Sony’s New PlayStation May Pummel Retailers

by Cynthia Wilson | April 2, 2012 1:16 pm

Rumor has it that Sony’s (NYSE:SNE[1]) next-generation living-room game console wwon’t accept pre-owned games.

Blog site Kotaku reports that the replacement for the PlayStation 3 — code-named Orbis — will block used-game play unless the player is connected to an online account.

It’s expected that pre-owned games will work in the newer console, but only in trial mode unless the game’s new player pays Sony a fee to access the full game. Orbis also will link each new retail game disc to a PlayStation Network account that must be actively signed into when the game starts up.

Sony isn’t the only video-game console maker intent on throttling the used-game industry. Several reports say Microsoft’s (NASDAQ:MSFT[2]) next Xbox won’t work with used games. Video-game retailers such as GameStop (NYSE:GME[3]) fear that the system that pioneered digital distribution in the game console may not even accept a disc when it’s released in 2013.

Sony and Microsoft are targeting used games in their next-generation set-top consoles because that secondary market is eating their lunch. The companies and their game publishers spend billions of dollars to produce, package, and distribute the games, yet they don’t get any of the revenue from used games traded in and resold at storefront operators such as GameStop and Best Buy (NYSE:BBY[4]), or through online merchants such as Amazon (NASDAQ:AMZN[5]) and eBay (NASDAQ:EBAY[6]).

A question of control

Sony and Microsoft’s motivation to limit or eliminate disc play isn’t just about getting back at businesses that are taking profits Sony and Microsoft believe rightfully belong to them. Converting to all-digital video-game play tied to an online account would give them control of their products and profit.

Sony reportedly will impose limits on used-game compatibility by using an x64 CPU and a “Southern Islands” GPU provided by Advanced Micro Devices (NYSE:AMD[7]) instead of the cell-based hardware currently inside the PS3. Sony already eliminated backward compatibility for used games on the PS3 when it upgraded the machine in 2007.  But the rumored new changes would have a broader impact on which games the system will accommodate.

If Sony and Microsoft make it harder or impossible to play used games on their systems, retailers such as GameStop, whose business focuses heavily on physical media content, may struggle. GameStop, based in Grapevine, Tex., sells more new games and consoles than used games, but the majority of its profits come from used-game sales.

That doesn’t mean that revenue and profit at Sony, Microsoft, and their publishers won’t suffer, at least in the short term. Used games are popular because they cost less, are available within weeks or even days of new title releases, and players can’t distinguish a used disc from a new one.

Many traditional video-game players will balk at paying a fee to play a game they already own. And they may avoid buying new releases if prices on new titles aren’t lowered or if they have no resale value. Consumers also may choose not to buy Sony’s and Microsoft’s newer systems if they can play only digital versions of new titles, in part because digital copies eat up storage space, and games stored in the cloud aren’t as accessible as discs.

All this could make the next generation of consumers more committed to cheaper and readily accessible games played on mobile devices such as Apple’s (NASDAQ:AAPL[8]) iPhone and iPad. Juniper Research already predicts that revenue generated by mobile games will reach $18.3 billion by 2016.

Some consumers may even abandon game consoles altogether for “smart TVs” with built-in game controllers like the sets being produced by LG Electronics (NYSE:LGEAF[9]) and Samsung (PINK:SSNLF[10]).

One possible solution: Game publishers might be able to head off a consumer backlash if they allow consumers to lease and stream digital versions of new games.

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