X-Box Price Drops

Microsoft to Cut Price of Xbox to Challenge Sony
Thursday March 18, 10:33 pm ET
By Robert A. Guth, Staff Reporter of The Wall Street Journal

Microsoft Corp. (NasdaqNM:MSFT - News) is taking its videogame battle with Sony Corp. (NYSE:SNE - News) to a new low in the U.S.

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The American company is laying plans to drop the price of its Xbox videogame console in coming weeks, in a move to boost demand for games ahead of the traditionally slow summer season, according to people familiar with Microsoft's plans. The cut would signal a new phase in a growing battle between Microsoft and Sony. Microsoft has followed the Japanese videogame giant ever since it first rolled out its Xbox game console in late 2001 -- 18 months after Sony's PlayStation 2 hit the market. Sony has also led in cutting its price in the U.S., a year ago dropping the PlayStation $20 to its current level of $179. Microsoft dropped its price to the same level on the same day.

But Microsoft is now trying to build the perception among game users, retailers and videogame developers that it can be a leader, according to people familiar with its plan. The price drop could expand the volume of games on the green-and-black Xbox and in turn tighten Microsoft's relationship with game developers, they say. Those developers are key to Microsoft's attempts to trounce Sony with the next version of the Xbox, expected in late 2005. Sony's next PlayStation is expected around the same time.

Microsoft also needs to fend off Japanese Nintendo Co., which late last year dented sales of the Xbox when it lowered the U.S. price of its GameCube console to $99. Under the plan, Microsoft would lower its price on the Xbox by early April to $149 from $179, say people who have been briefed on the plan. The new pricing would kick off with a promotional campaign at Wal-Mart Stores Inc. of the U.S., followed by other major retailers, says a person familiar with the retailers.

A representative for Microsoft wouldn't comment on the company's pricing plans. In an interview earlier this year, Microsoft Senior Vice President Robbie Bach said that Microsoft sees price cuts as a way to boost demand and less as a strategic move, since Sony can immediately match Microsoft's price. Still, "I'm not going to let them beat me on price," Mr. Bach said.

A spokeswoman at Sony's U.S. videogame unit said that even if Microsoft cuts its Xbox price, Sony has "no immediate plans to lower the price," of the PlayStation 2. "We will make adjustments when we feel the market is ready," said Molly Smith, a spokeswoman at Sony Computer Entertainment America Inc. in Foster City, California. The plan to not match Microsoft is in part a reflection of Sony's leading position in the market. Its PlayStation 2 continues to outsell the Xbox and GameCube and has a high number of popular games that aren't available on the other machines.

But game makers say they expect Sony will cut the price of the PlayStation 2 in May at the E3 videogame industry conference in Los Angeles. In the videogame business, price cuts are a carefully used tool that almost never fail to goose sales of game consoles and, in turn, games.

Game makers had expected Microsoft and Sony to lower their prices toward the end of last year. But the rivals held their ground as Nintendo, which vies with Microsoft in No. 2 position. dropped the price of its GameCube console in September to $99 and has since watched sales of the machine surge by 2.5 million units. Now game makers in the U.S. such as Electronic Arts Inc., Activision Inc. and THQ Inc. are pushing Sony and Microsoft for the $149 level and beyond.

The pricing hullabaloo is more than just hot air. In the U.S., the games business moves in roughly five-year cycles determined by the release of new consoles and punctuated by the launch of hot games. By many estimates, the latest cycle has passed its half-way point -- the point that the hard-core users are willing to spend whatever it takes to feed their hobby -- have already bought their consoles and their favorite games. The industry now moves into a period where increasing numbers of casual game users and other more price- conscious consumers start picking up consoles and games.

Microsoft's pending move addresses a key element to success in the game business: public perception that a piece of hardware or a game is "cool" or leading edge. Sony's PlayStation 2 captured that image even before it began selling in the spring of 2000. Since hitting the market in late 2001, Microsoft's Xbox hit has lagged behind PlayStation 2. As of December, Sony had shipped 70 million consoles to U.S. retailers and by year-end will have some 840 games. Microsoft had shipped 13.7 million Xbox consoles as of December. Nintendo to date has sold 15 million GameCubes.

I don't think that it will help THAT much, but it's still a thumbs up for Microsoft.