Publishers Rejoice: No More Xbox One DRM

News broke a few hours ago that Microsoft is drastically back-tracking on its DRM requirements. Games will not be tied to online accounts. Your physical game copies can play on any Xbox One anywhere without restriction. There will be no required once-a-day connection.

There will be no fees to trade-in games or to buy pre-owned games.

Actually, that wasn’t in the announcement. But it’s true and implied. Microsoft’s ability to let publishers charge fees for used games expires now that games aren’t chained to specific Xbox Live accounts. And while this didn’t happen the way I expected, I have to say it:

Publishers will not charge fees for used games. I called it.

Colbert called it

But I want to expand on this, turning the Xbox One debacle into a basic lesson on game theory. (Economic game theory, not videogame theory.) As I mentioned in my previous post, Microsoft’s proposal was forcing publishers into a prisoners’ dilemma scenario. A publisher could charge fees, but without the foreknowledge that every other publisher was following suit, they’d be left exposed and vulnerable to extreme public backlash.

This isn’t a generic prisoners’ dilemma. Microsoft was forcing publishers into a lose-lose scenario, a hybrid of the Bertrand model and the differentiated goods model.

(Both models are a prisoner’s dilemma where two firms compete by setting prices for their similar products – videogames, in this case.)

For an example, let’s take EA and Activision. Both have to make a decision about how much to charge for used games (with $0 being taken to mean that they won’t charge). Because their games are largely interchangeable (from an economic perspective), they are thus competing mainly on price. Battlefield and Call of Duty will always have their own fanbase, but for the non-diehard fans, price is the main distinguishing factor.

Once they announce their price, they can’t change tack. Whatever they announce is impossible to undo. And thus, there is a second mover advantage.

Do you want to know the real reason why no publisher wanted to talk about the Xbox One policies? Because they could not risk being the first company to announce plans. Think about it: If they announced anything other than $0, they would instantly lose a significant amount of consumer trust, and they would risk their company’s standing and reputation in the industry.

If EA announced a $5 fee, Activision could instantly undercut them with a $3 fee. And since they compete mainly on price (Battlefield, Medal of Honor, and Call of Duty aren’t that different when you get right down to it) in this model, EA instantly loses a lot of market share. Not everything – their products are differentiated to a degree, the same way the Nestle and Hershey’s are different brands of chocolate – but a lot.

Screen Shot 2013-06-19 at 10.20.41 PM

Note: Diagrams of the Differentiated Goods Model from my microeconomics textbook.

And while the economic models show that there’s a Nash equilibrium, where all publishers would be happy, that isn’t true in the real world. EA instituted online passes several years ago, clearly showing that $0 isn’t the stable equilibrium we wish it was. Nobody knows what the Nash equilibrium is, and nobody knows how to calculate it either. That’s the crisis that was facing publishers while Microsoft waxed poetic about its used games policy.

Screen Shot 2013-06-19 at 10.20.16 PM

And the worst part about it for publishers? They couldn’t even talk about it to each other. That would violate antitrust law, which prevents corporations from colluding to set industry-wide prices, or from raising prices.

While we have the popular image of publishers being soulless, the people heading them do not want to go to jail. It was truly a prisoners’ dilemma for publishers, since they couldn’t talk to each other, no one was willing to be the first to announce policies, and they knew intimately how a misjudged or wrong decision could damage their company’s finances and reputation. THQ went through bankruptcy proceedings less than 6 months ago.

If we’re completely honest, Microsoft did not do gamers a favor. Microsoft changed its policies in order to accommodate publishers, none of whom were comfortable with the Xbox One’s used games policies or knew how to answer it. But what I really don’t understand is how Microsoft didn’t see this coming in the first place. Were they so self-absorbed that they didn’t think about how the DRM/Used-games policy would affect 3rd party publishers, the ones who are responsible for making the Xbox a success in the first place? Microsoft doesn’t have the in-house developers of Nintendo. Nintendo can afford to think about itself first and foremost. Microsoft can’t. I cannot imagine what the gaming division was thinking, but all that matters to them is that the crisis is over.

I imagine that Microsoft will be receiving a lot of thank yous over the next few days. The important ones won’t be from us gamers, however, or even from Gamestop. They’ll be from EA, Activision, Ubisoft, and others. They are saved from the otherwise unavoidable pressure and criticism that would meet their used-games policy announcements.

So thank you, Microsoft, for giving publishers an escape route from a lose-lose situation. We’ll just ignore that you were the one responsible for creating that prisoner’s dilemma in the first place.



2 responses to “Publishers Rejoice: No More Xbox One DRM

  1. “If we’re completely honest, Microsoft did not do gamers a favor.”

    I wanted to say that exact thing in my own post on the subject, but I couldn’t think of a way to properly work it in. I’m glad you were able to make this point.

    I do really have to wonder what their strategy was here. Judging from what the other publishers have said when asked about the Xbox One used game matter, they found out about it at the same time as the rest of us. This was the kind of thing that was explicitly for the publishers ad that they’d need publisher support to get through, yet Microsoft never bothered to communicate with anyone about it to either help develop the program or to build up a united front.

    • Thank you. It really is puzzling that publishers were kept out of the loop on something that was so obviously geared towards them. Plus, EA had discontinued its online passes the month before. That should’ve been a red flag for Microsoft, considering that online passes are the closest thing to their would-be restrictions.

      Imagine if EA, Activision, and a couple others had been solidly behind Microsoft from day one? The conversation would be radically different right now.

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