With E3 approaching, and Sony all but certain to drop the price of PS3 $100 in the USA, it seems quite likely that Microsoft will follow suit.

At launch, Sony is estimated to have lost over $200 on each PS3 sold (either model).  The idea was that in time, the price would drop, and tons of 3rd party and 1st party game software sales would offset the initial loss.  The model was designed based on the runaway success of the PS2.

Microsoft launched in 2005, with smaller, but still substansial losses on each console sold.  To beat Sony, Microsoft wanted to launch the Xbox 360 in front of the PS3 - to build up a userbase to get the most 3rd party exclusives.  This, in turn would help offset the initial loss.  Recently, Microsoft had been murmuring that Xbox 360's division would be profitable in fiscal 2008.

But - here is what happened:

- Microsoft could not truly capitalize on the one year lead they had in hardware sales.  The best illustration of this is that Wii sales in 35 weeks of 2007 are on pace to equal the first 57 weeks of sales for Xbox 360 (including two xmas holiday boosts to wii's one).  In other words, Wii sales from Jan 1 to Sept 4 2007 should equal 360 sales from Nov 2005 to Dec 31 2006.

- Sony launched much weaker than expected in Japan, getting trounced by Wii much more quickly than in other areas.  Sales in the USA were solid for Nov-Dec and the first two weeks of January, and sales in Europe were enormous at launch, and then solid until about May 1.  Since the honeymoon launch periods, sales have been low.  Despite a number of solid-great games (Resistance, Motorstorm, VF5, Madden, etc), sales have not picked up for a sustained period. 

- During 2007, the Euro launch week and four ensuing weeks aside, Sony has been in 3rd place 21 times this time.  Microsoft has been 2nd in sales worldwide 21 times , and 3rd in sales worldwide 5 times.

- Microsoft lowered Xbox 360 shipments from 13-15 million to 12 million.  Yesterday, Microsoft announced only 11.6 million were shipped through June 30 (an interview with a 360 exec said "Xbox 360 is in the hands of over 10 million gamers" - like VGchartz numbers show).

- Sony has seen sales of under 50,000/month in Japan recently, and sales of under 100,000/month in the USA, meaning there is a need to jumpstart sales.

- To gain marketshare back, Sony is going to cut price at E3.

- Microsoft, trying to end up with a profitability net gain for the generation, is likely to respond with a price drop.  Increased sales of PS3 in the USA, along with stronger sales in Japan could see Sony gain marketshare back from Microsoft. 

- The potential $1.15 billion lost to fix the Xbox 360s could offset profit in the next year - even without a price drop. 

- Dropping the price of PS3 to gain marketshare is going to cost Sony a ton of revnue ($100 million for every million PS3s, probably 300 million+ from the time of the pricedrop to Jan 1 2008) which is likely not to be made up with software sales any time soon since at $10/profit per game (as my guess), you would need to sell 60 million games on a userbase not likely to be above 6-8 million by the end of 2007.  Even if it was a 10 million userbase, the average PS3 owner would need to buy 6 games to offset the loss in revenue.  Taking liscencing fees from 3rd parties into account, and accessories, the lost revenue probably is not quite this harsh, but I still doubt it will be made up.

- Although expensive, a pricedrop for Xbox 360 would knock it down to a price that millions more people would be pay for it.  The $300 console market may be as big as 20-30 million units.  I suspect the $400+ console market is only around 16-20 million.  Increasing marketshare, coupled with the strong attach rates may in fact be able to offset the lost revenue as more 3rd parties see strong sales on Xbox 360.  These benefits would could in the future however, when 3rd parties see accelerating sales and decide to shift even more focus on to the platform.

- Overall I see it like this...assuming both consoles drop $100 in 2007

$100 pricedrop 2007          Sony               Microsoft

Marketshare Boost            5%                    10%

Revenues 2007                 Awful                 Bad

Revenues 2008                Bad                    just barely in the red

Revenues 2009               Red                     couple 100 million in profit

Revenues 2010              Even                    Bad (price drop again)

3rd Party Support      slight improvement    big improvement

Reaches $200 in...          Early 2010            Late 2008                    

07' drop helps:    holiday game/ps3 ratios   3rd parties, start mass market adoption 

 What do you all think of this?  

One nitpick - the extended warranty cost is being written off to the previous fiscal year that ended this week, so won't affect MS's profits for this year.

Both Sony and MS are planning to make profits through things besides just hardware and software now, primarily advertising in the interfaces and inside the games themselves. MS of course gets more income from Live and a lot of accessories.

 To be fair, he said it would offset any profits from the coming year. MS had hoped for net profitability this cycle, a prospect which is steadily sipping away.

 Of course, an early price drop may kill any chance of a profitable fiscal year in any case. 

What's the difference in profits per game sold between 3rd party games and 1st party games for Sony? You said 10$/game, this isn't the same for both types right?

That would be true, however if MS hasn't fixed the main culprit of that "ring of death", it will be an ongoing issue for the 360 and will continue to eat away at profits if they continue having a near rumored 30% failure rate.  Also with MS extending the warranty to 3 years, will mean that older units that are more prone to failure will continue to eat away at costs as well.  Hopefully they did fix the problem and failure rates are much smaller then rumored.

>>In other words, Wii sales from Jan 1 to Sept 4 2007 should equal 360 sales from Nov 2005 to Dec 31 2006.<<

Just wondering if you purposely excluded the launch and xmas '06 Wii figures from this comparison for a particular illustration? 

As the comparison appears, you are saying the Jan-Aug slow period for the Wii should equal the entire 360 sales from launch up to and including two Christmases.

 This says a lot! 

Yeah it was supposed to be illustrative of how fast Wii has been selling post launch compared to 360.  Everyone knew Wii would sell well over the holidays..

The Source, selling 1 million PS3 for 500 instead of 600 dollar only costs Sony 100 million dollar, not 600 million.
I'm not really certain about your "the market for 300 dollar consoles is 20-30 million big" if you mean just for XBox 360 alone. 300 dollar is still a lot of money if you're just interested in 1 or 2 games and XBox 360 is almost not selling in Japan which means selling 10M in both the US and Europe to get there. Personally I don't see XBox 360 breaking 20M before lowering to 200 dollar.

You are right about the dollar amount, I'm going to change the first post.

As for the 20-30 million big..I based that on the fact that before the first PS2 pricedrop about 20-30 million had bought on.  Theoretically, that means at least that many people could be convinced to buy 360 at $300 (I'm not saying they be convinced though) 

1. Can Microsoft afford to cut the price of the 360 at E3, everyone thought this at first, but with the news of the $1 billion + costs for repairs and extended warranties, surely this will cause a huge impact. Also, they probably have reduced production costs to the point where they are making a profit on each sale, but by reducing the cost by $100 will eat into that profit if not distinguish it totally.
2. In my honest opinion, Microsoft need to reduce the cost of the 360. Their sales have slowed down considerably and a $100 pricecut would help boost much needed sales before the Wii takes over completely.