Microsoft Corporation (MSFT) Just Killed the Market for Used Video Games

Microsoft Corporation (NASDAQ:MSFT) revealed its next console on Tuesday, the Xbox One. With it, the company effectively killed the market for used games, and presumably, GameStop Corp. (NYSE:GME)’s business.

The Xbox One

The Xbox One is a step forward in gaming. The new console runs x86 PC architecture, boasts impressive technological capabilities, and offers users a whole new TV viewing experience.

But it doesn’t allow for used games in the traditional sense. All Xbox One games will have to be installed onto the system and activated online. Unlike previous video game consoles, which played games directly from the disc, the Xbox One functions like a PC — playing the game from an installation file on the hard drive.

Gamers won’t be able to loan their games to their friends, though they can still install the game on another console and play it — as long as they are signed onto their Xbox Live account.

Microsoft Corporation (NASDAQ:MSFT) has promised that there will still be some sort of market for used games, according to a report from Kotaku. But that marketplace will be online in nature. Presumably, it would allow users to sell or trade the rights to play a game — stripping it from their account and giving it to the buyer.

Altogether, it’s not a particularly good development for GameStop shareholders.

GameStop’s reliance on the used games market

GameStop remains completely dependent on the market for used video games. The abolition of this market would almost certainly lead to the death of GameStop, assuming the company is not able to radically reform its business model.

The company’s recent 10K reveals the extent to which it is dependent on the market for used games — 48% of Gamestop’s profits come from the sale of pre-owned video game products.

This category includes things other than games (pre-owned consoles and accessories) but games comprise the vast majority.

GameStop has been working at branching into other areas — bolstering its online store, getting into the market for used tablets — but replacing the profit it generates from used games would be no small feat.

Sony Corporation (ADR) (NYSE:SNE) and Nintendo

Sony’s PlayStation 4 does not appear to have this online activation issue. According to CNet, the PlayStation 4 will give gamers the ability to swap physical discs freely. Meanwhile, Nintendo’s latest console, the Wii U, is already here, and carries no such restrictions.