Im going to just use America because thats the country where I have the best information regarding the average sale price of both the Xbox 360 and PS3, also its less complicated due to only having one price cut. Im taking data from ~Jan 11 -> June 13 because high sales over the holiday season flowed through to the first weeks of this year.
Total sales for the 6 months 2009/2008
Xbox 360: 1,581,231 / 1,347,232 = 17.36% up
PS3: 1,149,307 / 1,462,547 = -27.25% down
So using the PS3 as a base, without a price cut the sales would be aproximately 40% lower than the are now.
The average sale price Xbox 360 as given by NPD for this year was $275 (its lower than reported to be conservative)
The average sale price for last year with $280, $350 and $450 Xbox 360s, lets say $375 (quite high but the Arcade is relatively more expensive compared to the Premium at this point)
Total estimated revenue from sales for the 6 months 2008 and 2009
2008: 1,347,232 * $375 = $505,212,000
2009: 1,581,231 * $275 = $434,838,525
2009 est no price cut: 1,581,231 * 0.6 * $375 = $355,776,975
So you can see, Microsoft were better off cutting the price than they were not cutting the price because the overall hardware revenues are higher than if they hadn't which indicates that overall elasticity is > than -1 which means revenue rises when they cut the price. With the recession deepening people are very much price concious at this point so cutting the price still further will be an excellent way to increase hardware sales and revenue at the same time. If one was to factor in the software and accessory sales it would shift the balance even further in favour of the previous price cut once you take into account the extra Live revenue, software revenue and accessory revenue.
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Now we're looking at the future of the Xbox 360 console, and whether or not another price cut is justified. One factor people obsess over on these forums is the die shrink so i'll examine that possibility first.
Area of wafer: 70,685mm^2, estimated cost per wafer: $7,000 and estimated yield = 70%
Xenon 90nm CPU: 176mm2 = 401 = 280 good dies = $25 chip
Falcon 65nm CPU: 135mm2 = 523 = 366 good dies = $19 chip
xxx 45nm CPU:100mm2 = 706 = 494 good dies = $14 chip
Simply use the ratio of the squares, e.g. 90->80 is (80*80)/(90*90)=79%
65^2 / 90^2 = .52
45^2 / 65^2 = .48
I estimated the die shrink at .76 because it maintains a similar shrink ratio to the Xenon -> Falcon transition. Also I've seen a cost of $7000 per wafer quoted for TSMC so I used that.
A die shrink alone isn't going to justify a $50 price cut, because $5 saving is a long way from $50. However a die shrink means lower power usage so they can save a few dollars here and there as an accessory to the die shrink. Because a new 45nm CPU would use less power so they can save of motherboard complexity in the power regulation circuitry and they can use a smaller power brick and it makes the console simpler to manufacture and more reliable so less money has to be devoted to potential warranty repairs. How much does it save in total? Probably about $10-15 which is pretty reasonable as a first step.
One of the major costs in the technology business are the royalties companies pay to each other for use of technology/patents that are developed. In the case of the Xbox 360 these royalties are to the DVD forum for DVD movie playback, IBM for the use of the Powerpc technology and AMD for the use of the Xenos GPU and memory controller. Its quite likely these costs are reduced every year as the technology inside the Xbox 360 becomes less valuable. I cannot quantify this but its important to mention. Also I have no idea on the structure of these costs.
The last thing to consider are the fixed costs, recession and depreciation and efficiency in scale. Fixed costs are divided by the number of Xbox 360 consoles produced, these are things like research and development costs, advertising, corporate operations, manufacturing plants. So the more Xbox 360s they produce the less fixed cost applied to each individual console. The recession means that each Xbox 360 has a lower variable cost of materials, and manufacturing automatically as all the parts which make up the console are cheaper now than ever before as there is a worldwide overcapacity in manufacturing. The Xbox 360 has also been produced for a while now so the specialised machinary used to produce the console on its 4th to 5th year of production have been depreciated which means each console is cheaper to manufacture. Finally as they produce more consoles they can ship them more efficiently. It costs them little more to ship 30 consoles to a store instead of 10 so the shipping cost per console is considerably lower towards the holiday season and in general as they sell more consoles.
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We have seen how the average hardware revenue increased with the last price cut, how a die shrink on its own can lead to $10-15 saving per console and how producing and selling more consoles is more efficient than producing fewer along with how lower royalty fees and cheaper manufacturing and materials due to the recession can save them money. If we take this alongside an expected PS3 price cut this year then it is almost certain that once again the Xbox 360 will recieve a price cut this year and that price cut will raise their overall hardware revenue above where it would have been otherwise with no price cut. Since the Arcade becomes the most populat SKU during christmas, if it gets cut to $150 the Xbox 360s overall sales this holiday season will be either equal to or greater than the PS3s if the PS3 gets a price cut to $299.
Tease.
