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Microsoft Is Reportedly Planning to Launch a Disc-Less Xbox One S

By Ashraf Eassa - Updated Apr 11, 2019 at 4:26PM

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Here's why the software giant might be doing so.

Over the course of the current Microsoft ( MSFT 0.98% ) Xbox One product cycle, the software giant has released multiple improvements and iterations. Following the launch of the original Xbox One, Microsoft launched the Xbox One S, which was slimmer and incorporated an updated, more efficient processor. Microsoft also released the Xbox One X, which was an even more powerful console thanks to a redesigned and much more capable processor. The Xbox One S and Xbox One X co-exist in the market. 

Now, according to Windows Central, Microsoft is planning yet another variant of the Xbox One S -- this time without support for physical discs.

Here's why Microsoft may want to give such a product a shot.

A wall with an Xbox logo on it.

Image source: Microsoft.

Cost-cutting and better reliability

Building in support for spinning discs in a game console does two things from the maker's point of view. First, it adds cost because the hardware required to read a game disc doesn't come for free. Second, it introduces another potential point of failure. 

A disc-less Xbox One S would likely be both cheaper to manufacture and less prone to failure. 

Such a product isn't likely to be salable at the same prices that the Xbox One S commands today -- nobody is going to want to pay the same for fewer features. Moreover, while Microsoft does generate revenue from console sales, the real money that Microsoft makes is from what comes after the console sale, such as revenue from game sales, service subscriptions, and so on. 

It's in Microsoft's best interest, then, to broaden its Xbox player installed base as much as it possibly can. 

By offering a disc-less Xbox One S -- presumably in markets where broadband internet connections are ubiquitous -- Microsoft should be able to offer a lower-cost console option to try to get more gamers into the ecosystem. 

Check out the latest earnings call transcript for Microsoft.

The game industry has gone (mostly) digital

A key reason that such a console might be viable in the market is that the game industry has already shifted significantly toward digital content sales -- and game publishers have significant incentive to do the same.

Electronic Arts (NASDAQ: EA) -- a major game publisher that generates about 70% of its revenue from sales of games for game console platforms -- has seen its gross margin rise significantly as a result of the shift from packaged goods to digital distribution.

After all, the cost of goods sold (COGS) associated with a digital download is far lower than that of a physical game that needs to be put on a disc (or multiple discs), put in an aesthetically pleasing package, and shipped to a reseller (an entity that's going to take its own cut, too) before it makes it into the hands of consumers.

Additionally, a shift to digital distribution will inevitably kill the used game market, meaning that gamers will have only one option if they want to play a digitally distributed game -- to buy it directly from the publisher. 

Moreover, about 74% of game publishers' revenue this year is expected to come from digital distribution.

A disc-less Xbox One S seems like a product that should both benefit Microsoft in the here and now while also accelerating the arrival of a disc-less future for the game console industry -- music to the ears of game publishers. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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