I see where you're going but I have two problems with the argument.

1. It seems to be the consensus among most experts that they are going to be selling at a loss - which is not a "natural progression."

2. I can't picture a huge army of customers who desperately wanted to have a 360 and just couldn't beg borrow or steal the extra amount so that suddenly they can afford it. It's not that big a cut. Certainly I'm sure there are individuals and I'm happy for them but I don't see millions of people to whom this is make or break.

Yes, there are many people I know who are my age that are unable to afford a 360. They are either in college or just starting a job and the $279.99 price is a little too much for them.

I still disagree with the your assessment of the price drop. We are nearing three years since the 360 launched. In three years time, the Premium SKU has received one $50 price drop. At the same time in its current life cycle, the PS2 had already received a $120 price drop. The PS3 in less than two years has dropped the price of its top-line console $200. If those are not considered desperate gambits, then I fail to see how MSFT's price drops are desperate gambits. This is the 360's simple price progression. I actually applaud MSFT for not dropping prices. Their price strategy has allowed them to turn some profit, and it has not caused them to lose a significant percantage of the market share relative to Sony.  

LOL. If thats a desperate gambit...the whole price cut/selling console at a loss Sony pulled last year is beyond desperation.

Its a simple price cut, and thats that. How long do you think they can charge 279 for technology that is 3 years old? Look up console pricing histry...every major console was at 199 or less within 3 years.

$199 is the "magical" mass market number that generates the most sales.

If the 360 doesn't see mass market sales at this price point, then there is little possibility the platform will ever expand beyond its current niche.

I do believe at $199, MS is taking a decent loss on every hardware unit sold, but this could be interpreted in multiple ways.
- Recoup losses on a percentage of units through sales of HDD peripherals
- Sacrifice a limb to save the body: a price hit on Arcade sales at a mass market price leads to mass market sales, risking potential backfire.
- Clearing out the SKU after the 2008 holiday season as evidenced by additional HDD uses being implemented in the next firmware update (full installs on HDD, presumably full games on HDD in the future like the PS3).

I don't think this will mean the end of the Xbox if the strategy fails to generate mass market adoption; MS already has too much invested in the platform as a part of their "living room expansion" strategy.

Worst case scenario; MS abandons the game hardware business with the claim that consoles are soon to be obsolete, and that the future of gaming is Games for Windows. This was the same exit strategy they used with the collapse of the HD-DVD format (the future of HD content is in digital distribution: hard media is obsolete).

@Grampy - Thanks for the link.  The linked article suggested that the $199 Arcade was a clearance sale and the Arcade would be discontinued.  This would leave MS with a $299 60 gig and a $399 Elite sku.  I think this is an accurate assessment.

Microsoft will be selling the Arcade at a loss if the $199 price is true.  The problem with the mythical $199 price for casual gamers is you need to be profitable on the console sale.  The consumer that the $199 price attracts will not pay for Xbox Live, they will not buy many software titles, and they will not buy a lot of accesories.

 So basically just like sony. But yeah, you believe in the 10year-plan...

Sony will feel the pressure. I don't see how you can say this is desperate. In two and a half months, the Xbox360 will be 3 years old, and the current price is pretty high for a console in this point of its lifecycle. $250 for a three-year old console is nothing new...

I try not to take sides in the "war" as I don't hate on the PS3 (don't have one yet though) but I wonder...

Sony: Multiple SKU's immediately post launch, removal of BC, addition of rumble, multiple price cuts = good decision making.

MS: Multiple SKU's 2 years post launch, 2 price cuts = desperation...

Honestly??

Wow.

To reply to the op, I have to agree with (some) others that this is just the natural progression. All things come down in price and I'd venture to guess that MS milked the 360 price teat as long as it could.

For the record I don't think "winning" 2nd place means anything to either Sony or MS, both companies want a solid, sustainable user base to generate revenue streams over the remainder of this generation. For those who think MS has not already achieved this, and will suddenly disappear from the hardware market I'd guess that you are letting your "hopes" interfere with your reasoning.

Does that mean they don't want expand their pieces of the pie? Of course not, but I think clearly the Wii is going to have the largest portion of this particular pie, and don't see MS or Sony eating away too much of that market share (though I'm sure that's not a popular opinion amongst the PS3 owners).

disolitude said.

Its a simple price cut, and thats that. How long do you think they can charge 279 for technology that is 3 years old? Look up console pricing histry...every major console was at 199 or less within 3 years.

That is about right I would say.

I think the answer lies in between a few statements by various sites and business-oriented sites.

1) The move isn't a move of desperation from Microsoft. The Xbox 360, for the Premium bundle, has come down a mere $50 ($399>$349) since it debuted, and the Arcade has come down $20, but included more items in the bundle. Microsoft has been far more aggressive in Europe (where it slashed prices by a similar amount in February), and Japan (which dropped it's price quite some time ago).

2) Microsoft will not lose money on dropping the price. The console is hitting the 3 year mark very soon in terms of production. You would have to be very dense to think that Microsoft hasn't lowered the cost of production from $513 per Premium to lower than $299 in 3 years, and similar margins on the Arcade. As I've stated before, when we broke the price cut story, Microsoft is most likely making Arcades for $143-179 per unit + shipping and misc. fees.

3) Microsoft will not phase out the Arcade with it's larger-than-the-rest price cut on the Arcade. They have been stating for the past year that they know the sweet spot starts at $199 for a console...I think Shane Kim was quoted as saying "70% of a console's sales are at, or below the $199 price point, and we know that". Microsoft needs a product at $199 to boost sales in it's casual/core division...And it's very unlikely that the Pro/Premium will sell at that price for another year or two.

4) As for the effect on the market. That's a tough one to call. In Europe, a similarly-styled price drop has boosted the X360's sales to 100% YOY versus last year - which proved the aggressive price drop worked for Microsoft. I think in the United States, Microsoft will see major gains against the PS3 and Wii. I don't think it'll actually hurt either console, but this move will lead the way to see Microsoft have it's biggest year yet, beating it's 3.2 million cume from September to December in North America, which it sold last year.

^

This kind of. also that would hurt PSP and PS3, much more, going up against the PS2 would be obvious but that's a competition of libraries and time line. Graphics versus Legacy.

Also sequals tend to have lower drift, though that isn't always the case, when they are released on the exact same console. This is a double edged sword as your sure fireing a hit but not making any real traction as far as pulling on a new demographic.