Analysts react to 360 price cut, predict $50 trim in '10

In the wee hours of the morning, Microsoft broke its silence on its long-speculated Xbox 360 price drop. Beginning Friday, the 120GB Xbox 360 Elite will cost only $299.99. As for its current $300 model, the 60GB Xbox 360 Pro, Microsoft will be cutting $50 from its price to clear inventory as the SKU is phased out. Microsoft's low-end Xbox 360 Arcade, which has 512MB of built-in memory and no external hard drive, will retain its $199.99 price point.

While the move simplifies the Xbox 360's SKU lineup, it remains to be seen how Microsoft's console will match up against Sony's 120GB PlayStation 3 Slim, which has just begun selling at the $299 price tag, or Nintendo's market-leading $250 Wii. And depending on which industry-watcher is asked, the move could have a decidedly positive impact or just one that maintains the status quo.

According to Wedbush Morgan Securities' Michael Pachter, the Xbox 360 Elite's new price tag is less of a price cut and more of a replacement. "They replaced the old $299 model with a new (black) improved (120Gb) $299 model," he said, going on to note that if the Xbox 360's sales decline, it wouldn't be at all out of the question for Microsoft to trim another $50 off its price tag. As it stands, he believes that 360 sales will remain at their current levels in the near future.

Electronic Entertainment Design and Research's Jesse Divnich agrees that Xbox 360 sales won't see much fluctuation as a result of Microsoft's move. However, Divnich notes that the $299 price point is a monumentally good thing for both Microsoft and Sony.

"Historical sales, accounting for inflation, suggest the $249 to $299 price point is the sweet spot where the industry can expand at a comfortable rate while still delivering profitability for the console manufacturers," he said. "A $249 to $299 price point over the next two years would give Microsoft, and Sony, the breathing room needed to improve manufacturing efficiencies while expanding upon the margins on each system sold. Any improvement on the bottom-line will allow Microsoft and Sony to each to properly fund new and innovative features that will drive our industry forward."

Divnich also thinks that Microsoft will likely cut another $50 off the Xbox 360 Elite's price tag within the next year, on account of being outmatched by the PS3 on a technical level and the Wii on an economic level.

"This puts the Xbox 360 into a tough position where it is outmatched in terms of hardware capabilities at $299 and the Nintendo Wii remains alluring to casual and price sensitive consumers at $249," he said. "Over the next year Microsoft will most likely reposition the Xbox 360 Elite model closer to the $249 price point to both pressure Sony and attract potential Nintendo Wii consumers."

Of those Wii consumers, Divnich believes that Nintendo is in danger of losing the mainstream audience that it has thus far done so well to court. "Essentially, Nintendo stole potential PlayStation 3 and Xbox 360 consumers from this hardware lifecycle three years in advance," Divnich said, before calling for a $50 price cut for the Wii.

"In order to maintain this position Nintendo should drop their Wii console down to $199, not because the current Xbox 360 or PlayStation 3 pricing structure poses a threat; rather, because they will eventually pose a threat," he said. "Nintendo's strategy should be to capture as many consumer dollars as possible while their competitors are still weak in their offerings to the casual audience and price sensitive consumers."

As for the optimistic sect, both Broadpoint AmTech's Ben Schachter and Lazard Capital Markets' Colin Sebastian believe Microsoft stands to see a healthy uptick in console sales. Noting that price cuts "always" have a positive effect on the gaming industry, Schachter said that Microsoft also stands to gain from simplifying its SKU count. Schachter also believes that the $199 price point for the Xbox 360 Arcade keeps it in close competition with the Wii.

Sebastian believes that Microsoft's and Sony's respective cuts will go a long way in bringing consumers back, after five months of consecutive US retail sales declines. "A hardware price war is good for the industry, particularly given the recent slowdown," he said. Sebastian also noted that Nintendo appears to be devising hardware bundles to remain competitive, but a price cut could be on the horizon for the console if sales don't pick up by October.