They're shoveling more dirt on GameStop (NYSE:GME), but this time it's not the retailer's fault.
The small-box seller of video games and gear is stumbling after a renewed report suggesting that Microsoft's (NASDAQ:MSFT) new Xbox will not support used software titles. GameStop's shares fell as much as 11% this morning, and rightfully so. If there is no longer a market for secondhand games, the retailer will miss out on its most profitable business of buying back old releases for a pittance and reselling them at juicy markups.
Edge -- a U.K. magazine and website for die-hard gamers -- reports that the next generation of Xbox consoles will require activation codes on software installations that can only be used once. Since the state-of-the-art system also reportedly requires continuous online connectivity, there's no legal way to circumvent this safeguard.
This isn't a new story. Gaming enthusiast website Kotaku reported the same thing last summer.
"I've heard from one reliable industry source that Microsoft intends to incorporate some sort of anti-used game system as part of their so-called Xbox 720," Kotaku's Stephen Totilo wrote at the time.
Well, more details are starting to come out on the anti-used game protection, and it's not going to be pretty for GameStop. The shift to digital delivery was already making the strip mall staple scarce, drying up the supply for new releases. GameStop has hosed down its same-store sales guidance four times over the past year. Now it's getting hit with what will be a problem with the supply for old releases, too.
It's not just GameStop that's going to be hurting with this move, though.
Does Microsoft really think it can get away with this? Edge's report claims that Microsoft is finally following rival Sony (NYSE:SNE) into supporting Blu-ray as its optical disc platform of choice. The new system discs will have as much as 50 gigabytes of capacity, so the potential for these immersive environments to blow players away is huge.
However, does Microsoft really expect gamers to pay $60 for a game that can't be traded in or passed over to a friend when complete? Has Microsoft gotten that cocky? Yes, it's been the leading console maker in this country for two years, but this is a shrinking pie. Nintendo (NASDAQOTH:NTDOY) thought it would raise the bar when it introduced the Wii U in November. It has sold just 3.06 million Wii U units. Nintendo last week slashed its Wii U target for its fiscal year ending in March from 5.5 million to just 4 million units.
If gamers aren't buying systems that still offer secondhand value in the titles, how is Microsoft going to convince players that they should upgrade? The early adopters will storm in blindly. They always do. However, the more sensible mainstream gamers will have every reason to be apprehensive. Microsoft is gambling with something that will cost more than GameStop's highest-margin business.