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Taking into account the reaction at E3, Microsoft (NASDAQ:MSFT) is backtracking on its "Always on" DRM scheme, with significant implications for GameStop (NYSE:GME). Put simply, GameStop's business model - which was at risk in the previously announced DRM scheme, is once again viable.

This is from Xbox Wire, which is now down due to heavy traffic (emphasis is mine):

Last week at E3, the excitement, creativity and future of our industry was on display for a global audience.

For us, the future comes in the form of Xbox One, a system designed to be the best place to play games this year and for many years to come. As is our heritage with Xbox, we designed a system that could take full advantage of advances in technology in order to deliver a breakthrough in game play and entertainment. We imagined a new set of benefits such as easier roaming, family sharing, and new ways to try and buy games. We believe in the benefits of a connected, digital future.

Since unveiling our plans for Xbox One, my team and I have heard directly from many of you, read your comments and listened to your feedback. I would like to take the opportunity today to thank you for your assistance in helping us to reshape the future of Xbox One.

You told us how much you loved the flexibility you have today with games delivered on disc. The ability to lend, share, and resell these games at your discretion is of incredible importance to you. Also important to you is the freedom to play offline, for any length of time, anywhere in the world.

So, today I am announcing the following changes to Xbox One and how you can play, share, lend, and resell your games exactly as you do today on Xbox 360. Here is what that means:

  • An internet connection will not be required to play offline Xbox One games- After a one-time system set-up with a new Xbox One, you can play any disc based game without ever connecting online again. 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.
  • Trade-in, lend, resell, gift, and rent disc based games just like you do today - There will be no limitations to using and sharing games, it will work just as it does today on Xbox 360.

In addition to buying a disc from a retailer, you can also download games from Xbox Live on day of release. If you choose to download your games, you will be able to play them offline just like you do today. Xbox One games will be playable on any Xbox One console -- there will be no regional restrictions.

These changes will impact some of the scenarios we previously announced for Xbox One. The sharing of games will work as it does today, you will simply share the disc. Downloaded titles cannot be shared or resold. Also, similar to today, playing disc based games will require that the disc be in the tray.

We appreciate your passion, support and willingness to challenge the assumptions of digital licensing and connectivity. While we believe that the majority of people will play games online and access the cloud for both games and entertainment, we will give consumers the choice of both physical and digital content. We have listened and we have heard loud and clear from your feedback that you want the best of both worlds.

Thank you again for your candid feedback. Our team remains committed to listening, taking feedback and delivering a great product for you later this year.

This explains the changes in their entirety. Obviously Microsoft saw that its new DRM scheme was being seen as a significant negative for the console, especially the part about it being harder to share/lend discs or play offline. This was creating a significant ill-will towards the Xbox One when compared to the PS4, something which led to the PS4 leading on pre-orders and massively destroying the Xbox in polls.

While this does not eliminate all of the Xbox's shortcomings, namely its rather weaker hardware, it does contribute significantly towards mitigating its problems.

And of course, this reestablishes GameStop's business model, at least for another console generation and when it comes to disks (since games which are downloaded cannot be resold or shared).

Conclusion

Due to the gamer community reaction, Microsoft backtracked on its restrictive DRM scheme, reestablishing GameStop's business model in the new generation gaming consoles, a fear which up to this point had penalized GameStop shares. A short squeeze ensues…

Source: GameStop Gets Bid As Microsoft Backtracks On DRM