The Xbox One Question: Why Did Microsoft Do It?

The dust is settling on E3 2013 and by now you have probably read countless opinions about why Microsoft is wrong and how it "lost" E3 - along with a few lonely stalwarts arguing to the contrary. With the benefit of a few days' hindsight on those explosive press conferences and a few tens of thousands of words of executive interviews to provide context, I've reached a slightly different set of questions. I'm less concerned with "is Microsoft doing the right thing" - it's an argument that pits "right for consumers" against "right for a very narrowly defined segment of the industry", and I know which side always wins those arguments in the end - and more intrigued by the question, "why is Microsoft doing this?"

"Nobody really believed that Microsoft would paint itself as a villain unless it was absolutely confident that Sony was going to be compelled to do likewise"

After all, we're talking about a set of strategic decisions which turned what should have been the celebratory unveiling of a new console into a focus for opprobrium and dislike from press and consumers alike - and which subsequently overshadowed a reasonably solid E3 conference by giving a rival firm the sort of clear competitive advantage that just hasn't existed in the console business for over a decade. Microsoft is not a company that hires stupid people. It remains one of the world's richest companies and its staff are, on the whole, extremely intelligent people - so while the Xbox One may face an uphill struggle to regain consumer trust and rival the PS4 come November, the decisions which led us to this point were presumably made by intelligent, rationally thinking people. Rather than simply heaping further criticism on Microsoft, a task rather like dropping pebbles on the Himalayas, I'd like to try to understand those decisions a little better.

One key point, I think, is that Sony's announcement that it was not pursuing an anti-resale or anti-sharing DRM strategy actually came as something of a surprise to many people. In the weeks between the Xbox One unveiling and E3, something of a consensus had developed that Sony must be planning a similar approach. Earlier statements confirming that the PS4 would play used games were reconsidered - after all, the Xbox One will play used games, it's just that there's half a page of caveats and footnotes accompanying that statement. Many commentators argued that Sony was simply doing a better job of dodging the question than Microsoft, while most of us simply hoped that whatever awful DRM system PS4 used, it would be less restrictive than Microsoft's approach.

The reason that this consensus developed was that nobody really believed that Microsoft would paint itself as a villain to this extent unless it was absolutely confident that Sony was going to be compelled to do likewise. Who would do the compelling? Publishers, presumably - publishers who, we figured, had been leaning on platform holders to "do something" about second-hand games for years. Microsoft had made an internal calculation that Sony, too, would be forced to adopt this sort of system - we all therefore assumed that Sony, facing the same kind of pressures as Microsoft, would end up presenting the same unpleasant cocktail in a slightly different glass.

"Most publishers have hastened to distance themselves from an online pass requirement, which is making Microsoft look rather isolated "

Well, they didn't. Sony's policies for boxed games on PS4 hasn't changed an iota from PS3 (or Vita, or PSP) - the games aren't locked to a console or an account and they're region free. Publishers can implement an "online pass" style system if they wish, but most publishers have hastened to distance themselves from that requirement, which is making Microsoft look rather isolated (though I don't believe for a single second the protestations of innocence from publishers claiming they never asked Microsoft to implement stricter policies for second-hand games). Whatever pressure the platform holders came under to implement this kind of strategy, only Microsoft blinked.

This could be an outright miscalculation on Microsoft's part - they could simply have failed to hold their nerve in the face of partners who threatened to withdraw software support from a console that didn't fight back against the "menace" of pre-owned sales (and sharing, and swapping, and lending, and all those other nice things humans quite enjoy doing with their friends and colleagues). That would be embarrassing - it would suggest that Sony's announcement about not beefing up its DRM came as a huge shock to Microsoft, and is probably causing some pretty angry scenes in Redmond meeting rooms right now.

However, I think there's a cultural difference at work here too. I suspect that within Microsoft's culture the notion of "restricted licensing, not outright ownership" is viewed as uncontroversial and mundane. I suspect that there are quite a few people at Microsoft wondering what all the fuss is about, and far more who are just waiting for the "vocal minority" to quiet down and go away, confident that the "silent majority" is perfectly comfortable with everything that Xbox One is doing. Many big companies end up being a bit of an echo chamber, reinforcing viewpoints through ongoing repetition rather than exposing them to healthy external challenge, and Microsoft is no different.

Those viewpoints are borne out of two mistaken assumptions. The first is that people are already familiar with the idea of licensing over ownership. This is an assumption that's not uncommon within parts of the games business and it arises from thinking in terms of technicalities, teasing apart arguments to find flaws in the surrounding logic rather than tackling the wider point or understanding the full perspective. This focus on technicalities to the exclusion of a broad understanding of a wider picture that includes complicating factors like sentiment and public opinion is a common flaw in the games business, as well as being easy to identify in other parts of the technology and entertainment businesses.

This is important, because technically, every piece of entertainment or software you have bought for years has been licensed, not purchased outright with no strings attached. Every game, every album, every movie - they all come with an end-user license agreement or some other form of terms and conditions, pages and pages of (mostly unenforceable) legal nonsense which outlines the idea that you haven't bought a product, you've licensed something for use in a very specific and restricted set of circumstances. The lawyer's perspective, the geek's perspective and, I suspect, Microsoft's perspective is that this is already the status quo, Xbox One is simply enforcing it and everyone apart from a few noisy people on the internet should be happy.

"Consumers fight back when an actual restriction is imposed, not when a sneaky piece of legalese implies a restriction that nobody attempts to enforce"

The problem is that that argument began with the words "because technically" - which usually signals an argument which will prove to be logically flawless yet utterly at a tangent to reality. The fact is that while lawyers and the denizens of company boardrooms have become accustomed to this idea of licensing over ownership, consumers absolutely have not - because so far, it has mostly just been legal jargon that their eyes skim past, without actually changing how they interact with someone. Sure, that CD says you can't have an unauthorised public performance, but it doesn't stop you playing it at a party. Yes, the DVD says you shouldn't copy it, but it can't actually prevent you ripping it to your laptop to watch on the train. Absolutely, that game says it's only for the use of one person and unauthorised resale is banned, but I can still physically take the disc out of the drive and give it to a friend or put it on eBay. The people who have grown accustomed to licensing restrictions are only those who seek to impose the restrictions; actual consumers have yet to feel the cold hand of these restrictions on their day to day behaviour.

That's why a strategy that was probably seen as simply "continuing the status quo" within Microsoft has provoked outrage from consumers who, yes, have "technically" been bound by these restrictions before, but have not actually had to contend with them for real. Arguing, as some have done, that consumers should have fought back before now, when these EULAs and licenses were first being introduced, is another "but technically..." argument - consumers fight back when an actual restriction is imposed, not when a sneaky piece of legalese implies a restriction that nobody attempts to enforce.

Of course, there's another reason Microsoft may have seen Xbox One as an uncontroversial device - because we already accept similar restrictions when we buy digital software from Steam, the App Store, Google Play and their ilk. You can't trade in your Steam games, so why are you so upset about the same restrictions being imposed to Xbox One?

Again, this is a conflict of "but technically..." versus real consumer sentiment. Yes, Steam applies these restrictions, but there are two key differences. Firstly, Steam applies them to digital products, not to physical products, and consumers have very different relationships with digital products (rightly or wrongly). Applying the same restrictions to physical products - to items which consumers feel that they physically own ("but technically!") and feel that, as with any physical item, they have a right to keep, to give away, to sell or otherwise to treat as any personal possession since time immemorial has been treated - feels deeply unpleasant and grasping.

Secondly, Steam - like any store on a PC or a Mac - is a choice. I can buy software from Steam, but if I don't like the terms I can also buy through many other routes. Steam is chosen by consumers because it's the most convenient and often most cost-effective way to get games - it competes with lots of other channels, physical and digital. The same applies to iTunes, which dominates the music market but is entirely optional - you could buy all the music you want through other channels if you liked. I buy a lot of books on Kindle, fully cognisant that this is more restrictive than buying paperbacks, but accepting those restrictions in return for good value and superb convenience.

"Sony will end up selling digital software subject to fairly strict restrictions - all without having had to pick an enormous fight and look utterly black-hearted"

Xbox One doesn't propose to let consumers make a choice (other than "not buying an Xbox One", a choice a rather large number of consumers seem to be making right now). It intends to apply the same restrictive DRM to physical and to digital goods, treating them as one and the same despite consumers' radically different relationship with them. Sony will apply strict DRM to digital purchases on PS4, just as it does on PS3 (and as Microsoft already does to digital purchases on Xbox 360), but consumers won't complain vociferously because they accept this - it's an option. If you choose to buy a digital game over a physical copy, you do so aware of the restrictions but feeling that they are outbalanced by the convenience or other factors. In extending those restrictions to physical products, Microsoft removes a choice that consumers have become very attached to.

So that's what I think Microsoft's reasoning was. I wonder if they blinked in a staring match with publishers in which Sony kept its cool - but either way, I think that the decision was informed by a culture in Microsoft which sees licensing restrictions as far less controversial than they are out in the real world. I think that's a mistake, one which created a stupid business decision but which was not, in itself, based on stupid decision making - rather on intelligent people making a perfectly rational decision within a climate that warped their perceptions and understanding of the market they're operating in. I suspect that those same intelligent people are today rather shocked by the backlash and while some will be seeking to justify their decision, the brightest and best will be thinking of the most effective ways to backpedal and limit or even reverse the damage.

The only aspect of the debacle that I find really crazy is this: this is a fight which Microsoft had no need to pick. As I mentioned, Sony will apply similar DRM to digital purchases, just like everyone else in every entertainment and software industry does. In the coming five years, more and more of the software published and purchased on PS4 will be digital software. The physical retail channel will remain, and it will keep the industry honest by providing a competitive pricing channel, but by and large, Sony will end up selling digital software subject to fairly strict restrictions - all without having had to pick an enormous fight and look like an utterly black-hearted villain for kicking the legs out from under physical, boxed games. Microsoft, too, will be mostly a digital business in five years. Was it really worth risking the company's image and its product's popularity with the core market, potentially undoing years of hard work at building up the Xbox business, just in order to hasten on that process by a few years? Was this not a fight that could have been won just by being a little more patient?