Friday, March 30, 2012

Orbis: It's the End of the World Again: Analysts are Shitheads Edition

I love this kind of story. Some anonymous source on a website told the world the next PlayStation will be called "Orbis" and that it will not play used games. As some random guy with a blog, I would expect me to write something about this - I did not - but why are all of these "professionals" weighing on speculation and being so very, very wrong in the speculation layered on top of speculation. While the only basis for validating the speculation is the memorialization of the thought in a series of letters comprising words on a page, the analysts feel the compulsion to comment. The very, very sad part is their commentary betrays them and shows why they are so often so very, very wrong. They see the wall, they see the train tracks, but the do not realize they are sitting on an airplane. Michael Pachter of Wedbush, David Cole of DFC Intelligence and Lewis Ward of IDC all focus on a recent announcement suggesting PS4 - they say it is called Orbis but if Sony caught on to Microsoft's game in the last round they are giving different code names and feature sets to everyone so they know who leaks details - will not allow the play of used games. Their grasp to this nugget like rats to the flotsam of a sinking ship points them to impact on Gamestop. This is a valid concern. One half of Gamestop's business is the resale of used games. The focus may be well placed, but the conclusion ignores even the speculative facts put out in the original post.
If you then decide to trade that disc in, the pre-owned customer picking it up will be limited in what they can do. While our sources were unclear on how exactly the pre-owned customer side of things would work, it's believed used games will be limited to a trial mode or some other form of content restriction, with consumers having to pay a fee to unlock/register the full game.
Used games are not blocked, they are limited. Fellas, this is not a whole lot different than what is going on today. There is a long list of the most popular games on the market that only allow full use to the first player. This article suggests the paywall - or repay wall - will simply be moved closer to the beginning of the game. Analyzing this point would also lead to a conclusion of potential benefit for Gamestop and the publishers. If the games are limited utility, the value, and therefore the price goes down. However, no one said they are useless. The games are still low cost demos and entry points for consumers. If there is enough value on this side of the repay wall, consumers may pay twenty dollars for the limited use disk. If they like the game, they pay another 20, or micro transactions, to the publisher, and everyone makes money.  Used revenue per disk will go down for Gamestop, but volume could increase significantly as it did when the price of home video was reduced from $99 to $59 to $20 and to $5. The only potential users are the console manufacturers who will not make the fee on the manufacture of the shiny disk, but this could be made up on transaction fees for the downloads.

The weird thing about the focus on the used games half of Gamestop's revenue is the failure to consider the much larger and much more significant threat. If these consoles go to direct downloads or cloud based gaming Gamestop will lose revenue from the sale of the shiny disks and lose the access to the inventory of used games. Seeing as Gamestop's entire business may in fact be built around consumer funding of their used game inventory, every download game is a double impact on Gamestop revenue. Gamestop's CEO, Paul Raines, is a very smart guy. He supports Gamestop's relevance by saying digital is further out than we think. Storage is simply not there to collect all of the games we want to play. Unfortunately, cloud computing and access may make storage irrelevant and console manufacturers would be short sighted to ignore the rest of the world and not take advantage of the technology - of course this would not be the first time. Paul knows this and is driving the company in the direction of digital. They do have a long, long way to go, but there is a world where a retailer offers stellar service, enhanced value and in exchange generates high revenue per square retail foot selling things that are all available on line and a transaction fee for downloads. Today we call it the Apple Store. Gamestop just has to figure out how to get there. The analysts have to figure out how to analyze.

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