Microsoft's Next Mistake?

Buzz is building for Microsoft's (NAS: MSFT) next Xbox, even though the initial reports claim that the new console won't hit the market until late 2013.

However, there may be something unique about the Xbox 720 that publishers will love but gamers, GameStop (NYS: GME) , and video game rental will loathe.

Video game enthusiast website Kotaku is reporting that the powerful new gaming system may spit out used discs.

"I've heard from one reliable industry source that Microsoft intends to incorporate some sort of anti-used game system as part of their so-called Xbox 720," writes Stephen Totilo.


Whether the authentication process is seamless or we're talking about the Microsoft model where a unique code applies to each disc, this could be disastrous if this is true.

I'm not just thinking of GameStop, whose high-margin business of buying and reselling used games would be crushed. I'm not just thinking about Gamefly, Blockbuster, or Coinstar's (NAS: CSTR) Redbox -- the three leaders of used video game rentals that would see that niche dry up. I'm not even thinking about eBay (NAS: EBAY) , though one can imagine video game sales drying up and buyers hesitant to buy a used game being passed off as new.

What about the gamers? Don't they have a say? Do you think they'll want to fork over $60 for a game that they can't trade with a friend or for retailer credit? Obviously video game publishers would love it if the gaming community ate this up. They only cash in on the initial sale, forgoing any piece of the action on rentals or used game sales.

However, it would seem outrageous that Microsoft -- after finally clawing its way to the top among the three console makers in 2011 -- would throw it all away to please publishers.

It can't be. Can it?

Allow me to throw one more log in this conspiracy fire.

During last night's earnings call, Netflix (NAS: NFLX) revealed that it will definitely not be entering the video game rental market. This was expected, though the company had always opened up the possibility after announcing back in September that video game rentals would be part of the since nixed Qwikster offering.

Why is this worth noting? Well, Netflix CEO Reed Hastings just happens to sit on Microsoft's board of directors. If he was on the fence about offering video game rentals, anything that he may have heard at Microsoft of the Xbox 720's rumored features may have made it an easy decision to nip video game rentals in the bud.

Regardless of the chatter, my money is on this not happening. GameStop and Redbox can go back to worrying about the demise of physical distribution. Now that's the real threat. If Microsoft were to somehow be stupid enough to tempt legalities and the patience of fickle gamers with a feature that would spit out used games the Xbox 720 will be as good as dead.

It won't happen. Microsoft is smarter than that.

I've been covering Microsoft since the 1990s, and I've generally had a lukewarm opinion as an investor. However, I entered a bullishCAPScallon Microsoft in Motley Fool CAPS earlier this month, reversing my earlier bearish pick.

If you haven't read about thetwo wordsthat's giving Bill Gates and Steve Ballmer fits, it's a free report so you as may wellcheck it out now.

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

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