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.
Hal's (Im)Perfect Vision 
Well I’d love to think that you’re right about driving the price of games down, but the cynic in me thinks it’s highly unlikely. In Oregon we have no state sales tax but a fairly high (~10%) income tax. Most people think it would be great if the income tax were eliminated or dropped to say 2-3% and a sales tax were instituted to make up the income. However, this measure gets voted down every time it is introduced. Why? Because no one trusts that the politicians would actually drop or eliminate the income tax. It’s not in the government’s interests or desires to get smaller or even stay the same size (especially, in Oregon’s case, a largely Democrat government). Most likely we’d just end up with both a high income tax and a sales tax.
We actually have a model for this situation in eBooks. You would think that because there is no used market for eBooks and they are super cheap to produce compared to traditionally published books that this would push their price down. However, corporations exist to make money and if the market will bear $10 / eBook, publishers will charge that and happily double their margins compared to what they used to make on paper.
Another consideration is the parity pricing. I think the publishers are likely to want to price their latest blockbuster titles the same on all platforms. If they are charging $60 on the PS3 and PC, then I think it’s unlikely they will charge $30 on Xbox. Aside from the consideration that Sony probably wouldn’t even let them do that (I doubt Sony would stand for an MSRP of half the price on a competing platform), it just doesn’t make sense for the game publishers. They would be leaving money on the table by doing that and I don’t see any way Microsoft could possibly apply pressure to force them to lower prices like that.
I think we’re just going to have to accept the new world we live in. DRM exists, almost everything in the future will be bought digitally or at least tied to an account, and there will be a limited number of installs of software allowed for an account (or a limited number of devices usable with the account which amounts to the same thing). The rental market will probably completely go away in physical form. I think it would be smart of the companies controlling the platforms to allow rentals or even lending between friends in digital form, but the software publishers may or may not move to block those scenarios. On the plus side, there is a huge amount of heterogeneity in software and software pricing now, which is fantastic. Prices for great games can and do go from completely free all the way up to $100+ (if you count in-game paid downloadable content which is often available on day 1 now even for big titles). And having games tied to an account means that they can go with you from device to device easily often without having to worry about physical media which is great. You just have to take the good with the bad.
The current situation for console games seems to have the game publishers on the road to oblivion. There are a handful of blockbusters each year, and that’s it for making money. So something in the business model needs to change. Now I wove together this problem with the rumor about always-on to propose one possibility, but I could be completely wrong. Still, I think it is useful to get people thinking about possibilities other than just an attempt to screw users.
eBooks are not super-cheap to produce. They cost almost as much as regular books. 70% of books never make back their royalty advance to the author. Thus, the cost of most books is dominated by the cost of royalties, editors, layout, image rights, marketing (including book readings and signings), etc. The actual paper book itself only accounts for 8% of total costs.
It’s the same situation as newspapers. The cost of the journalism *far* exceeds the cost of printing and distributing newspapers.
Are you factoring in the amount of money publishers eat from the bookstore chains which send back the covers of books that don’t sell and get rebated the price? Because what happens in a lot of cases is that a publisher pays to make a print run of say 100k books and those get bought by Barnes & Noble, etc. Then when only 30k actually sell, the publisher has to rebate B&N back the cost of those books. So the publisher is in effect eating the cost to produce a huge number of books each year. That’s why most books don’t make back their initial royalty to the author: most books don’t make it past a single print run and a big portion of that print run has to be eaten by the publisher. The few blockbuster titles which do go to warrant many print runs pay for all the rest. In eBooks, you don’t have any of the waste associated with that model. There is no “print run” to worry about and books can sell in small numbers that build over time. Plus, making 70% of the purchase price on Amazon is a lot higher margin for the publisher than they make selling wholesale to 3rd party book sellers. Plus there’s no used market in eBooks so every sale is going into the publisher’s pocket.
Publishers do certainly pay for editing, layout, imaging, and marketing (although most publishers today are only doing much marketing for very high end titles; a lot of small to mid range authors get little to nothing in marketing dollars). Those costs haven’t changed a lot between paper books and eBooks. However, just because the cost of print itself is only 8% of the initial cost of book production doesn’t mean that publishers aren’t making much much higher margins on eBooks than they did on paper. Even an 8% margin increase for most businesses would be huge, but we’re talking about a lot more than that in this case.
If you want to skewer a strawman, you could at least give the strawman credit for some brains.
If you want to skewer an internet rumor (i.e. a viral strawman) then have fun, but “winning” your argument is a no-brainer.
Hal, your blog is usually more thought provoking…
I’m not sure I was trying to skewer anything.
There are a number scenarios that I hope the Xbox team thinks about.
1. Customer who has multiple Xboxes in their house. Does he need a to purchase a game multiple times so he can play the game on different consoles in his their own house?
2. A customer wants to bring a new game they just bought (or got as a present) to a friends house to play with his friends. Can this be done?
3.Console has a problem and the customer has to get a replacement console.
Will the game be tied to an Xbox ID or will you get a certain number of times to play the game on a different console? I know you do not have the answers but I think more to think about.
I think even if the game price were kept at the same prices Microsoft and the game publishers might think this is a good idea.
The issue with the used market is that MS and the game publishers get virtually nothing when someone buys a used game. From the Microsoft side the customer needed to acquire a game console (at a lost to MS) and maybe the customer will purchase and Xbox Live subscription to take advantage of some online multiplayer gaming or to connect to Netflix. What are we looking at a max of 60 dollars. The game publisher at best is looking at in game purchases.
So if game prices where to drop that mean that they must sale at least 3 times as many games in the future than they are selling in the future at the discounted prices. If prices were the same or only slightly discounted you can probably get an increase in sales with only slightly increasing the number of games sold.
The game publishers and Microsoft have to be able to sell the advantages of playing a game on a console vs a mobile phone, tablet or even a computer. If they cannot do that yes, they will be in for a bumpy ride.
Excellent post, Hal. You get it right. the real sensitive point is the DRM-oriented future in which we are going to, and in which nothing will be free again.
The key to all of this is that we really don’t know yet. At the start of your blog post, I was expecting that you might hint at the answer due to your background, but that wasn’t your idea for the post at all. It’s fun to speculate and ask “what if”, but I certainly don’t want to make a purchase decision nor get angry about something on which I don’t have the facts. Hopefully it will combat piracy. Whether the rental market gets squashed isn’t really a concern for me as the used / new price has been getting closer for games that have been on the market a while.
Being a gamer and a father of four, XBox Gold licensing has become a bigger issue for me. The older kids have to buy their own gold accounts if they want them (family plan went away recently). The issue is how the content is tied to individual accounts. For instance, I purchased the “Brave” game recently when it was on sale via Games on Demand. A cheap $10 for a game that originally went for $60. I had to purchase it on my account since my girls don’t have purchase options. I originally thought it was a Kinect title and purchased on our living room Xbox. Well, it’s a controller game and they want to play it in the toy room. Any account can play it on the 1st xbox it’s downloaded on, but only the account holder can play it on subsequent 360s. I can move all my content to the other xbox, but I can’t move that one piece of content to the other 360. So they log in with my account to play it. This is just one use pattern, but it illustrates some of the issues that are lurking (as in the comment above about loaning ebooks or games).
So although “Always On” and DRM are the hot topics in the gaming press, the big factor for me and others is the XBox Gold account cost and licensing (required for Netflix anyone?). If they want to make this more of a platform for general apps (i.e. IE11, entertainment apps, etc..) then they really need to have a good plan going forward.
If the original rumor that Microsoft is working on two devices, a gaming-centric device and a media-consumption device, are true then I agree they need to be rethinking the Xbox Live licensing for viewing media content. The media-consumption device won’t achieve much market share against Roku etc. when they require a secondary paid subscription to view exactly the same content as the Roku, smart TVs, etc. do without that secondary subscription. One way Microsoft could counter this is to continue to require the Xbox Live Gold subscription but have it include a streaming video service, so it has some direct value of its own (to non-gamers).
They’d still need to address your concerns around each member of the family needing their own account.
Overall this feels to me like part of the transition from being primarily a gaming console to being more of a fully thought through entertainment console. Not just in the hardware and software, but in the thought processes of the business leadership.
Reblogged this on http://www.frootpipe.com and commented:
God I hope not … it’s a cleverly wrapped DRM fiasco waiting to kick off :S Only will tell more ….
“I live in Seattle, I am developing Xbox V.Next and I am going to assume the rest of the world has the same Internet bandwidth as the rest of the world. I have never spoken at TechEd in Australia to find my Internet at the Gold Coast hotels still using dial-up modems and charging $100s for the week. I have never heard of a “download limit” of 20GB per month in Australia for a 512KB downstream connection for $60/month where there are no services like Netflix. I have never worked as a consultant in Africa where the Internet is still accessed by most people via dial-up modems. I don’t have a holiday house in Australia or Sweden where I do not want an Internet connection, if it is possible… I live in the US, I have never travelled and with respect to the rest of the world, I have NO IDEA…”
You do realize that many (possibly even most) members of the Xbox team grew up outside the U.S.? And that the largest segments of those grew up in infrastructure-challenged countries? And that they still have family there and spend time there? And that parts of the team actually reside in other countries? And that they have an infrastructure of employees worldwide who are responsible for providing input on making sure products are designed for the global customer base? And that beyond all that, Microsoft employees are amongst the most world-traveled of any group of people you will find on the planet?
Now all this doesn’t mean they won’t make decisions based on priorities that make the product a challenge under certain conditions. But you are 180 degrees from reality in terms of the your assessment of the world view of the average employee in the Interactive Entertainment Business or any other team at Microsoft.
I forgot to mention…the really scary part would be if they assumed the world had the same bandwidth as South Korea 🙂