I’m not much of a gamer, so I’ve not really had a strong opinion about the Next-Generation Xbox (“Xbox 720″) Always-On controversy that has gripped the web lately. I have no idea if its true or what the details may be, and the truth is that the devil is in the details.
Presumably the Xbox will require an Internet connection in order to run games and that the reason for this is to enforce the Digital Rights Management (DRM) scheme. From what I can tell the real controversy is about DRM and not the actual need for an Internet connection. People hate DRM in every form, style, intent, etc. that mankind has come up with. Even the people who insist on protecting their intellectual property with DRM actually hate DRM, they just can’t make the business model work without it. But in this case the controversy isn’t about DRM specifically, it is about the notion that the next generation Xbox’s DRM scheme would eliminate the resale and rental models for games. Right?
So let’s explore “Always-On” along two dimensions. First I want to talk about the raw requirement for an Internet connection and then I’ll dig into the DRM topic. Yes I know most of you care more about the DRM part, so skip ahead if you want.
I’ve tweeted one point about Always-On and it was something I learned from a friend some time back. They live in a rural area with only Hughesnet satellite Internet available to them. Hughesnet has a Fair Access Policy (FAP) that limits how much data you can use in any given 24-hour period after which they slow your connection down to dial-up speed for 24-hours. My friend had to disconnect his family’s Xbox from the Internet because he’d go to get online to do work and discover his kids use of the Xbox had caused the FAP limits to be exceeded. Metered connections of one sort or another are all that is available to tens of millions of Americans, and even supposedly unlimited service actually has limits. Outside the U.S. metered connections are more common.
So when Always-On is mentioned as part of the Next-Generation Xbox I’m left to wonder if Microsoft is paying sufficient attention to the details of what this implies. To give an example of a case where they did not take DirectAccess. It has an always-on management channel that will, in the background, ship updates to your system whenever it is connected to the Internet. In its first release there was no way for an administrator to say “don’t ship updates if this is a metered connection”, and so hundreds of megabytes or even gigabytes of data would be shoved down to your PC no matter what the implication. This was a significant inhibitor to adoption of DirectAccess, particularly outside the U.S.
So the question is, how much attention is the Xbox team paying to networking issues like metered connections and poor connection reliability? The truth is that addressing these is not rocket science, it is just prioritizing dealing with them. For example, can I specify subsets of Xbox functionality that can use the Internet connection? Can I say, “yes you can use it to maintain DRM but you can’t use it for anything else”? Can I decide if I want updates downloaded automatically or only with my permission? Etc. Another example is when one says “always-on” what does that really mean? A lease-based mechanism would seem to provide any imagined benefit while handling poor connectivity and reducing bandwidth usage. In other words, once you check DRM for a game it takes a lease that could last for 24-hours, 72-hours, or perhaps even 7 days before you have to renew it. You don’t actually have to go out on the network every time the game is played.
Although the real noise in the system isn’t about the network usage, in practice that could become the real problem if Microsoft hasn’t paid attention to the details.
So what about DRM? DRM frustrates us all both because it intrudes on usability but also because it restricts us from doing things that we feel we are entitled to. For me the most important variant of this is that when I purchase something I feel it belongs to me and not to a specific device. I should be able to use it from any device I own, or in fact anywhere in my household (e.g., my wife should be able to watch the movie too). This becomes more and more true as the price of whatever purchase I make goes up. At $.99 I do not feel put out by the need to buy something for each of the devices I or my family want to view or run something on. At $5 I am annoyed (and somewhat impeded) by it. At $50 I am outraged. Many new top-tier console games are running around $60, so you know where they sit in my personal hierarchy.
In this context I understand why people would want to be able to create secondary market for games that cost $50 or $60. That’s a lot of money to spend for something that you, or your kids, lose interest in after a few days or weeks. You want to either buy a used copy for less, sell the new copy you bought when you lose interest, or rent a copy because you know you won’t be playing the game regularly. And so you have a particular market dynamic that has been working for much of the last two decades.
But the world is changing. Game prices for mobile devices are an order of magnitude less than what you pay for those on a gaming console. Are you getting more for your money on the console? Of course you are. Are you getting 10x worth? For hard-corps gamers maybe, for most people probably not.
Let’s review the game console business model. Consoles use a subsidized business model. They are sold for far less than the cost to manufacture (let alone market, sell, and distribute) in return for a share of the sales of all games sold. So Microsoft or Sony or Nintendo lose money on every console sold, but when you buy your 5th or 6th game they start to make money. And it isn’t just their games, it is any game on the console. So buy EA’s FIFA Soccer 13 for an Xbox and a portion of what you’ve paid to EA actually goes to Microsoft.
There are billions of phones, 1.3 Billion PCs, hundreds of millions of tablets, but only about 60 million (of the market leading) Xbox 360s in the world. For even a top-tier console game that means the potential unit market is actually quite small. Game development costs are high. Marketing costs are high. And you’ve got to share the wealth with the console manufacturer. Combine that with pricing pressure coming from the mobile gaming segment and one has to wonder if the current console game business model is sustainable. I posit that it is not.
Which brings us to the Always-On DRM question for the Next-Generation Xbox. If one combines that model with $60 games the result is a total disaster because it is effectively a price increase in a market with severe downward pricing pressure. But what if this is really about changing the console game business model. What if you wanted to, nee had to, drive the price of top-tier console games down to $30 or even $20? The game publishers still have to make a profit on a relatively low-volume product. Microsoft still has to get enough of a cut to make the Xbox business profitable. What if the way to do that was to kill the resale and rental markets but drive the price of a new game down to less than they currently go for on the used market?
From the standpoint of business people inside Microsoft and the game publishers this seems like a win-win situation. Game unit sales volume would go up dramatically. Opportunities for in-app purchases and other ancillary sales would go up dramatically. And the cost of a game to the end-user would drop. There is no loser in this, except for the people running resale and rental businesses.
The bottom line on both my networking concerns and the broader DRM concerns is that not only don’t we know if there really is an Always-On requirement, if there is we don’t know any details. Microsoft could be giving us something that will make the Next-Generation Xbox far more attractive to a far larger user base, or instituting business practices that kill of the console gaming business entirely. We just don’t know.