PayPal Inc. is now connected to Microsoft Corp.'s Xbox 360 game consoles — a move that could spur similar growth in digital game sales as PayPal did for eBay's marketplace a decade ago.
On the surface, the PayPal option simply links millions of PayPal users to the game developers who sell on Microsoft's platform without requiring a credit card. But further, it opens the door to allow Microsoft to capture the money in the $3 billion secondhand game market, a large part of which transacts online using PayPal accounts.
Game developers have been seeking ways to recapture revenue from the used game market. As with almost any industry, game makers are paid only when a product is first sold, not when it is resold. And since many boxed games are sold on eBay, much of the money from the sale of used games today winds up in PayPal accounts.
The growing market of downloaded games, however, locks games to the buyer's account or hardware — there is no boxed disc to put up on eBay.
Before the Xbox update, which went live on Thursday, users who wanted buy downloadable Xbox games had to use a credit card or buy a Microsoft "points" card, a virtual currency used only on the Redmond, Wash., technology giant's platform.
Analysts considered the buying of this card a roadblock to spending on Microsoft's platform.
"PayPal is more widespread than [Microsoft] points, and it is opening up the market and making it easier for people to buy games and pay for them," said Zil Bareisis, a senior analyst with Celent.
Billy Pidgeon, a senior analyst for M2 Research of Encinitas, Calif., estimates that eBay controls about 6% to 8% of the used game market. GameStop Corp., which buys and sells used games through its brick-and-mortar stores nationwide, controls about 80%, Pidgeon said. (In its first-quarter earnings, GameStop reported selling $625 million in used games, up nearly 10% from a year earlier.)
Pidgeon said that whereas users could always buy boxed games with their PayPal balances, they are "more likely [to use those balances] toward downloadable games."
Carey Kolaja, senior director of digital goods for PayPal, wrote in an emailed statement that "PayPal … is enabling a more seamless payment experience for gaming and a host of other platforms."
Kolaja said May 19 in a blog post that 75% of people who identify themselves as gamers also have PayPal accounts.
Industry observers said the addition of PayPal, a unit of eBay, lets Microsoft stake out a larger territory in the burgeoning online video game space.
Jesse Divnich, an analyst for Electronic Entertainment Design and Research of Carlsbad, Calif., said, "This is Microsoft's attempt to profit from the sale of used games … the broader point is that this gives Xbox consumers additional ways of paying for their digital products."
Other payments companies also are keenly interested in developing traction in the gaming payments space.
In February, Visa Inc. acquired PlaySpan Inc., a privately held company with its own platform for buying digital goods.
"Visa and MasterCard are actively waking up to this space," Bareisis said.
David Furlonger, a fellow and vice president of industries research at Gartner Inc., said over time Microsoft may ultimately charge an exchange fee for transactions flowing over the network, in much the same way Facebook Inc. does with its Facebook Credits transactions.
"Microsoft owns the Xbox platform, which has a stable level of popularity," Furlonger said. "One would assume the link with PayPal or eBay would only enhance the value proposition."
Though Microsoft said it was unable to respond to requests for comment by press time, Larry Hryb, director of programming for the Microsoft Gaming Network, writing on his "Major Nelson" blog on May 19, suggested the integration would increase sales of Microsoft products.
"Once you've linked your PayPal account to your Xbox LIVE account on Xbox.com, you'll be off and running to use it as a billing option, allowing you to buy content such as Microsoft Points, Xbox LIVE Gold subscriptions and Games on Demand titles," he wrote.
