Since rumors first surfaced yesterday that Sony may be planning to effectively block used games from working on the follow-up to the PlayStation 3 (following similar rumors about Microsoft's next system that leaked earlier in the year), I've been hearing some gamers and industry watchers suggest that such a move would be market suicide for any console maker foolish enough to go through with it. Despite publishers agitating for an aggressive stance against what's seen as a revenue-draining scourge, console makers that actually took steps to block used games would face a consumer backlash and reduction in demand that would easily outweigh any supposed benefits from the scheme, or so the argument goes.
While that's certainly a possibility, thinking through the standard arguments regarding the potential market impact of a used-game-free console leads me to think that such a move probably wouldn't make a significant dent in the bottom line for console makers or publishers.
Balancing supply and demand
One thing many publishers and used-game opponents seem to minimize when arguing against game reselling is that the mere existence of an aftermarket for games helps support the demand for new games. After all, you're much more likely to shell out $60 on a game the day it's released if you know you can get $20 to $30 back if and when you plow through it in a week. Eliminate the sellback option, and that same new game becomes that much harder to sell to a significant part of the audience, lowering demand and sales (or, alternatively, forcing publishers to lower the asking price for new games).
On the other hand, in a world where used games simply don't work on your console, some segment of the market would be forced to pay full price for titles that they would otherwise buy in the form of a cheaper used copy. This would in turn increase the amount of money going to publishers and developers, compared to a world where used games are siphoning off some of those direct profits.
It's hard to know exactly how big these countervailing effects would be, but we can try to estimate. Using Gamestop's annual used game sales revenues of $2 billion as a basis, Wedbush Morgan analyst Michael Pachter suggests that the retailer is paying out roughly $1 billion a year in store credit for used games. Most of that money is plowed right back into new game sales, which Pachter says could be "driving overall games sales up around five percent or more." That sounds like a big chunk of the new game market's nose to cut off just to spite the used market's face.
"It's impossible to know the balance, but the cannibalization of new game sales from used games is most definitely largely offset by the purchase of new games with used game credits," Pachter told me.
I jump, you jump
If either Sony or Microsoft implemented a used-game-blocking solution on their own, they'd run a significant risk of unhappy gamers shifting en masse to the opposing system. But if both system makers integrate such a scheme into their new systems, the potential impact would likely be significantly muted.
Sure, dissatisfied gamers could shift their gaming money to other options like the the Wii U, the PC, or mobile games, but none of these are perfect replacements for the type of experience Sony and Microsoft are likely to offer (this isn't a dig against any of these other platforms, just an acknowledgement that they are significantly different from the kind of consoles Sony and Microsoft will release). By presenting a unified front against the problem, both Sony and Microsoft could keep their publishers happy while basically daring their customers to try and find the same kind of gaming experience elsewhere.
As with any collusion scheme, though, there'd be an obvious problem of collective action here. If there's really an economically significant section of the market that has a strong interest in continuing to buy and sell used games, both system makers would have a strong interest in undercutting the other by re-opening the system to secondhand games after launch. If one console maker showed a significant sales boost through such a move, you can bet that the other one would be quick to follow, ending the used-game-blocking experiment, possibly for good.
But there would also be pressures pushing the console makers to hold the line on their efforts to stop secondhand sales, in the form of direct and indirect lobbying from game publishers. If only one system started allowing used game sales and purchases again, it's easy to imagine publishers suddenly realizing that they want to publish a lot more exclusive content to the other system, for instance. A console maker's best defense against this kind of pressure would likely be establishing such a large base of players that the publishers would be unable to ignore the market, used sales threat or not. It's hard to predict how these competing pressures would play out, but it's far from a foregone conclusion that blocking used games is totally unworkable, even if it's only pursued by one console maker.
Shutting out offline gamers
Perhaps the best argument I've heard for why no console maker will actually require an online-connected account that links retail purchases to a single owner is the fact that doing so would lock out the significant minority of consumers who don't have high-speed Internet access in their homes. The National Telecommunications and Information Administration estimated that only 63.5 percent of US homes had broadband access in February 2010, suggesting that online-linked protection schemes would reduce the potential audience for a console by about a third in one fell swoop.
But there's reason to believe the effect might not be that pronounced. For one, that broadband usage rate is up from 51 percent in October of 2007, according to CTIA. If the roughly linear growth during that timeframe continued, broadband will already be in 85 percent of US homes by late 2013, when Microsoft and Sony will likely be launching their systems. (Linear growth may not continue, as some people either do not want broadband, can't afford it, or live in places where it is not available.)
There's also reason to believe that HD console gamers are more likely than the average household to already have a broadband connection. A 2010 report from The Diffusion Group found that 78 percent of PS3 users and 73 percent of Xbox 360 users connected those systems to the Internet, surpassing the 68 percent of connected homes in the country as a whole. In other words, the people most likely to spend a lot of money on a new video game system are also likely to be spending money on a high speed Internet connection.
This doesn't mean there's no cost in requiring broadband verification to play console games. Players might not be happy with being unable to play their games every time their Internet connection goes down, for instance. Of course, if console makers are really determined, there are other ways to try to stop used game purchases that don't rely on Internet access.
I admit that it's hard to predict exactly how much of a backlash would result from technical solutions that tried to block used games on new consoles, and how much of that backlash would actually affect overall revenues on those systems. But to suggest that the video game business would be rendered utterly unsustainable without the used game market probably goes too far.
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