Rumor: Next Xbox May Not Work With Used Games

The market for video games is big, with $9.3 billion generated last year in the U.S. through sales of new games for portable gaming systems, PCs, and consoles like Microsoft’s (NASDAQ:MSFT) Xbox 360. But it could be much bigger. Sales of used games cost publishers and console makers billions of dollars yearly.

Used video games are popular with consumers: they cost less, they’re available within weeks or even days of the new title releases, and from a player’s perspective, used games are indistinguishable from new.

Publishers and console makers have struggled with the used-game market for years and rumors are flying that Microsoft may be tackling the issue with its upcoming replacement for the Xbox 360, unofficially known as the Xbox 720.

The easiest methods —linking the game copy to a specific Xbox Live user account or doing away with physical media altogether and making games download-only— require an Internet connection. This approach would be problematic, though, because not all console owners are online and high-definition games mean huge downloads that take time and count against download caps. If Microsoft has developed a scheme to prevent used games from being played without requiring an Internet connection, it might be able to effectively force consumers to buy new titles only for its next generation system.

Used games’ market muscle

GameStop (NYSE:GME) is one of the world’s largest video game retailers, with some 6,100 stores in the U.S. GameStop reported $8.1 billion in sales related to video games in 2010 and of that total, $2.5 billion (more than 30%) was from used video game products. When the profits by segment are broken out, it quickly becomes clear why the chain loves used video games: they account for nearly 55% of profits, compared to 32% for new video games. Hot new game titles can retail for $60 or $70 (while costing the retailer $50), but when a retailer can buy a used copy from an early adopter for $20 and sell it for $55, the store earns a significantly higher margin. But when that happens, game developers, publishers (and console makers, who often earn a royalty fee on each copy sold) are cut out of the equation.

A quick search on eBay (NASDAQ:EBAY) shows nearly half a million auctions underway for used video games. Amazon (NASDAQ:AMZN) lists over 12,000 results for used video games.

Locks, keys, and single-play titles

Software publishers have tried a variety of schemes to combat reselling their games. Capcom’s Mercenaries 3D for the Nintendo 3DS (PINK:NTDOY) is a one-play cartridge that prevents users from starting fresh once they’ve complete the game, rendering it useless for resale. Batman: Arkham City, one of 2011’s biggest hits, included key content that could only be unlocked via a one-time-use download code. Needless to say, both titles drew fire from critics because of these restrictions.

A hardware-based lock implemented at the console level would negate the need for game developers to come up with new solutions for each game released. If it goes ahead with the rumored plan, Microsoft may disrupt sales of used video games and help to boost profitability overall for the video game industry. There is considerable risk that any such scheme may backfire, though. Gamers may avoid the Xbox platform if other consoles don’t implement similar restrictions, or they may simply cut back on game purchases.

You can bet that video game players, and companies associated with used game sales like GameStop, eBay and Amazon, will be watching this story very closely.


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