Sony's Gaming Gamble

Neal is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Well it's about that time again. By that time I mean the year where new video game consoles are launched. Under normal circumstances that would be cause for celebration because sales increase. However there might be a patent that could drastically reduce revenue for one company.

Sony (NYSE: SNE) is currently working on a patent to potentially mark games as played and allow them only to be used on one system. An editorial from independent video game news website Game Industry News as well as other outlets have reported. What Sony is attempting to do is stop used games from being played on their system.

In my spare time I do a significant amount of gaming. Many of which are used games that I bought for a discounted price. Since the prices have gone up and the amount of hours employers are giving employees have gone down; affording multiple new video games is near impossible. Prices are getting too high for hardcore gamers let alone the casual person who plays just to relax.

The issue stems from a long and storied war between video game developers and used game retailers. Parts of the gaming industry have claimed that used game retailers have cut into their profit. No evidence has laid a solid foundation to this claim. Normally game developers have brought up the argument and this is the first time a console maker has taken steps in this debate.

Sony's competition is taking the smart action by allowing used games to continue in circulation for their consoles. Microsoft (NASDAQ: MSFT)) is taking the smart course by following the trail left by the Wii U game system. Sony is taking a huge risk here by trying to slow down an entire area of retail. 

With a fair amount of time between now and E3, Sony has a big decision ahead of them. If they want to stay competitive then they need to not go through with the patent. Brand loyalty only goes so far in a down economy. I don't see Sony pulling the plug on the plan and this will likely cost them. If Sony thinks that the used game market cuts their profit and work towards shutting it down they won't attract the numbers needed to stay afloat. I used to work retail at Best Buy and my entire time there I never sold a Sony computer or TV because of the price difference.

No doubt that Nintendo (NasdaqOTH: NTDOY) and Microsoft will use this to their advantage in terms of advertising. In the state the gaming industry is in any large groups of new customers is enough to warrant renewed confidence. I can really see Microsoft take more advantage of the patent due to close release dates. A reduced amount of launch sales could severely hurt Sony's stock.

As we get closer to the giant gaming expo known as E3 we will find out if Sony has decided to go ahead with this patent. I firmly believe that the use of the patent will only have minimal effect on used game retailers such as GameStop (NYSE: GME). While some of the business would be lost by the hardcore Sony gamers, the increase in gamers buying for the competing systems should balance out.

Another factor is the unveiling of more game systems like the Nvidia (NASDAQ: NVDA) “Project Shield” hand held game. In addition to this surprise announcement also comes the Kickstart funded OUYA android based game set to release in April. With more consoles hitting the market, revenue is going to be tighter than ever before. Because of this Sony needs to realize that if they shoot themselves in the foot there may be no recovery from it. 

That being said I think we can expect a small jump in Nvidia's stock if the game system is affordable and meets the hype of early articles. Android has been gaining high amounts of popularity which means there could be a shift in balance. Based off of Sony's latest track record it wouldn't surprise me to see them fall to fourth or fifth in the game race. Sony isn't placing gamers first and need to realize that specs like blu-ray aren't going to carry them through multiple hacks and shutting off used games.

My advice is to keep an eye out on Sony. As always they are withholding ninety percent of their consoles details. If all rumors about the patent is a hundred percent confirmed I advise trying to get some stock in Microsoft. Microsoft has been doing all things right in the game industry and have a great chance to push Sony to third place. I really believe that Sony is making a catastrophic choice by filling for this patent, but what's done is done. I  feel it's going to get worse for Sony before it get's better.


nsayatovich has no position in any stocks mentioned. The Motley Fool recommends NVIDIA. The Motley Fool owns shares of GameStop and Microsoft. The Motley Fool is short Sony (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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