Microsoft Corporation (MSFT) Does an Xbox One – Eighty

The big losers

Microsoft’s DRM reversal is a big win for console consumers, but a big loss for game developers.  Here I’ll frankly admit to some bias in favor of the developers.  But beyond personal sympathy, the game software industry has been in the doldrums, as the chart of revenue and earnings for the two major game developers, Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ:EA), shows below.

Based on the interest level in the new consoles, I expect about a 10% year over year uptick in game software revenues in Q1 of the new year, but Microsoft’s DRM approach, if it had become a standard for both new consoles, would have ensured greater near term growth for the developers.  Since Microsoft maintains its own game development group within the Entertainment and Devices division, Microsoft was naturally sympathetic to their desire to curtail the trade in used games, from which they derive no additional revenue.

Not that gamers didn’t have the legal right to buy, sell, or trade used games. Copyright law in the U.S. has a long established “right of first sale” that allows consumers to resell copyrighted works such as used books, CDs, or videos that have been legitimately purchased.  Software companies and digital content providers have been nibbling away at this right for years, especially for digitally downloaded content.  In this area Microsoft held fast to its existing policy of not allowing trading, reselling or loaning of downloaded games.

In the long term (2-5 years), I’m not sure that the DRM issue really matters.  The entire software industry is moving to digital delivery, and the convenience of digital delivery inevitably comes with DRM strings attached.  Game consumers have at most a temporary (2-5 year) reprieve from this, since the Internet is still a little slow in some places for downloading 25 – 50  GB of game content, the capacity of a Blu-ray disc.  But eventually,  the game software industry will migrate fully to Internet delivery, since it’s the most cost effective way to distribute software.

Mark Hibben has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft.

The article Microsoft Does an Xbox One – Eighty originally appeared on Fool.com and is written by Mark Hibben.

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