ANALYSIS: What a 360 Price Cut Means for Wii, PS3

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ANALYSIS: What a 360 Price Cut Means for Wii, PS3
By Kris Graft
Five analysts who believe that an Xbox 360 price cut is incoming speculate on what such a move means for PS3, Wii and the Xbox business's profitability goals.
A purported Kmart ad began tearing through the Internet last week, showing a "new low price" of $299 for the 20GB  Xbox 360 Pro model, and a July 6 shelf date. Such a price tag suggests a $50 price drop for the Xbox 360 model even before the E3 Media and Business Summit, taking place a week later. While Microsoft won't confirm the price drop, gaming sites are abuzz with speculation. Now, five top industry analysts have told Next-Gen that they believe an Xbox 360 price drop is not only imminent, but likely required if Microsoft intends to fend off competition from rival PS3. "We believe Sony will be forced to follow suit [with their own price cut], although we suspect they may wait a little bit," said Arvind Bhatia with Stern Agee. "A price cut sometime between July and September is possible [for PS3]." A price cut would expectedly increase the PS3's installed base, and create an opportunity to sell more high-margin software to offset hardware losses. But still, a reactive PS3 price cut may go against the PlayStation businesses' recently restated "profitability first" mantra. For now, Sony will wait and see how an Xbox 360 price cut will affect PS3 sales and share, says Lazard Capital Markets' Colin Sebastian. "The gap of $100 may be a fair price to pay for PS3's built-in wireless Internet connectivity and Blu-ray, but Sony's done a terrible job of explaining that to consumers." "In the event of decelerating PS3 unit sales trends, we believe Sony might rethink its strategy on PS3 pricing, but for now, the hope is that a stronger software lineup as opposed to price concessions will drive hardware adoption," he said. Wedbush Morgan's Michael Pachter said that Sony will have to keep pace with a reduced-price Xbox 360 by either cutting the price, or by making "some strides in marketing." "The gap of $100 may be a fair price to pay for [PS3's] built-in wireless Internet connectivity and Blu-ray, but [Sony's] done a terrible job of explaining that to consumers," he said. Janco Partners' Mike Hickey said Xbox 360 price-cutting pressure would be a timely move, hitting Sony as the company concentrates on profitability. He said, "We continue to believe the Xbox 360 has a distinguished value proposition from the PS3, but Microsoft could use price as a competitive weapon, particularly after Sony reiterates focus on profitability." Of course, Sony's profitability isn't the only dollars-and-cents issue here. Microsoft's traditionally bleeding console business has only now begun to maintain quarter-after-quarter profits, and with a hardware price drop, the company would slash any hardware margin that it might be currently enjoying. But Pachter believes that the 20GB Xbox 360 now costs Microsoft less than $300 to produce, and with strong sales of high-margin software (monthly software attach rates have surpassed seven units), the firm has some breathing room. "...If Microsoft can convert more people to Xbox Live, they will more than overcome the 'lost' $50 profit on hardware. My guess is ... they can afford a $50 [hardware] cut," he said. Jesse Divnich with Electronic Entertainment Design and Research (EEDAR) concurred that Microsoft has made "great strides" in cost-reducing the Xbox 360 hardware, so if the firm can afford to bring down the price, it should. "Bottom line, if Microsoft wants a stronger position to generate long-term revenue, they need to get their system in as many homes as possible," he said.
Pachter estimates that a 15 percent Xbox 360 price cut would increase hardware demand by 15-20 percent, although he admits that monthly sales are highly variable and tough to pin down. "I think Microsoft would be happy to keep demand at 50,000-60,000 per week as long as they can. Recent demand is slightly below that level," he added. Divnich expects a larger hardware boost of 20 to 30 percent in the short term, but says the real mass market sweet spot is the $199-$249 range. Sebastian said that more than hardware price cuts, compelling software is key for sustained hardware sales. Bhatia added, "It’s hard to quantify how much of a boost a price cut will provide. But I would say if the price is not dropped, Microsoft may risk losing share." "I would say if the Xbox 360's price is not dropped, Microsoft may risk losing share." What about the Wii? There's much talk revolving around the battle between the high-def behemoths Xbox 360 and PS3. But the Wii has been selling more units than both of its rivals combined for the past few months in the U.S. Could an Xbox 360 price drop possibly affect Wii sales momentum and market share? For the most part, analysts polled answered with a resounding "no." Hickey thinks that with improved supply, Wii sales momentum could build even further. "We do not see any waterfall competitive pricing pressure on the Wii console..." he said. "We expect that additional supply over the holiday period will meet demand; a market equation that has been out of balance since the console’s release." Pachter and Bhathia both agreed that an Xbox 360 price drop will have "no impact" on Wii sales this year, while Sebastian said the Wii's unique interface offers a decidedly different experience from rival consoles, therefore making it only an indirect competitor with the 360. Divnich doesn't say that Xbox 360 is going to eat into Wii's growing market share, but he states that as Microsoft approaches a more mass market price, the company will put a larger focus on mass market software, and begin to look to Wii's audience. "...We are going to see a lot of changes in Microsoft's strategies as they attempt to target the mainstream market," he said. "It is safe to say at this point that they have done all that they can with trying to capture the bulk of the hardcore gaming market. "Don’t be surprised if at E3 Microsoft announces several new online features, exclusive games, and/or new features that will be targeted to the mainstream and casual gamer." He continues, "Microsoft knows that as we get to that $249 price point, a system becomes more appealing to the masses and they will be sure to have the right games and content to appeal to that market. Isn’t Rock Band 2 hitting the 360 first?"

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