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July 10, 2008 3:17 PM
Posted by Benjamin J. Romano
The video game world seems pretty confident that Microsoft will cut the price of its Xbox 360 console by $50 on Sunday, a day before its big press conference at the E3 Media & Business Summit in Los Angeles. A story in The Wall Street Journal further confirms the rumors.
A $50 cut would lower the price of the Xbox 360 Pro version of the console to $300. So why is the company dropping the price now? And why not cut the price more to really put the pressure on Sony? Hint: Microsoft's Entertainment and Devices Division has a promise to keep.
For an answer to the first question, check out Dean Takahashi's post at VentureBeat. Takahashi is one of the best when it comes to explaining the inner workings of the Xbox 360. He explains how Microsoft has improved the motherboard inside the Xbox 360, realizing cost savings that it can pass to customers.
But why not cut more? Takahashi says the console competitors -- Sony's PlayStation 3 and Nintendo's Wii -- aren't pressuring Microsoft to make price cuts more than once a year. The PS3 is still the higher-priced player in the market; the Wii is "so different" and still generates huge demand. (In fact, even though it's listed for $250, the least you'll pay for one right now through third parties on Amazon.com is $323.95.)
One analyst I talked to, however, thinks Microsoft needs to be more aggressive with its console pricing to try to catch runaway Nintendo and turn up the heat on PS3, which is heading into the 2008 holiday season with a strong lineup of exclusive games.
If Microsoft dropped the price of the Xbox 360 by $100 instead of $50 -- thus opening a "significant" $150 price gap between the Xbox 360 Pro and Sony's lowest-priced PS3 -- it would give Sony fits, said Mike Goodman of the Yankee Group. Bit with the rumored $50 cut, Sony would "breathe a huge sigh of relief," he said.
For Microsoft, "it has fundamentally come down to a question of market share vs. profitability," Goodman said, "and based upon the commitments that Microsoft as a corporation has made to the financial community, they're choosing to approach price cuts in a more conservative manner."
As early as July 2007, Entertainment and Devices Division President Robbie Bach pledged to Wall Street analysts that the games business and his division as a whole would be profitable in the 2008 fiscal year. The division turned in a loss of nearly $2 billion in fiscal year 2007 and, now in its eighth year with products in the market, has yet to post a full year of profitability. But in 2008, it has reported a healthy $614 million profit through the first nine months. Microsoft reports fourth-quarter and full-year results a week from today.
One more twist: Deeper price cuts now would affect sales and profitability for the division in the 2009 fiscal year, which began July 1. When I asked Bach in October 2007 if the commitment was ongoing profitability, or just profitability in fiscal 2008, he said:
"We've said we're going to be profitable this year and that Xbox is going to be profitable this year. That's kind of all we've said.
"Certainly the presumption is ... that we want to build a sustainable business. Is it possible we could look down the road and say, 'Gosh, there's a big investment that we need to make that might make us unprofitable in a year or in a quarter?' Sure. Everybody should always assume that's possible."