Is Xbox One 'Game Over' For GameStop?

| About: GameStop Corp. (GME)
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Microsoft (NASDAQ:MSFT) unveiled the new Xbox One game console and it has a lot of bells and whistles. I'm going to ignore most of them for this article and look at one interesting item - used games and how it may affect GameStop (NYSE:GME).

A recent Wired article addressed some new issues with the console but here is one of interest to GameStop investors:

"There's one feature of Xbox One from which we can infer quite a few conclusions: You can install any game from the disc to the console's hard drive, and then play that game whenever you like without having to put the disc in."

Wired asked Microsoft if installation would be mandatory. "On the new Xbox, all game discs are installed to the HDD to play," the company responded in an emailed statement. Sounds mandatory to us.

What follows naturally from this is that each disc would have to be tied to a unique Xbox Live account, else you could take a single disc and pass it between everyone you know and copy the game over and over. Since this is clearly not going to happen, each disc must then only install for a single owner.

Microsoft did say that if a disc was used with a second account, that owner would be given the option to pay a fee and install the game from the disc, which would then mean that the new account would also own the game and could play it without the disc.

But what if a second person simply wanted to put the disc in and play the game without installing - and without paying extra? In other words, what happens to our traditional concept of a "used game"? This is a question for which Microsoft did not yet have an answer, and is surely something that game buyers (as well as renters and lenders) will want to know. (Update: Microsoft called Wired after this story was originally published to say that the company did have a plan for used games, and that further details were forthcoming.)

This passage made gamers quite upset about a possibility for charging for used games. The end of the quote states that it may not be exactly right and Microsoft will let us all know later about it (instead of telling us now).

The only clue we can get are in their official Q&A page.

Here is their official response:

"Q: Will Xbox One allow players to trade in, purchase and play pre-owned games?

A: We are designing Xbox One to enable customers to trade in and resell games. We'll have more details to share later."

I'll get back to this in one second. First, there is another answer that I want to link with this:

"Q: Will Xbox One be backward compatible with my existing games?

A: Xbox One hardware is not compatible with Xbox 360 games. We designed Xbox One to play an entirely new generation of games-games that are architected to take full advantage of state-of-the-art processors and the infinite power of the cloud. We care very much about the investment you have made in Xbox 360 and will continue to support it with a pipeline of new games and new apps well into the future."

So two things:

1) The word "enable" in the first answer speaks to me. It tells me that there will be access to used games, once Microsoft "enables" them. This tells me there may be truth to the fee that Wired reported.


2) No backward compatibility means NO used market for older games to be played on Xbox One. But in this digital age, how long until Microsoft puts old games in their cloud and charges people to buy them? My guess is within a year or two but I have no proof of this.

For GameStop, these two items should set them in panic mode. What's more, Sony (NYSE:SNE) will unveil more about their new PS4 console at E3 and if there is any hint about following a fee-like structure for used games (which would surely delight the publishers), things will get ugly fast.

Even if Microsoft comes out and says there is a small fee to "unlock" a used game, GameStop may be forced to lower prices to offset this to keep prices attractive, thus lowering margins.

And one thing that should also worry investors in GameStop right now - Microsoft could have come out and fixed this by telling everyone that it is all fine, there is no fee and used games are staying the way they are. But they didn't. Microsoft got tight lipped and are probably circling the wagons on how to put a good face on this issue.

We will know more soon, when Microsoft enables it.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in GME over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. If Microsoft verifies a fee for used games, I will be sure to short GME if the price is attractive.