There’s a growing trend in video game development: always-on digital rights management (DRM). Intended to prevent piracy, always-on DRM requires players to maintain a constant connection to the Internet while playing video games.
Some of the biggest publishers, including Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ:EA) have used DRM in their flagship titles, while Microsoft Corporation (NASDAQ:MSFT) is widely rumored to be implementing such a system in its next Xbox console. Yet, the requirement of maintaining an Internet connection has alienated many consumers. Should investors be concerned?
Gamer backlash is widespread
As one might expect, always-on DRM has generated a degree of backlash in the gaming community. Game Informer is a monthly magazine devoted to all things video games. The first story in the May issue is dedicated to the controversial subject of DRM.
“Piracy is no small matter for publishers and developers, but neither is the goodwill of the game-buying public,” Matthew Kato writes. “DRM often solves one problem while creating others. Apart from the annoyances of having to rely on an online infrastructure that is not completely reliable even if you’re playing a single-player mode, there is also the larger question of what gamers actually own…What happens if Electronic Arts Inc. (NASDAQ:EA) decides to shut down SimCity servers or if the company closes its doors?”
Later, the magazine reviews EA’s recent SimCity title. Although Game Informer calls the first few hours of the game “wonderful” and praises the level of detail built into the title, it ultimately awards SimCity a poor score based mostly on DRM-related issues.
“Even though the servers run better now, I still experience delays ranging from 5 to 45 minutes when trying to share services or gifts with other cities in my region,” Joe Juba writes, “Given time, Maxis could clear up the problems with SimCity…[EA is] charging gamers for this [lackluster] experience right now. At this point in time, it just isn’t worth your money.”
EA’s struggles with DRM
In SimCity, players construct and manage their own cities. Due to the nature of its gameplay, most SimCity titles have been single-player games, requiring little interaction with the outside world.
But in this new SimCity, EA required the game to be played on its servers. Unfortunately, the servers were not adequate to keep up with the initial demand, leading to a buggy game with widespread connection issues.
Shortly after the SimCity debacle, Electronic Arts Inc. (NASDAQ:EA)’s then-CEO John Riccitiello stepped down. Over his tenure, EA’s stock was a terrible performer, down over 60% since he took the control.
Will the next Xbox require DRM?
Microsoft Corporation (NASDAQ:MSFT) has yet to unveil its next Xbox console, but the video game player is widely expected to debut this year. A persistent rumor has claimed that the new Xbox will require a constant connection to the Internet.
Given that the architecture of next-generation consoles is becoming more PC-like, employing PC anti-piracy tactics like DRM would make sense. But that won’t stop gamers from being upset about it.
Microsoft Corporation (NASDAQ:MSFT)’s creative director Adam Orthy took to twitter to criticize the opposition to DRM. In a tweet from early April, Orthy stated that he didn’t “get the drama.” Of course, that wasn’t what gamers wanted to hear.
Microsoft later apologized for Othy’s tweets. Soon after, Orthy left the company.
Microsoft is a huge business, with tentacles in all forms of computing. But as PCs decline in popularity, and Windows 8 fails to attract the attention of mobile users, the Xbox business will become increasingly important. If Microsoft Corporation (NASDAQ:MSFT) does decide to go with DRM for its next console, consumer opposition could lead to tepid sales.
A vocal minority
However, in truth, the opposition to DRM may just be the cries of a small, yet extremely vocal, minority. Despite its early failings, SimCity has sold exceptionally well — surpassing over 1.1 million sales in the first two weeks.
Activision Blizzard, Inc. (NASDAQ:ATVI)’s Diablo III was plagued by similar (though not nearly as severe) issues following its release. The game went on to be a mega-hit, setting an early sales record, and ultimately selling over 10 million copies.
In fact, most of Activision’s biggest games derive their value from the Internet. World of Warcraft, for example, is a massively-multiplayer online game, and exists only on the company’s servers. Despite this, the game has been a cash-cow for Activision since it acquired Blizzard in 2007, with its nearly 10 million subscribers forking over a monthly fee around $15.
Its Call of Duty franchise, too, is largely an online multi-player phenomenon. Although the game has an offline single-player mode, the online multi-player keeps the franchise’s fans buying the latest edition every year.
Electronic Arts Inc. (NASDAQ:EA)’s struggles with DRM might be better evidence of the company’s own issues than an industry-wide concern. Activision’s stock is up nearly 70% since the beginning of 2007, and analysts at Sterne Agee remain bullish with a $17 price target.
Ignore the DRM cries
Previously, I’ve written that I’m leery of all video game-related investments. Investment history is littered with the corpses of failed video game companies.
That said, investors should pay no attention to DRM-related complaints. Despite the backlash, sales of the games employing the tactic have done well, while the upside to the strategy (eliminating piracy) could boost the bottom line of developers.
The article Should Investors Worry About Always-On DRM? originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
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