Microsoft Pulls a Dramatic 180

It's safe to say that Microsoft's (NASDAQ: MSFT  ) next-generation Xbox One game console has gotten off to a bad start.

Many gamers slammed the console for its restrictive policies. They cited its digital rights management system that requires users to check in online once every 24 hours or else the console shuts down, its lack of freedom over trading or lending used games, and other policies. Microsoft tried to counter at last week's E3 conference with a slate of high-profile future games for the Xbox One, but the furor over the console drowned out anything else. Competitor Sony (NYSE: SNE  ) was all too happy to capitalize at E3, pointing out how its next-gen PlayStation 4 won't require an "always-online" connection and will support the trading and resale of used games.

After E3, momentum largely shifted to Sony, with Microsoft struggling to fend off the intensifying criticism over the new Xbox. Yesterday, Microsoft gave in and offered consumers an olive branch.

Giving in to what consumers want
Microsoft announced on the official Xbox website that the company will drop several of the major hot-button policies that so riled up consumers. According to Microsoft, the Xbox One will no longer require an Internet connection to play games offline. The console will still require gamers to log on to the Internet while setting up the device, but after that, no more checking in every 24 hours for offline play.

In a huge boon for the used games market, Microsoft also reversed course on its previously draconian used games policy. Microsoft originally planned to restrict the sale or trading of game discs, a major issue that won points for Sony when it made sure to support used games during E3. Yesterday, Microsoft stated that disc-based games won't have any new restrictions. The market for used Xbox One discs "will work just as it does today on Xbox 360."

Digitally downloaded titles will still be restricted -- but that's no new revelation to the industry -- and digital titles will also be available to play offline without any checking in. Microsoft also pulled back its regional restrictions, where games and devices had once been locked depending on location.

Microsoft had to make a move after watching consumers and analysts rally around Sony's PS4 after E3, particularly after GameStop (NYSE: GME  ) representatives claimed that PS4 pre-orders were sharply outpacing those of the Xbox One. No digital rights management restriction is worth lost sales, and Microsoft couldn't afford to let Sony get an early lead in the next-generation console battle before either device even launched.

Some of the damage to the Xbox One's reputation can't be undone, and the device still has a few issues that consumers don't like, such as its requirement to have Microsoft's Kinect motion-capture device connected. Still, Microsoft's admission that its previous policies had upset consumers may have averted disastrous sales for the console. Sony's still riding its wave of optimism after E3, but Microsoft's top gaming competitor won't be able to rely on its consumer-friendly policies alone now to cement the PS4's future market leadership. The race for next-generation console leadership just got a lot closer.

The real winner from this revelation isn't Microsoft or Sony, however. GameStop's future is twice as bright after Microsoft's about-face. While GameStop's tried to diversify its sales away from used games, this market still makes up a significant portion of the retailer's revenue, with pre-owned video game products contributing more than 21% of the company's total sales last year. A future without the Xbox One's original heavy-handed used games restrictions is one where GameStop investors can breathe a whole lot easier. The relief was plain late Wednesday, as GameStop's stock shot up by 6% in after-hours trading.

Microsoft does the right thing
Microsoft's battle with Sony for next-gen sales is only just beginning, but yesterday's announcement is a major step in the right direction for the Xbox's future. Microsoft may have admitted defeat over its planned policies for the console, but the company and investors have avoided a potentially far more devastating defeat in what really matters: sales.

The Xbox One announcement is a spot of optimism in what'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.

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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 20, 2013, at 11:53 AM, VegasSmitty wrote:

    Microsoft giving the consumer what they want, unlike Apple.

  • Report this Comment On June 20, 2013, at 12:27 PM, lenniecrout wrote:

    Microsoft listening to the online complainers, thanks complainers, no multiple xbox one family plans, no ability to share my digital downloads. I was actually looking forward to the new changes, Microsoft was trying to move us OUT of the old, seeing the Digital Download is the new, and now its also the old. Thanks Online Complainers. I wish people could have seen past such small issues. (I know this its a "big" thing to most, yet in three years when 90%+ of all games are bought digital download and your forced to keep them. Don't cry to me, I am sure a "Azure Digital Seller" was being made so you could sell your digital games, yet pretty sure that is gone.

  • Report this Comment On June 20, 2013, at 12:42 PM, kellenbmiller wrote:

    I get the 180 on Microsoft's but what I don't get is the 180 from investors. They are immature to give in to the short sellers and sell. It seems that any misstep on Microsoft's part and they run for the hills. As if trying to save themselves from a tsunami. Or maybe it is just greed. I don't know. But it is becoming or has been a manipulated stock. From my point of view. It is too easily downgraded. The analysts are flip floppy over what is more like waves than an all out drought on the shores. I don't know.

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