Well I think PS2 would be the example to use with it's insanely cheap prices and longevity in the market partially because of that. I would personally say that PS3 is somewhat similar to the XB1 situation in that PS likely wanted to move on and leave the PS3 ecosystem and as many of it's troubles behind, as quickly as possible. At the very least, overshadowing it heavily with a PS4 laser focus. Will PS5 be just $399, or $499?
Part of the reason PS4 is as expensive as it is, is because it's still selling strong enough that PS see's no reason to drop the price. You don't fix problems that haven't come to pass yet. XB1 is selling for much less, with big bundles, and it's still not selling anywhere near PS4 numbers, so why would PS drop the price just yet? Now PS4 sales numbers are starting to show signs of weakness, so a PS4 SS this holiday with a price cut makes a lot of sense. It should have an entire year on the market before PS5 hits shelves, and will go toe to toe with XB1S(ADE) pricing if MS doesn't update that hardware.
I'm sure some people pass on their old hardware, and there is no doubt a second hand market for last gen consoles, but that clearly only covers a portion of the audience. There are definitely buyers who still want a warranty, something you don't get with an older second hand unit. If you finally save all that money and blow it on a used model and it craps out a couple months later you're screwed. Think about all the second hand 360 owners who paid the price and faced the RROD, and well as some of the OG PS3's.
The $199 market today surely isn't the money maker the $299 and $349 market has been, but it's not just about the money, especially this late in the gen, going into the next. As for PS I wouldn't be so sure about upgrading. If PS was planning on a single SKU, or multiple with minor storage differences, and they felt strongly the MS multi performance SKU leaks were likely to happen, they very well could change plans and have a cheaper model as well. Maybe, maybe not. It could be simply to keep MS from having the entire affordable next gen market to themselves. Now even if PS did plan a cheaper SKU from the start as well, they can hope for people to upgrade all they want, if you can only afford $199 period, a $299 model doesn't help now or for the next few years.
While they've sold plenty of XB1X models, they may even end up somewhat of a rarity if XB drops a low end SKU next gen. I would have to imagine MS will just end XB1X production altogether by next gen launch at the latest. Whether the SKU is 4TF or 6TF, XB1X wouldn't be necessary anymore. The ports for it will be interesting assuming that even though it's GPU will be capable enough, how much will the CPU's differ? It shouldn't matter too much anyway since PS4 and Pro should get strong support for a couple years, which means anything jaguar related shouldn't be too much of a problem for the first while.
PS2 and Wii are last time we had consoles around $99. The 2DS is cheap as well but that mostly a vehicle for selling Nintendo games and has very limited capabilities.
Your argument is really MS should lower their price, but I don't believe MS or Sony are interested in a price war. Sony kept the PS1 and PS2 very competitively even while dominating. In theory they could grow their userbase further and hurt Xbox with a PS4 price cut, that's what old Sony would do. However, if there is a price war then both companies lose money, so we got a stalemate. I feel that's why 7th gen consoles stayed expensive.
Ideally, the Xbox Lockhart should be powerful enough to phase out X1X. Keeping the X1S on the market only makes sense due to its potentially lower price. If Xbox X1S and Xbox Lockhart only have like a $50 disparity, then kill off the X1S quickly.
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