XBox One: (Not) Attempting to Modernize Through Monopolization

In late May 2013, Microsoft announced details of its new console, the XBox One, to be launched in November 2013. In addition to new games and technical improvements, consumers were surprised by Microsoft’s initial statement that that games on the system would be bound to a user’s account. The PR backlash caused Microsoft to change its stance, but the copyright-related issues still remain interesting and relevant in today’s “digital age.”

 

Although new games could still be installed by using the disc and saved in the memory of different consoles, they could only be played if the original user was connected to his/her personal account. As a result, the secondary market of games could be controlled by Microsoft. Even if the game discs themselves could be exchanged or resold, the second users could not play these games without paying for a new licence or accessing the personal account of the first user. It is important to note that Microsoft´s measure was not explicitly designed to combat game piracy, but to place greater control on the retailer-driven secondary market.

In proposing restrictions against the freedom to dispose of used games for the Xbox One, Microsoft gave rise to a point of tension between copyright holders and consumers. This issue has been openly discussed in relation to the music industry and for the use of protected works on the internet for some years.

 

From the perspective of the video game industry, there are a number of valid reasons to implement such measures. Considering that profits and activities of video game companies have been threatened due to the growth of piracy and to the aggressive push of used games by several retailers, increasing revenue by controlling the secondary market would provide greater sustainability in the competitive video game market. By doing this, companies would have money not only to remain in the market, but also to invest in developing new technologies in the medium- and long-term. Furthermore, the increase of profits might contribute to the overall reduction of cost for original games, as the risk of losses arising from the independent secondary market would not be included in the price.

 

At this point, it is important to highlight that the adoption of measures of restriction of the secondary market is not something new in the digital age. The use of “one-way” CD-keys for activating software on computers and consoles has been used for some years, which combats against piracy and places greater control on the secondary market. Similarly, digital rights management (DRM) services such as Steam – used by PC-gamers since 2002 – bind the games to the purchaser’s account through the use of a licence.

 

In spite of these advantages, the changes purposed by Microsoft received a large number of negative responses. In binding the original games to a specific user account, users might be forced to pay costs to game publishers in order to acquire a licence needed to play an used game and would not be able to recover part of these costs through resale of the physical copy. Although it is argued that increased profits in the video game industry might help reduce the price of new games and promote the development of new games and consoles, there is no assurance that (i) it will really occur, and (ii) if it occurs, the price reduction and technology development will be satisfactory to compensate the restrictions imposed by Microsoft.

For these reasons, many gamers rejected the new system adopted by Microsoft and pressed Sony not to use this model in their upcoming competitor console, the Playstation 4. After the outcry, Sony confirmed that used game sales would not be restricted by the Playstation 4.  Microsoft, in fear of losing a considerable number of sales, backtracked on its initial announcement, ensuring that XBox One games may be freely exchanged and resold without the need of purchasing a new licence.

While the license-based system of games sale proposed by Microsoft won’t be implemented by the company in this hardware cycle, there are some legal and policy issues of great importance that should be highlighted.

Proposals such as this give rise to discussions about the boundaries of copyright law. Considering that intellectual property rights are often used as an instrument to increase market share and to maximize profits, their function would better be justified under a social and collective perspective than under an individualistic perspective. In that respect, the scope of copyrights should be limited to the function of promoting creativity. In my opinion, the development of the video game market in the last two decades shows that creativity and innovation in this sector is possible even if a secondary market is not restricted. Here, Microsoft’s business strategy may require some fine-tuning.

Furthermore, the approach initially proposed by Microsoft might nullify the practical effects of the doctrine of exhaustion, a fundamental principle of property law. If Microsoft went ahead with their initial plans, discs would circulate in the market, but the games contained on them could not be played by other users without acquiring a new licence. By licensing access, publishers would effectively retain their right to control the product of its intellectual creation after its first sale in the market. In my view, in countries where the exhaustion of rights for creative works and software is ensured (i.e. USA, Brazil, EU-countries), sidestepping the practical effects of the “first sale doctrine” via licensing should be considered incompatible with the copyright system. If allowed, interests protected by the exhaustion doctrine would be ignored. If the measure suggested by Microsoft is performed by a company in the future, the Courts and legislative bodies should take into account its effect on the exhaustion of rights in order to shape the laws of the digital age appropriately.

The initially-proposed measure of controlling the secondary market might be considered at odds with the purpose of copyright and of the “first sale doctrine.” In this situation, we saw that market forces stayed Microsoft’s hand, but we must wait to see what the future brings as business models continue to evolve, and large and well-reputed players like Microsoft continue to commercialize new technologies.

 

Pedro Henrique Dias Batista is an IPilogue Editor and a PhD student at Ludwig Maximilian University of Munich.

Leave a reply

Your email address will not be published. Required fields are marked *

three × 1 =