The Legitimization of the Arcade

[amirnetz]

With all of the discussion around Microsoft's dramatic turnaround with its last price cut, there is one important fact that was kind of lost in the excitement.

The 360 Arcade became a legitimate product.

History:

Microsoft launched the 360 with two models: the Premium and the Core at the price points of $400 and $300 respectably. The Premium was an instant hit while the Core was left to be rediculed by the gaming community and had measly sales.

Even when Sony launched the $600 PS3, and the Core was only half its price, nobody was buying it. In mid 2007 Microsoft tried to revive the Core by renaming it Arcade and bundling a few games with it. Still, there were almost no takers. Even when the price was lowered to $270, nobody paid any attention to this disk-less machine. The only legitimate offerings from Microsoft were the Premium and Elite models.

When Sony dropped the PS3 price to $400, Microsoft was in a bind. It was really struggling in the market with the value proposition of the $300 Premium vs the $400 PS3. It seemed like for just $100 more you get Blue Ray and so much more. And indeed, after the Halo3 boost was over, the PS3 started making rapid gains in market share.

But then came September 2008 with the dramatic price cut of the Arcade from $270 to $199. And WOW! Suddenly the sub-$200 price tag grabs everyone attention. Microsoft soon reported a 600% increase in the sales of the Arcade model. Yep, it started selling like pancakes.

The lowly Arcade suddenly got the limelight. It became the banner for Microsoft price differentiation compared to the PS3 (and to a lesser degree the Wii). Suddenly it was all about the $199 vs the $399 price gap. Half-Price! Wow! This  led a huge reversal in market position and the Arcade became a major seller for Microsoft.

Analysis:

Why is this important? Because in the process the Arcade became a legitimate product, worthy of consideration. From now on it is not the PS3 vs the Premium anymore. It is the PS3 vs the Arcade. This is the price comparison in everybody's mind (unless you are a hardcode PS3 fan).

Moving forward, it is the PS3 that is in a bind. A $50 price cut is just going to make it a $349 vs $199 comparison. It does not move the needle much. Only a $100 price cut may significantly change the market perceptions. But can Sony’s cost structure afford it without suffering a red-ink bath? I doubt it.

Legitimizing the Arcade was a brilliant move by Microsoft. How will Sony get out of this jam?