Microsoft Gropes for Market Share With Xbox Price Cuts

As the video game industry begins to ramp up for the holiday season, Microsoft (Nasdaq: MSFT) announced Wednesday that it has cut the price of its line of Xbox 360 gaming consoles. The new pricing, which goes into effect Friday, starts at US$199 for the low-end console, the Xbox 360 Arcade model, down from $279.

For consumers, the golden price for a gaming platform is $200 or lower. Consoles retailing at or below that price point account for more than 75 percent of the systems sold, according to Microsoft.

"$200 is the critical break point for volume," Rob Enderle, principle analyst at the Enderle Group, told the E-Commerce Times. "People can typically justify up to a $50 premium for more features; over that is a much harder sale. The Xbox Arcade is low enough for volume. It will depend on whether the market views the Arcade as a full product or a crippled product."

If consumers view the Arcade -- Microsoft's barebones model that comes with a scant 256 MB of memory for game storage -- as a lesser product, then the price cut will be moot.

"The market does not like crippled products at any price," Enderle remarked.

Holiday Challenge

Microsoft's red pen did not cut as deeply into the price of higher-end models, the Xbox 360 and Xbox 360 Elite. Those systems will retail for $299 and $399, respectively -- $50 lower than their previous price points.

The console maker could have lopped off more, according to Enderle. "The Xbox should be $249 for volume, while the Elite is a exclusive product and probably can hold at $399."

However, facing a challenging holiday season, Microsoft had little wiggle room when it came to price cuts, Michael Cai, a Parks Associates analyst, told the E-Commerce Times.

"It's an action Microsoft has to make based on recent sales figures. Of course, they have an early to market advantages with this generation and can afford cutting price. Microsoft has hinted that they want to cut prices once a year," he explained.

"They cannot afford cutting $100 on an annual basis, so the $50 cut makes more sense for the Xbox 360 and Xbox 360 Elite models," Cai continued. "They also need to consider profitability, not just sales revenue."

Consumers are willing to pay $280 for an Xbox 360, based on Parks Associates research, so this round of price cuts "definitely helps, and brings the Xbox 360 price more in line with [that]," he added.

Season of Good Cheer or Disappointing Sales?

The big question is how the Xbox 360's new pricing structure will position the console against its competitors, the Nintendo Wii and the Sony PlayStation 3 (PS3).

In July, the most recent month for which data is available, Nintendo sold more Wiis in the U.S. -- 555,000 -- than the Xbox 360 (204,800) and PS3 (224,900) combined, according to sales figures from NPD Group, a consumer sales tracking firm.

Even with the price cut however, the Xbox 360 line may not be able to mount a significant challenge to the Wii, which offers gamers more than a low price point.

Still, Microsoft might be able to make some gains against the Wii, Enderle suggested. "The Wii is winning on more than price, but with the right bundle of games the Xbox could challenge it."

Cai is a bit more pessimistic about Microsoft's chances versus the Wii.

"I don't think [the Xbox price cuts] would be a big challenge to the Wii. We are comparing apples and oranges. Intenders for the Wii want it for a different reason. It's definitely more than a price consideration," he pointed out.

"If Microsoft had launched the rumored motion-sensing controller with the price cut, maybe there'd be a bigger impact," Cai said. "However, building developer support takes time for a new controller."

The Xbox is likely to do better against the PS3.

"The Xbox has always had price and game advantage against the PS3 -- this will enhance one of those advantages, Enderle said.

"I do think the impact on PS3 will be bigger than on the Wii," Cai agreed. "The target market is more similar."

The newly trimmed prices will help Microsoft, in any case, and without any big name titles scheduled for release during the holiday season, the console market will need all the help it can get.

"I'm not yet that excited about any of the games I've seen coming this year," Enderle said. "I'm hoping for a surprise, but this will be a problem for all products -- with the possible exception of the Wii, which remains on constraint [because] demand exceeds supply, and is still largely driven by its initial game package. The Wii remains very different than either the PS3 or Xbox in terms of how it is approaching the market."