Microsoft’s High Stakes.

Can’t read my, can’t read my…

Microsoft are involved in a game of high-stakes poker.

They have turned their hand face-up right from the off; the XBox One. With it, they revealed their hand – and it’s not a particularly strong one for the moment. From the online connectivity issues to the emphasis on Interactive TV (which appears to be less and less likely to see any light of day outside the United States), from the Always-On Kinect sensor becoming an audio and visual DRM authenticator and much more. There’s plenty to admire in the sheer balls of the reveal – but, unlike Sony who are still playing their cards close to their chest, Microsoft has thrown it’s hand face-up on the table for everyone to see. And they have a Six and a Seven.

Not particularly awesome. Could still be a winning hand, but it’s hardly anything to write home about.

The thing is, Microsoft’s weakest point is currently it’s concept of used game restrictions. A conflicted, confusing mess of tangled if’s and but’s, the Used Game Policy was clearly one of those things that was absolutely not ready for prime-time. The details had not been fleshed out. Representatives from Microsoft were bewildered and gave conflicting accounts of what they believed the policy was to be, and with it created a mish-mash of barely-there ideas and thoughts that many are still trying to piece together into something that represents a more tangible, solidified whole. The thing is, the one thing we definitely do know is there is definitely a policy to restrict used games from working on the XBox One, and that policy isn’t going to go unnoticed by the other player in this deadly serious game of Texas Hold-‘Em.

That other player is the Retail Sector.

It’s one thing to suggest a digital-only future, or one where a game cannot be sold used because it is disabled upon authentication by the XBox One Cloud Service. It’s another thing to do this before you have conversed with the retail sector – and it seems the retail sector is as much surprised about this development as anyone else. The retail sector is the gateway between distribution and the market, they are there to sell the machines that they think will make them a profit so they can pay their rent, wages, insurance, stockists and a raft of other expenses that need to be taken into consideration. The retailer is the channel in the middle of an hourglass, the spot where things flow from the factories to the homes of grateful consumers.

Retailers have also got experience in this game; something Sony know all too well. The retail sector has, not too long ago in fact, been successful for actively smothering the life out of a new piece of hardware, and that hardware was the PSP Go! It was a novel and not-too-daft idea for a digital-distribution PSP. No media socket and no moving parts meant that it would be more reliable, and cheaper, and games could be downloaded from the store and onto a memory stick. It was nicely designed, aesthetically pleasing and seemed to have been in all fairness had most bases considered. It needed games on release day, but they thought that wouldn’t be a hard sell for publishers if the PSP Go! took off. Why shouldn’t it? What could possibly go wrong?

Well, as it happens, a lot. Retailers realised very quickly what Sony was proposing was to destroy their games-selling potential. Sony tried to counter by offering “code cards” which could be sold for some profit, except the margins of profit on items like that are minuscule at best. It wasn’t just the used games market, but the whole games market – something which games retailers are reluctant to let go of at this moment in time. The aftershock was swift and brutal; retailers just didn’t stock the PSP Go! No stock, no sales. No amount of persuasion seemed to be able to change the minds of the retail market who were standing up for their rights and their own future, by refusing to stock a product that was a wide-open gateway into cutting them out of a sizeable portion of the market.

The PSP Go! did not last long. The price rocketed thanks to retailers who were taking a chance, and Sony who felt they needed to recoup costs back faster, meaning that even when you could find one, the item was being priced out of the market. Similarly, Sony priced the games higher than retailers, meaning that there was even less reason to enter into it. A desperate combination of this and retail stubbornness ensured it’s untimely demise. It took eighteen months – the same time that the Dreamcast had on the market, for comparison – for the PSP Go! to shrivel back to whence it came.

This was in April 2011. Not so long ago that Microsoft cannot claim to have missed it.

Similarly, Microsoft’s issue now is to find a way to appease the retail sector and woo it over to its way of thinking. Now, we are aware that Microsoft are considering that 10% of all “recycled licenses” go to the retailer. And this sounds pleasant until you think that for a £39.99 game, that means that the retailer gets a cut of £3.99 – this has to cover all its costs, including paying the customer for their old disc. This means, to us as consumers, that the future Microsoft is looking at means that £3.99 is the absolute most that we’re likely to see from a retail shop – and even at that maximum, they make absolutely no profit on that whatsoever. Ten percent is simply not enough of a sweetener for the retail sector, and if Microsoft thinks that it will be, then they are incredibly out of touch with the realities of the world.

Not just this, but it appears that retailers to even get this would have to register with Microsoft. It is unclear if this is a free service but let’s consider the possibility that retailers would have to pay an annual fee to take advantage of this service. They make very little on the games themselves, and Microsoft gets a sizeable chunk of the recycled disc and would also be getting money from retailers so they could offer this frankly abusive service.

In more grown-up terms, Microsoft is asking the retail sector to wear a gimp mask and suit. If you don’t know what that is, look in your dads closet.

With this in mind, and the largely negative response from the consumers and the press who watched and reported on the event, retailers can gauge interest in the device and consider their options. Given that the majorative opinion on the XBox One has been a resounding “Meh…”, retailers have been given full control of the negotiating rights here. Microsoft would have to pull off a miracle unlike anything you’ve ever seen at E3 to be able to take control of the board back from the retailers, who are now looking at the weak hand which Microsoft has thrown up and giving off a wicked, mischievous grin, knowing that they are in the driving seat here.

Microsoft know that it needs retailers in order to shift stock. But, with interest already on the wane and suspicion running very high, retailers can counter with a simple argument. “We’d love to stock it, but what’s in this fancy future of yours for us?” And it’s a fair question to ask, however brutal. As much as EA and Microsoft may look at retailers as the enemy, in reality the majority of their sales are generated through the retailers. That is the means to which a product is sold to the market, and without it you have to create a new means – this would lead to a digital only future for the games, which sounds fun, but ultimately just further drives the machine away from the retailers and into very specialist stores, likely ones owned and operated by Microsoft themselves. And then on top of all the profits come the overheads that come with retail outlets; insurance, tax, wages, rents, supply and shipping costs, handling, training and maintenance.

This reality would eat directly into the profit margins of the XBox One and its games; when it’s a cost that has to be paid, it has to be paid. Right now, Microsoft don’t have to account for those costs. That is taken from the profit margins that are added to products. Not to mention that specialist retail doesn’t have the massive market penetration that main retailers or supermarkets tend to be able to enjoy. They don’t have the negotiation room and more than that, being specialist and directly tied to the company itself, there is no space for competition. There is no need to drive down prices. There is no need to offer deals and sales because, ultimately, you are an arm of that company. You are selling the companies product, and you are towing the company line. Whether you like it or not.

What will the general retail focus on instead? Areas that they can make money. Perhaps Nintendo will come to the fore and be good for retailers, enjoying the larger share of the shelf-space and becoming largely the dominant force by means of choice being removed. Or perhaps the reality is that rather than the games market growing, taking away the retail sector will see sales shrink considerably, crushing the games industry underfoot like a bug. Less market presence, fewer sales. Fewer sales = less money. The games market enjoyed an explosive growth in the last decade largely because more and more outlets chose to stock consoles and games – outlets which ordinarily would not have sold them. From high-street newsagents to budget supermarkets, from stores usually focused on consumer white goods to the small independent outlet and numerous Internet options, there was no escaping video games. They had hit the mainstream – helped along by the fact that it was hard to escape the multitude of places stocking them. Give them less reasons to stock your product, and stand back and be amazed at how quickly the sales potential of the market shrivels and shrinks to mere nothingness.

When you consider that the games industry is already talking about a cash flow problem, creating a situation in which you could end up shrinking your market can only mean less money overall. To compensate, some will have to put game prices up. And that’s when you are effectively cannibalising yourself to spite something that ultimately isn’t even proven to hurt your market. Because there is no evidence to support the notion that used games hurt sales. It’s a crutch, it’s a scapegoat in much the same way video games are used as a crutch to explain away real-world violence. There is no confirmation, no intrinsic link. It’s a notion dreamed up because second hand games got popular because games publishers were largely attempting to screw the retailer and take more money.

Not that retailers are absolved of this notion; when the Wii U was released, it cost retailers roughly £200 for the premium Zombi-U box of the console in the UK. When it got to sale, it cost £324.99. Retailers aren’t there to be our guardians; they have to make money, and sometimes the profits they expect to make are unreasonably high. Not that this is a surprise, and not like it didn’t work brilliantly in the first month where sales for the Wii U were exceptionally high. But retailers are not our protectors. They are simply a means to an end, competition driving down the prices and keeping things reasonable as the market grows. They are not our friends, they are merely another player looking out for their own interests. But that doesn’t mean they don’t have their reasons to play a hard game. A business is a business. Costs beget costs. Give the retailers that power, and the retailers terms become more and more unrealistic and devoid of altruism.

But it’s a proposition Microsoft should expect. It’s conflicted, confused and muddled rambling and half-baked marketing lines have only served to inflame and antagonise the consumer, and by token, the retailer as well. Sometimes the best way to bluff that your ideas aren’t quite ready yet is to say nothing at all. Not a word, until you are in a position to fully show your hand and see what others have got. The last week, by Microsoft trying to justify, explain and dampen down the flames of rebellion already rising from the consumer crowd, it has given every last bit of power to the retailer, who now knows consumers and the press aren’t convinced. It knows Microsoft’s policy isn’t quite set in stone yet. It knows that without them, Microsoft cannot win the upcoming generation. And it knows what Microsoft are planning to do to cut them out of a sizeable part of their profits. It has been given the full picture, and it hasn’t even had to turn over its own cards yet.

Microsoft may yet win the hand, of course. But it’s a dangerous, risky strategy. The retail market can smell fear, and have already in recent memory successfully destroyed one piece of hardware that sought to take away their ability to profit from the market. The next few months will involve negotiation, reparation and humility. Microsoft is going to have to win people back to its side, and that goes as much for the consumer as well as the retailer – no small feat to pull off. And when the console hits the market and Microsoft go all-in, it needs to know that it is either in the best possible position, or at the very least, bluffing like a master so people don’t really notice that they are winging it.

It’s hard to tell how it will go. There are many hands to play, and many months until the big prize hits the market. But the route there is now fraught with complications, and it’s an uphill climb that Microsoft has made entirely for itself. Had they stayed silent, had they kept their cards quiet, arguably no-one would be any the wiser. Rumours and speculation would continue, but they always will. That would have given Microsoft more power over the retailers. “People want this product. These are our terms.” And then sure, we’d be shocked about it later. But really, the whole concept is to screw us. Now or later, the only real issue I think is up for debate is why Microsoft chose to respond to the rumours with confirmation when they themselves weren’t quite sure what the flop was about to bring! A reveal is about generating excitement, not dousing it with oil and lighting it up.

My grandfather, wise man that he was, told me once, “Better to remain silent and be thought a fool, than to open your mouth and remove all doubt.”

It’s a lesson that Microsoft are learning the hard way.

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