Does an All-Digital Xbox Make Sense?

Stephen Lovely, The Motley Fool

Microsoft (NASDAQ: MSFT) has confirmed that it plans to release a new video game console. No, it's not a next-generation device: It's another iteration of the Xbox One, the gaming console that debuted in 2013. The Xbox One was slimmed down for a 2016 refresh that Microsoft dubbed the Xbox One S. Then came the more powerful Xbox One X in 2017.

The newest version of the Xbox One will look a lot like the last one, sporting a slimmer form factor than the original Xbox One. But there's one big difference. The new device will not have a disc drive. It's an "all-digital" console that will rely on games users download from the internet. Is this the future of gaming?

A man plays video games on his television set.

Image source: Getty Images.

The shift to digital

When Microsoft first announced the Xbox One, fans weren't too happy. Microsoft's new console had a few problems, fans felt, especially when it came to digital rights management for physical copies of games. Under Microsoft's planned rules, game developers could have prevented purchasers of physical games from installing them more than once or playing offline. This meant that consumers would not have been able to resell such games on the secondary market -- or, for that matter, take them to a friend's house to play or lend them to someone.

Fans were so irate that Microsoft rolled back some of its plans.

But how times change. These days, physical game discs -- despite the resale and portability advantages mentioned above -- are losing ground to their digital counterparts. In 2018, digital game sales reportedly jumped 17% year over year globally. In the U.K., 80% of all video game revenue is now digital.

In the future, it seems, few people will want to buy a video game on a physical object in a store. In that sense, the new all-digital Xbox seems like a sign of things to come -- it would be no great surprise if a disc drive is not even an option on the next generation Xbox, though Sony's (NYSE: SNE) next-gen PlayStation will reportedly have one.


Of the moment -- but not for much longer

But while all-digital consoles may be the thing of the near future, there are other trends that could make the all-digital Xbox look positively archaic in a few years.

Consider that while the new Xbox lacks a disc drive, it still has a lot of other things that have long defined video game systems. It has beefy hardware in every department where a game might need it. It has a top-notch graphics processing unit (GPU), plenty of memory (RAM), and a healthy dose of that other kind of memory -- long-term storage -- in the form of a hard drive that will reportedly have a 1-terabyte capacity.

By contrast, another would-be model for future systems, Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Stadia, has virtually no on-board storage. That's because Alphabet is betting a different, and arguably much larger, shift in how video games are consumed: Alphabet believes that cloud gaming, in which the game itself lives on faraway servers and is delivered to the gamer over the internet, is the next big thing in games.



While cloud gaming devices like Stadia do need hardware good enough to communicate quickly over the internet and display impressive images on players' screens, they can rely on faraway hardware to improve loading times and do other things that, on traditional consoles, would be the responsibility of each individual player's own machine.



Your mileage with cloud gaming machines will vary with the quality of your internet connection, presumably. But that's already the case with online multiplayer games, even when they're being played on devices that could handle similar single-player gameplay on their own. In short, it looks like cloud gaming devices will be able to do everything that their storage-heavy (and, most likely, pricier) older-console cousins can do.

The future, for now

We're in the very early days of cloud gaming. Several companies are betting big on it, but so far, there aren't many ways to play. Owners of Sony's PlayStation can stream games via Sony's PlayStation Plus, and owners of gaming PCs can try NVIDIA's GeForce Now, but nobody seems ready to knock the bigger hardware devices out of the game: For the most part, a device with local storage like a PlayStation or a gaming PC is what you play these cloud games on. For now, then, there's no reason to expect big consoles with onboard hard drives to go away. For as long as that's true, going all-digital feels like a reasonable innovation.

But it remains to be seen how long big consoles remain necessary. Sony and Microsoft are both expected to release new entries into their respective console lines, and those new products will certainly boast impressive specs. But don't be surprised if those next-generation consoles gain pesky rivals in the form of lower-cost systems that lack not just disc drives, but some of the other hardware that we've come to take for granted in gaming.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Stephen Lovely has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Microsoft, and NVIDIA. The Motley Fool has a disclosure policy.