This May Be Sony's Dumbest Move Ever

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Let me start off by saying that Sony (NYS: SNE) is a company with a recent history of bad decisions and bad luck.

When you delve into last year's repeated hacking attacks on its consumer-facing PlayStation network or the fact that it's lost a ton of money on its bread-and-butter TV business for seven consecutive years, you come to the conclusion that Sony is either unlucky at best or incompetent at worst.

However, it's the self-inflicted moves -- typically revolving around brainless decisions to overprotect its media -- that deliciously backfire in the once-great company's face.


Well, it's at it again.

There should be a cheat code for this
Gaming enthusiast website Kotaku has unearthed some chilling tidbits about Sony's next console. Now, while Orbis -- and that's the name of the PS3 heir, according to the website's source -- won't be out until late next year, some of the rumored specs continue to stick.

I'm not talking about the graphics and sheer processing power that will make Orbis a powerful gaming console. I'm actually talking about the two things that may make Orbis seem more like an obit if they wind up being incorporated into the final product. According to Kotaku, the new PlayStation gaming console will not be backward-compatible with earlier PlayStation systems and it will have "anti-used games measures" built into the console.

The former is going to eat into sales. If folks can't play their PS, PS2, or PS3 games on the Orbis, most gamers are unlikely to upgrade right away. Since they've also seen how Sony systems fall precipitously in price over time, waiting is never a bad strategy with this company.

The latter is going to be worse. If the Orbis won't be able to play secondhand games, you may as well just toss them into the clearance bin as overpriced paperweights.

Sony can't be this stupid. Right?

Does it really think that folks will buy a likely pricey system that can't play used games?

Sale and resale
It's easy to see the attraction of an "anti-used game" platform for both software developers and Sony (which collects a royalty on new software sales).

Friends swap games when they're done playing with them, eating into the sale of shrink-wrapped releases. There are also several ways to rent games. Folks turn to GameFly, Coinstar's (NAS: CSTR) Redbox, and DISH Network's (NAS: DISH) Blockbuster to rent games at a fraction of what they would cost new. Once the titles outlive their popularity, these companies will also sell the used games.

Redbox and Blockbuster obviously make more money through movies than they do through games, but then we get to GameStop (NYS: GME) . The video game retailer's biggest margins lie in its resale business. GameStop will buy back old games -- make sure they work -- and sell them at huge markups.

All of these models would be toast if the Orbis can't play rented or cheaper secondhand games. If Orbis games come with unique codes that can only be installed on one system, all of these companies will take a hit.

However, it will be Sony itself that pays the biggest price here. After all, the reason that GameStop has been able to hold up far better than the video game industry that has been largely fading over the past three years is that customers know they can trade in their older games and gear. If they can't do that with Sony's new console, suddenly that $60 game is no longer the $40 game that they were used to buying after flipping a $60 game for $20 of credit.

If GameFly, Redbox kiosks, and Blockbuster can't rent Orbis games, there goes that promotional lifeline. Gamers may also conclude that a new platform isn't selling well if it isn't being promoted through these channels -- and they'd be right, though for the wrong reason.

If Sony upends GameStop's thriving resale model, how much support do you think the small-box retailer is going to give Orbis? You probably know the answer, and it would be more bad news for Sony.

No more Mr. Softy
There were rumors earlier this year that Microsoft (NAS: MSFT) was weighing similar anti-used measures for its eventual Xbox 360 replacement. Forcing owners to register new purchases online would lock purchases into a particular console. The big push to digital delivery also anchors purchases to the original owner.

However, the chatter is hard to believe when it comes to Microsoft. It may not always get it right the first time, but it does think things through. Sony has a history of stupid media-protecting decisions. It's dumb enough to actually go through with this move that will nix any chance that the Orbis has of succeeding before it even hits uninterested retailers.

The video game industry in general, and Sony in particular, can't afford to be cocky.  

Play on
A new special report singles out three winners in the iPhone, iPad, and Android revolution. Sony and its gaming ambitions don't play into that, but can you guess the three that do? The report is free, but it won't be around forever, so check it out now.

At the time this article was published The Motley Fool owns shares of GameStop and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft and Coinstar. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft and writing covered calls on GameStop. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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