A Contrarian View of The Xbox DRM Debacle

Microsoft recently unveiled policies and procedures designed to link games directly with individual user accounts, rather than linking them to physical disc media.  According to Gizmodo’s Kyle Wagner, the vision could be summarized as follows:

  • Every game purchased would be tied to a customer account. This would eliminate current-gen problems like buying a disc, and then being unable to store it or download it from the cloud.
  • Because every single game, physical or digital, would be tied to an account, publishers could create a hub to sell and resell the games digitally. L
  • Because reselling games would now work through a hub, publishers could make money on resold games.
  • New games could then be cheaper.  Publishers understand that they will not make money on resold games, so they charge the first buyer a premium.  In other words, the first buyer subsidizes future buyers. In theory, this would hold prices down.
  • Customers would also receive a better return on “used” games, whose licenses would not have to be resold at a diminished rate.

The goal is to introduce a mechanic similar to Blizzard Activision’s subscription game World of Warcraft.  The player pays a fee, installs a game linked to an account, and is limited in playtime only by the number of hours in a day.   The xbox system then “checks in” every 24 hours to make sure your local library of games is updated with purchases.  As you might imagine, customers responded enthusiastically.

Come Forth, Reddit

No, not really.  They actually responded like this:

Screen Shot 2013-06-20 at 2.32.08 AM

All this has also been a source of truly inspired comedy:

xboxbrick

The White Flag of Surrender

Microsoft quickly rescinded the new DRM policies, returning to a policy of linking game purchases to the possession of physical disc media.  The update can be summarized in three bullet points:  

  • An internet connection will not be required to play offline Xbox One games.
  • Players may trade-in, lend, resell, gift, and rent disc based games.
  • Players may download games from Xbox Live on day of release.

Before we can understand what’s driving Microsoft’s behavior, we first need to understand the state of digital entertainment.  Consider this blog post part crisis response for digital media publishers, and part primer on the state of digital entertainment economics.

The Roots of Microsoft – Retailer Discord

First, let’s look at revenue breakdowns by party involved when a new title is sold to an enthusiastic gamer.  Here’s the breakdown:

game-pie

If we run a bit of napkin-math on a typical 50% profit margin for resold games, with a game sold on average 3 times over, here’s what the respective revenue breakdowns look like:

Screen Shot 2013-06-20 at 3.32.47 AM

Pie charts like that above invariably lead to some serious finger pointing.  Microsoft  points the finger at second hand markets to account for inflated game title prices.  For it’s part, GameStop argues that used games are an essential currency accounting for a 17% of industry revenues.

Regardless, the point is that Microsoft isn’t trying to dismantle the secondary market – they’re trying to control it.  In other words, Microsoft is attempting to reorganize the secondary market under a Xbox digital marketplace, rather than allow a middleman pumping out questionable customer satisfaction stats to organize and profit from it.

We’ve Been Here Before:

Microsoft’s response has been basically by-the-book response to the PR crisis, including video responses from the  Director of Programming via Youtube to critics:

What they haven’t done (yet) is consider how fluid customer perspectives can be. Valve’s Steam game distribution platform for PCs was widely dismissed as “destructive” just a few years ago.  Just as Microsoft today is referred derisively as Micro$oft, Steam was once $team. Today, Steam is the dominant player in PC game distribution, and is looking to steal the console market right right from beneath Microsoft and Sony.  They’ve succeeded by effective evangelism supported with obsessive customer-product value alignment.

The Solution is to Leverage Choice 

“Companies need to enable and profit from the collaborative economy, rather than fight it”.  It sounds great in an ivy league, MBA sort-of-way, but how to companies enable and profit from a market dynamic siphoning their profits?

The answer lies in giving customers a clear, unequivocal choice over what they value most.

How to Execute on the Vision

Customers are not a homogeneous mass of protoplasm.  Valve realized many hardcore gamers value frictionless game access over resale value, and obsessively broke down every ounce of play friction.  Valve’s steam simplifies payment, enables social sharing, and allows gamers rapid recovery of all purchased games in case of hardware replacement.   New hardware?  Playing on a work computer? No problem, just log in and effortlessly download games you’ve paid for.  Not everyone buys into the Steam platform.  For those customers who place a greater value on physical media ownership rights, Valve also releases games on physical media.

It’s a win-win.  Customers have freedom of choice (and tradeoffs to make), and Valve doesn’t alienate the retail channel.

The retail channel we’re talking about here.

Nintendo’s e-shop approach is tactically different, but strategically the same: they’ve offered customers a choice (and tradeoffs) based on what they value most. Nintendo is offering customers a direct digital download of the highly anticipated Super Luigi U on June 20th, 2013. That’s a full month before brick-and-mortar retail availability on August 29th 2013.  In doing so, Nintendo is aligning to two distinct markets:

1) Hardcore Mario Bros fans – this client segment isn’t interested in resale value, because they’re not interested in resale. These customers value early access and membership in a community of early adopters.

2) Casual players – this segment is similar to the paperback book buyer. They’re not interested in ownership, but rather in minimizing out-of-pocket cost (vis discount or resale) for a premium experience.

Each segment is getting exactly what it values the most, and everyone (most of all Nintendo) wins. Despite Microsoft’s policy rollback, expect Microsoft to experiment with both the Valve and Nintendo e-shop models as the Xbox One matures.

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This entry was published on June 20, 2013 at 3:38 AM. It’s filed under Uncategorized and tagged , , . Bookmark the permalink. Follow any comments here with the RSS feed for this post.

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