Microsoft Will Cut Xbox Prices in the U.S.

The software giant aims to build its scale in game consoles to better compete with Sony and Nintendoand to draw in more casual gamers

Microsoft (MSFT) thought it would steal a march on the competition when it launched its Xbox 360 video-game console in late 2005, a year before rivals could get out their competing products. The idea was to secure a lead to build on, something that eluded the company when it launched the original Xbox four years earlier. But the Xbox 360's advantage evaporated this summer when Nintendo's rival Wii bolted ahead of the Microsoft device in the number of consoles sold. The Wii's innovative motion-sensing game play lured casual gamers, landing Nintendo atop the $48 billion-a-year business.

Now Microsoft is taking a page from Wii's strategy in its battle against Nintendo and Sony (SNE) in video games. BusinessWeek has learned that Microsoft will cut prices on all three of its Xbox 360 models in the U.S. on Sept. 5, following a similar cut in Japan on Sept. 1. The latest move includes an $80 price cut on the entry-level Xbox 360 Arcade, which at $199 will be the cheapest of the current generation of consoles on the market, $50 lower than the Wii.

Microsoft is also repositioning the Xbox to make it more appealing to casual gamers. It has designed a cleaner, more intuitive way to navigate through the console, instead of the current hierarchical tabs that have a computer feel to them. The software will be downloaded to Net-connected Xbox 360s in the fall, and offered on CDs for other customers. Microsoft is also creating a new casual gaming channel on its popular Xbox Live Web site, called Primetime. There, gamers in each of four markets—North America, France, Germany, and Britain—will be able to play against one another. One of the first games: a trivia battle called 1 vs. 100, created by Deal or No Deal producer Endemol. "They're looking to get a different demographic of consumer," says Bob McKenzie, senior vice-president of video game retailer GameStop Stores. "This is really about the casual gamer."

Second-Place Finish?

Luring such gamers should keep Microsoft ahead of Sony, though even Microsoft's top Xbox boss acknowledges the company is unlikely to catch up to Nintendo. "I'm not at a point where I can say we're going to beat Nintendo," says Don Mattrick, senior vice-president of Microsoft's Interactive Entertainment Business. Indeed, Nintendo is likely to run away with the lead in the current generation of console gaming, leaving Microsoft and Sony to battle for second place. Microsoft's lead over Sony, coupled with the changes it's bringing to the console, positions it to secure that spot, Mattrick says: "We will sell more consoles this generation than Sony."

There, Microsoft has a fighting chance. While Nintendo sold 11.4 million Wiis in the U.S. through the end of July, Microsoft is solidly in second, selling 10.7 million Xbox 360s, according to market research firm NPD. Sony is far behind, with 5.1 million PlayStation 3s sold. Worldwide, the race for second is tighter, though Microsoft is still ahead of Sony, according to sales estimates from market researcher IDC. By yearend, the firm estimates that Microsoft will have shipped 27.7 million Xbox 360s, compared with Sony's 24.2 million PlayStation 3s. Nintendo will dwarf both with 44.5 million Wiis shipped.

Still, Sony is gaining ground fast. Gamers are flocking to the console's Blu-ray player, which lets them play high-definition DVDs on their televisions as well as games. And Sony is creating titles that let gamers leap from video console to its popular PSP handheld gaming device. Nevertheless, IDC analyst Billy Pidgeon doesn't think it will be enough for Sony to overtake Microsoft: "I expect the 360 to remain in second place this generation. But it's going to be close."

Expecting a Sales Jolt

Scale matters in the video-game business because the popularity of a console feeds upon itself. Game developers want to make titles for the most widely used consoles, which in turn makes the best-selling consoles more popular because they have the hottest games. It also gives companies a platform to launch new entertainment services that go beyond gaming, such as social networking and movie downloads. But it takes millions of users for those services to be successful.

The price cut should provide a jolt for Xbox 360 sales. In addition to the Xbox 360 Arcade cut, Microsoft is also trimming the price of its mid-range Xbox 360 model to $299 from $349, and its high-end Xbox 360 elite to $399 from $449. GameStop's McKenzie expects Xbox 360 sales at his stores to jump anywhere from 1.5 times to three times current levels. That's because even the least expensive version of the console was priced too high for mass-market buyers. Microsoft wasn't able to hold onto first place in the video-game console business. But offering an entry-level price of $199 should be just enough to keep it in second.

Business Exchange related topics:MicrosoftSonyVideo Game IndustryStrategic Marketing

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