Analysts endorse 360 price drops

Yesterday, Microsoft officially confirmed that the long-rumored Xbox 360 price drop first announced in Japan would extend to North American gamers as well. As of September 5, Microsoft's Elite 120GB Xbox 360 SKU will drop $80 to $399, with the 60GB Pro and the hard-drive-less Arcade following in line at respective $100 intervals. The latter SKU is of particular note, as it will effectively give Microsoft the cheapest current-gen console on the market--$50 less than current market leader, the Nintendo Wii.

The price drop is sure to have an impact on the gaming industry, but just how much has yet to be seen. If there's anything that industry watchers seem to be in agreement upon, it's that the cut will shift momentum back into Microsoft's corner and that Sony and Nintendo aren't likely to counter the potentially game-changing move with price cuts of their own.

Electronic Entertainment Design and Research analyst Jesse Divnich told GameSpot that Microsoft's $199 SKU puts the company in prime position to halt Sony's surging PlayStation 3. "Microsoft has the industry's best exclusive licenses, such as Halo, Gears of War, and Fable," noted Divnich. "In terms of software, Sony has Resistance and LittleBigPlanet, which can't compare to Gears and Fable 2. So with Microsoft beating Sony on pricing, beating them on library, and beating them on services with Xbox Live, the price cut should shift momentum back to the 360," asserted Divnich.

The EEDR analyst also believes that Microsoft has a lot riding on this drop, especially if it doesn't spark momentum. He cautioned, "It may force them to release hardware before they plan. We probably won't see next-gen [consoles] until 2012, but if this plan fails, they may be forced to release in 2011."

With Sony reiterating on several occasions that the PlayStation 3's price will remain fixed in 2008, Divnich joined a chorus of other industry analysts in saying that Microsoft's archrival isn't likely to respond. "Sony has been adamant for the last six months about maintaining its price point," noted Divnich. "This is risky, but Sony just isn't where they need to be in terms of manufacturing efficiency to drop price."

Echoing Divnich's sentiments, USB Ben Schachter noted, "We believe any cut from Microsoft aims to slow Sony's momentum before first-party PS3 releases in [the second half of 2008] such as LittleBigPlanet, Resistance 2, SOCOM, and others...Sony is unlikely to cut in response, though, in the unlikely event that PS3 sales significantly slow, Sony might have to reassess."

Stating that he also expects Sony and Nintendo to stick to their guns, Lazard Capital Markets' Colin Sebastian turned to what Microsoft stands to gain from broaching the $200 threshold. "Our analysis of historical console sales in the U.S. suggests that price points below $200 can be an inflection point in sales, with appeal to a mass market audience," observed Sebastian. The analyst then demonstrated via bar graph that the PlayStation 2 had its best single-year performance after Sony reduced the console's North American price to $199 in May 2002, helping rack up nearly 12 million system sales for the year.

Wedbush Morgan analyst Michael Pachter believes Microsoft stands to see as much as a 20 percent bump in hardware sales this holiday season as a result of the price cut, assuming the hardware maker markets the drop effectively. "They are certainly going for a piece of the mass market, and seem to have focused on the Arcade model as the central SKU," he observed.