet! Whether or not this is the truth does not matter because this is the perception and if Microsoft does not deal with this then the Xbox one will fail. It does not matter what game selections exists.

    As far as third party DRM restrictions go, if a third party vendor wants to pursue such restrictions with the release of a new game on a disk it takes the risk of being boycotted from the gaming community. It will just take a few times of this happening before the practice is abandoned altogether. If you don’t think the gaming community is united enough to make this happen just look at what happened to the Playstation 3 when it forced blu ray and watch what is getting ready to happen to the new Xbox one.

    By the way one clue that marketing does not know what they are doing is the very fact that they call this the Xbox one! Hello….this will be the third Xbox!

  • Report this Comment On June 12, 2013, at 5:34 PM, TMFGemHunter wrote:

    Thanks for the comments everybody.


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