Depends on 4 factors:

1) How this price cut (if it exists) affects sales

2) Whether MS is going to opt for lower prices or improved abilities (bigger HD, bluray player, minibar, etc)

3) Sales and prices of the PS3 and Wii. If the Wii stays at $250, MS won't have much need to go lower. However, if the PS3 pulls out a $100 cut next year, MS will almost certainly have to shave off another $50 off the Premium and Elite.

4) The planned release of the XBox720. If MS is expecting their next console to launch in 2010 (doubtful), they will want the 360s to move briskly in the last year and will be more aggressive with their price cuts. If launching in 2012, they won't cut too far, as they will need to have some "drop room" for their final year.

MSFT will do this ever more so when the Valhalla chipset comes out.

Let's take a trip to reality.  http://www.gamepro.com/news.cfm?article_id=205656

Microsoft is finally making a profit on the 360.  $426 Million so far through 2008.  Guess what, all the production and cost savings you talked about are inlcuded in that figure.  They lost close to $2 billion last year.  If things go well for Microsoft the remaining portion of 2008 and sells 10 million.  This $50 price cut will cost them $500 million.  Reality is they are not going to throw away  Their first full year of profit.  Shareholders are getting very restless with the losses.  Nintendo has shown that breaking even doesn't cut it in the video game industry.  They may drop the price $50, but the most likely result is Sony will drop the price of the PS3 $50 mitimizing the increase in sales and taking away profits. 

The Core may make a profit now.  But a price drop of 29% is unheard of in electronics.  Additionally, it is very unlikely they make $80 profit on each model.

It is typical for consoles to drop in price each year.  But, no console has been as complex as either the 360 or PS3.  And until Microsoft, came into the market, the loss leading strategy was typically short lived 1 year of losses versus a generation of losses.

You do know that Microsoft lost $2 billion in 07 right?  Yes, $1 B was warranty expense but another $1 B was straight up losses.

So until Microsoft's financial's start to look rosier I'm going to go out on a ledge and say that are in denial of reality and grossly overestimating the cost savings that Microsoft has incurred. 

nm, double post.

Smaller chips eat less power which means less electrical components to route that wattage; we are talking about condensers, resistances and similar components (spelling, I know those technical terms only on my native language). This reduces complexity on the motherboard which means savings. On top of it there's the saving on the chip itself, the savings on the power brick (remember smaller chips consume less power? it means the power surge feeding the whole shebang gets simpler too when the power requeriments go down). Of course it will run cooler which means they get to save some on the cooling parts and finally shipping companies make you pay for both size and weight - the power brick contributes significantly to package weight so maybe they'll also get a saving there (saying maybe because there's a lot of variables in there). If you consider that for all we know they've been making a profit on the hardware for some time already I really think they can drop 80$ on the core and make even or maybe a small profit.

Bitmap, be realistic here.  They have the worker's salaries, the utility costs for running the facilities, shipping costs, administrative salaries, and advertising.  These costs are either the same or increasing from the prior year.  It's not as simple as the sum of the compenents = $195 so we can sell it at $199 for a profit.  It's also unlikely that manufacturing gains will accelerate.  So I find it hard to believe that the 360 that has been selling at a loss for nearly 3 years suddenly has such gains that it can drop the price 12%-29% and gain profitability.

Also, $199 does nothing for Microsoft at this point.  $249 with a game or $229 set Microsoft up perfectly to compete with the Wii and are much cheaper than a 360 has been opening it up to new gamers.  $199 while often considered mass market does nothing for them if the consumers are ready for it yet.  Consumers could see it as fallout from the RROD and be scared away, or it could confirm that 360 is less powerful than the PS3 and they could decide to wait for Sony to drop prices.

They could throw Lips or something in there with the supposed $199 Arcade but of course, if confirmed, they won't due to the casual dash update, 1 vs 100, primetime, etc.

I know the official party line these days (heck, all the users pushing sony agenda have been repeating it like mad as of late) is that MS is willing to lose whatever money it takes to take down the caritative Sony that pricedropped the ps2 for the xbox launch, but really... for starters, there's no proof that they are still selling the hardware at a loss - in fact the hints suggest rather that they've been making some dime off the hardware for some time already. Then you mix up a whole bunch of costs when we are talking just about the console itself, not the whole division. Nice derail attempt there but it won't work - at all. Either you reply to my points about the specific savings on the console or you don't reply anymore, but don't derail this bunching in the whole division while conveniently ignoring other sources of revenue like software, gold, accesories, etc.

You are just scared a 199$ arcade might end up crushing the ps3 like the rest of sony fandom is.

Microsoft is starting to make very good profit, so I don't doubt that they are starting to gather people. This is good thinking. The Holiday season might become far more pleasing for them with installed base. I might have to adjust the numbers for the end of the year as well.

I am inclined to agree with Bitmap.