What Microsoft Should Have Done

The biggest story of the upcoming console generation is that Microsoft has, within a month of the initial Xbox One announcement, already bowed to pressure and reversed its attempt to cripple the importance of physical discs. The Internet is currently doing a victory lap.

The transition from physical to digital was sure to be rocky, but the start to this console generation is now a lost opportunity for the industry. Physical discs are bad for everyone (except for retailers, of course). They are bad for developers, who lose the long tail of revenue once Gamestop undercuts them with used copies. They are bad for consumers, who end up paying artificially inflated prices for new games because of the inefficiencies of selling a digital product as a physical good. Physical discs are expensive, inconvenient, wasteful, and – most importantly – allow the entrenched and reactionary interests of retail to control gaming.

The answer, however, is not to implement a slate of arbitrary and restrictive rules that push the consumer away from physical discs. The answer is to make digital games so attractive that players will abandon physical discs on their own. (One might call this the Steam strategy.) Microsoft could have avoided this whole fiasco by maintaining the old disc-based ecosystem while softly undermining it with three moves that create an alternate digital future.

1. Cap the price of all digital games at $40

I argued that converting players from retail to digital required a price drop back in 2008. Besides the fact that both the publisher and the developer get more revenue from a $40 digital sale than from a $60 retail sale, the price cut strongly incentivizes players to buy the digital copy instead of the physical one, which is what Microsoft wants most anyway. The different price tiers make logical sense as well – a $60 disc costs more because it can be loaned out or resold while the digital version has the restriction of being tied to the original owner. Valve has maintained the $60 price point for new AAA PC games, but they have put in 10 years of hard work earning the trust of the community (not to mention that the $60 price is mainly an anchor point to make the discounted price more attractive). Microsoft does not have the same well of goodwill to draw upon, so they need to make a bold statement about the benefit of a digital game, which should start with a lower price.

2. Heavily discount older titles

Developers selling games on Steam always report that their highest-revenue days come during Steam Sales, better even than the first days after release when the game is still at full price. The power of the sale really has to be seen to be believed (here is an example from the indie game Dustforce.) Many developers were concerned about what these heavy discounts would do to their overall revenue, until they saw the actual results. Steam Sales generate extra revenue by appealing to a segment of the audience that might not normally buy the game – someone who is only willing to pay $5 but has either the patience to wait for a sale or the urge to buy before time runs out. Indeed, one of the hidden benefits of Steam is how many games are bought and then never actually installed; the community is full of collectors. Ultimately, heavily discounted digital games are the best weapon against used games, which at least still carry some stigma of being a secondhand item; buying a “new” digital copy at a bargain price is much more compelling.

3. Purchase persistence and backwards compatibility

I will never buy an Android phone or tablet. Why? The reason is that, now that I am on my third iPhone and second iPad, I have a lot of apps attached to my Apple ID, the majority of which are games. If I switched to Android, I would have to buy all those games all over again. Instead, when I upgrade between Apple devices, all my games are waiting for me. Much of it will never be downloaded again, but the option still exists. I haven’t gone heavily into iTunes for either music or movies, and that would tie me even closer to the Apple ecosystem. Neither the Playstation or the Xbox works this way; migrating to the PS4 or the Xbox One means starting a new digital games collection from scratch. Ostensibly, this migration of games between generations is not possible because the consoles are not backwards compatible; put another way, Microsoft and Sony both made the strategic decision not to spend the money to support this feature. In fact, the companies are missing a huge opportunity to help players tie themselves to their own closed ecosystems. If digital purchases from a Live account persisted forwards across every version of the Xbox, how less likely would a player be to switch over to the Playstation? Most importantly, purchase persistence gives players one more reason to buy a game digitally as it will be forever included with the account.

Combined, these three changes would destroy the traditional retail market. The $40 price would make digital games cheaper at release; the ongoing heavy sales would undercut the used games market; and persistence would make digital games easier to maintain across multiple devices. Microsoft needs to make buying games digitally a better deal for the consumer than buying them physically. The trick is to allow both physical and digital to co-exist and then let the consumers catch up with the obvious benefits of the latter. Allow the retail market to wither and die by evolving past it rather than attacking it directly and needlessly.

5 thoughts on “What Microsoft Should Have Done

  1. I thought the problem was that Gamestop would just refuse to stock games sold for less online? Perhaps MS have the leverage over them that individual publishers don’t though…

  2. These points are 100% correct.

    Microsoft blamed the backlash on not having “educated” the consumer. Frankly, the negatives did not outway the positive benefits and the consumer is smart enough to recognize that fact.

    Microsoft should look at Apple’s digital strategy as a model for how to execute successfully. With App Store on the Mac, as long as you have your iTunes ID tied to the App Store you can download purchased versions of software and games to multiple computers. When I upgrade computers I’m not worried about losing all the software purchases I have made.

    The same can be said for Steam. I can build a new computer and I am confident that all my game purchases will work on the new machine.

    I am not anti-Microsoft, but I am going to stay clear of the Xbox One until they take a more pro consumer approach on digital purchases.

  3. The disc isn’t wasteful. It provides choice. To believe the Steam model is infallible or better for consumers is where a lot of this mindset comes from. I can buy Tomb Raider for PC for $50 right now, or $30 physically on 360. BioShock Infinite? $60 Steam, $40 on 360. The used game market created a competitive environment where publishers need to work to keep the new copies relevant, and thus, lower prices faster (and permanently). That is a benefit to me as a consumer, and I’m freed from the shackles of DRM policies that tell me when, where, and how I play. Microsoft’s closed digital ecosystem would have no such competition, thus no incentive to reduce price. They have XBLA games on their service that have NEVER been on sale (since launch!), let alone seen a temporary price drop.

    Steam isn’t the only place to get deals either. I can readily go to GameStop and purchase games for under $5. The difference is that GameStop doesn’t readily explode with these sales; they have them everyday, never mind the burgeoning markets on Amazon, eBay, and local Craigslist where those prices also live.

    While it serves as a boon for indie devs (and I wholeheartedly support digital/Steam/others for indie efforts), EA/Activision can’t be happy seeing their triple A franchises reduced to pennies on the dollar on Steam. Revenue is minimal and/or non-existent compared to what they are used to.

    You can charge $40 for the digital copy, but the reality is I’ll take the $60 physical copy every time. It has value. When I purchased Gears of War Judgment, as a longtime fan of the franchise, and disliked it, I was able to recoup the majority of my cost. It amounted to a rental. That was the choice granted to me. With the $40 digital, I would be out $40 for a worthless digital file on the cloud.

    So, why does that benefit me? It wouldn’t save me money. It wouldn’t give me choice. The bigger battle is in convincing people that digital files have value. While people readily snap up iOS apps for a few bucks, convincing them to buy $40-$60 digital they can’t do anything with is another matter all together.

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