Microsoft remembers it’s in the games business

The Xbox One is an impressive piece of hardware, designed to position Microsoft for life beyond the expiration date of the console gaming business. This week, though, Microsoft remembered that it’s still in the console gaming business, at least for now.

In the face of a sustained outcry from gamers over Xbox One’s non-support of used games and online check-in policy, Microsoft completely reversed course this week and abandoned both policies.

“After a one-time system set-up with a new Xbox One, you can play any disc based game without ever connecting online again.,” Microsoft president of interactive entertainment, Don Mattrick, wrote in a blog post announcing the about-face. “There is no 24 hour connection requirement and you can take your Xbox One anywhere you want and play your games, just like on Xbox 360.” Further, Mattrick said, “There will be no limitations to using and sharing games, it will work just as it does today on Xbox 360.”

The move was stunning on multiple levels, not the least because Microsoft presumably had thoroughly researched the potential impact that its strict new DRM policy would have and concluded that any initial backlash would fade and have no significant affect on console sales. Something has now convinced Microsoft that assessment was wrong.

Part of that something was the vehemence of the backlash. Given its muddled PR efforts in response to the initial outcry, Microsoft seems to have underestimated the strength of the push-back, despite whatever research it had done, and was unprepared for the uproar. But  ianother part of  what convinced Microsoft to change course was almost certainly Sony.

With Microsoft reeling from the reaction to its pre-E3 reveal of the Xbox One, Sony won accolades at the show itself by announcing full support for used games on the PlayStation 4 and a price point $100 less than the Xbox One.

According to the gamer website Kotaku.com, both decisions appear to have been made at the last minute, in response to Microsoft’s perceived vulnerability. Sony, after all, was under the same pressure from game publishers as was Microsoft to put limits on used games in the new generation of consoles, and was rumored to be planning a similarly strict DRM policy. And as I noted in an earlier blog post, it’s unlikely the PS4 really costs $100 less to manufacture than the Xbox One given its spec sheet.

Microsoft, in other words, seems to be have caught off guard as much by Sony’s aggressive competitive moves as by the backlash from gamers over its DRM policy. According to gaming web site VGChartz, pre-orders for the PS4 through June 15 were at 75,000, compared to 45,000 for the Xbox One. Those numbers are not yet large enough to be material, but the ratio has to be alarming to Microsoft.

All of the moves and counter-moves, however, reflect the basic challenge facing both Sony and Microsoft with the new generation of consoles. The clock is obviously ticking on the console gaming business. Even if it’s unlikely to go away completely, the attach rate for new games is likely to fall over time more sharply than with past generations of consoles as both gamers and developers shift more of their attention to mobile platforms, and with it Sony’s and Microsoft’s own game sales as well as the licensing fees they collect from third-party publishers. That means a tighter window to recoup the development and manufacturing costs of the PS4 and Xbox One.

To address that challenge, both companies have focused on positioning their consoles to earn revenue from non-gaming sources by tapping into broader entertainment offerings, particularly so for Microsoft. In the meantime, however, console gaming remains an intensely competitive business. And if you lose that competition, it won’t matter how well your console is designed to tap into other businesses. If gamers don’t buy it you can’t sell them non-gaming services.

That’s the penny that dropped for Microsoft this week.