Are the Days of Microsoft Points Numbered?

I recently listened to the March 31, 2008 EGM Live Podcast (download) where Garnett Lee interviewed Aaron Greenberg, Microsoft’s Director of Product Management for the Xbox 360 and Xbox Live. Among other topics, Aaron had the unenviable job of defending the concept of Microsoft Points (time index 17:40).

[Update: June 1, 2009: Today Microsoft announced ‘Games on Demand’. A feature to be launched in fall 2009 where full games can be purchased with credit cards. Finally, one small step away from Microsoft Points! See Gamasutra article.]

Reading several articles today on Sony’s pending PS3 on-demand service (see here, here and here) and Sony’s pending Playstation cards, to be denominated in local currency (here), it occurred to me that Microsoft’s use of points alone is going to become increasingly untenable as Microsoft’s key game/movie/TV show download competitors all offer competing products denominated and purchasable in local currencies.

Below I discuss Aaron’s arguments for Microsoft Points and what, to me, are overwhelming competitive arguments against them.

A. Aaron’s Arguments For Microsoft Points:

1. Minimizing Credit Card Transaction Fees: Microsoft doesn’t want to ‘burden’ consumers with credit card transaction fees. Credit card companies charge transaction fees on low and high value purchases. Forcing the consumer to make bigger purchases lowers the relative transaction fee. Microsoft passes the savings on to consumers.

Comment: Amazon and Apple manage to individually charge consumers 99 cents per downloaded song. PS3 owners can purchase downloaded content in their local currency with their credit card through the PS3’s Playstation Store. Surely Microsoft can similarly find a way of charging consumers $2.00 to $20 per content download. Give consumers a choice. If some (arguably most) consumers wish to be burdened, then give them the option to choose between points, cash card or credit card purchase options. My guess is only a small minority would choose the point system.

2. Enabling People Without Credit Cards to Purchase Content: A point system makes it possible for people, especially children, without credit cards to purchase content on XBLM.

Comment: Good point. But gift cards and cash cards achieve the same goal. These are not new. I use my Starbucks card to purchase my $1.55 coffee each day. As mentioned above, Sony will soon be offering offering Playstation cards denominated in local currencies (see here) that can be purchased from retailers nation wide.

3. Points Pricing Permits Unified Global Pricing: Microsoft believes consumers prefer a unified global points-based pricing system whereby everyone in the world is charged ‘the same’ points price.

Comment: Unified points pricing is a fiction. Consumers purchase Microsoft Points in local currency. The price Microsoft charges for points is different in every jurisdiction (see chart). Consumers understand this and know that despite the unity of Microsoft Points, the price they pay out of their pocket is different from the price paid by others in other countries. In our Internet-connected world, consumers see through the fiction. It is especially exacerbated because Microsoft does not adjust the price of Microsoft Points to take into consideration fluctuating currency markets (see below).

Garnett suggested a system whereby Microsoft post a Microsoft Points price on XBLM with the local currency quoted in parenthesis beside. Presumably this would be tied with an ability to purchase the content in that currency. Aaron thought this was a good idea and was going to bring it back to the team.

B. Non-Spoken Reasons:

While Aaron didn’t mention the following reasons, common sense tells us that the following are also reasons why Microsoft has chosen to use Microsoft Points.

• It’s Profitable: Microsoft is a business. Clearly they came to the conclusion that this would, all things considered, be the most profitable payment system for the Xbox Live marketplace, for the Zune marketplace etc.
• Confusion May Lead to Sales: Points keep consumers from knowing exactly what they are spending. 500 Microsoft Points sounds cheaper than $7.75. If a product seems cheaper it probably leads to higher sales.
• Forces Consumers to Carry a Float / Interest Free Loan: The system does not allow the consumer to purchase the exact number of points needed for a given download. So whenever a consumer wishes to purchase an item, they must, by definition, buy more points (and spend more) than they wish. This amounts to both: (i) more unearned cash on Microsoft’s balance sheet; and (ii) an interest free loan to Microsoft.
• Unused Points Means Higher Profits: It’s commonly known in the gift-card industry that a significant portion of gift cards are never redeemed. Undoubtedly a significant proportion of both: (i) Microsoft Points purchased and retained as a float balance (see above); and (ii) purchased/gifted Microsoft Points cards will never be redeemed. This is pure profit for Microsoft that wouldn’t exist if consumers purchased downloads with cash or cash equivalents.
• Technical and Extensibility Reasons: It was probably technologically easier to go this route and possibly more easily extensible to multiple markets than a currency-based payment system.

C. Arguments Against a Points System:

• Points are a Hassle & Confusing: Consumers don’t like them. Consumers do not like not knowing how much they are spending. Consumers don’t want the conversion hassles. Consumers don’t want to be forced to purchase more points than they need.
• Multi-step Purchase Process: Having to maintain a balance of points, or worse, having to stop mid-transaction to recharge a points balance, causes friction and lowers the likelihood of a consumer purchase. This frustrates consumers and lowers possible sales. It’s much easier to purchase items with a 1-click credit card system (witness Amazon’s 1-click successes). Several times I’ve chosen not to purchase an item from the Xbox Live Marketplace for no other reason than I couldn’t be bothered to recharge my points.
• Currency Fluctuation Inequities: The Canadian dollar has been at par with the U.S. dollar for about six months now (much of that time it has been above the U .S. $). Yet the price per Microsoft Point charged by Microsoft still assumes the Canadian dollar is worth 24% less than the U.S. dollar.  This angers consumers. It’s simply not fair to charge Canadians 24% more for the same product when Microsoft chooses not to (or can’t for technical reasons) price Microsoft Points in line with currency fluctuations.
• Points Price Variations Within the Same Currency: I was at Best Buy a few days ago. They were charging $39.95 for a 2800 Microsoft Points card. That works out to $1.42 Cdn per 100 points (by comparison Microsoft charges $1.25 per 100 points in the U.S. (see chart).  When the Halo 3 Legendary Map Pack came out the next day I needed more points because, as usual, the number of Microsoft Points floating in my account were just a few hundred short of what I needed to purchase the map pack. Microsoft was charging $1.55 Cdn per 100 points to purchase the points through Xbox Live Marketplace. Why the 13 cent difference per 100 points from Best Buy’s price? XBLM did not offer similar discounts for bulk points purchases. Had it been anything other than the Halo 3 Map pack, for that reason alone I would have forgone the purchase.
• Competitors Sell in Cash: The PS3’s Playstation Store, Apple TV, Amazon Unbox via TiVo are all direct competitors to Microsoft’s download marketplace business. They all price their offerings in local currencies and let consumers pay with credit cards or with cash cards/gift cards. All else equal (and purchasing identical movies/TV show via downloads are pretty much equal) when given a choice I believe most consumers will use the system that prices downloads in their currency and allows them to pay in cash or cash equivalents. I have three of these devices under my TV. That will be how I decide which service to use.

D. Conclusion

When Microsoft was the only video game/movie/TV show download game in town, they could afford to impose a points-system on consumers. But as competitors (Sony PS3, Apple TV, TiVo/Amazon Unbox/Blockbuster etc.) enter the race, offering a more consumer-friendly transaction system, I believe most consumers will choose the alternative.

I think the writing is on the wall. Microsoft will either have to abandon the points system, or, at least, offer cash-cards and credit card-payment alternatives, to compete.

[April 8, 2009 Update: In a step in the right direction, gamers can now purchase Xbox Live games, add-ons for cash through Amazon.com. See stories: Kotaku | Gizmodo | Ars Technica]

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