Microsoft hits 'sweet spot' with new Xbox 360 prices

Posted by Aharon Etengoff

San Francisco (CA) - As predicted, Microsoft has lowered the price point of its Xbox 360 Elite console by $100 to $299.99. The Redmond-based company also slashed its Xbox 360 Pro console by $50 to $249.99.

However, EEDAR analyst Jesse Divnich noted that he did not expect the Xbox 360 to see a "significant sales lift" over last year's performance. According to Divnich, the consistency of sales indicated that the $299 price point was a "sweet spot" for next-generation home consoles.

"Microsoft is setting a strong precedent by not lowering their core bundle below the $299 price point, a precedent that has become the standard in other industries. If one looks at consumer purchases over the last three years, you will probably notice the median cost for televisions three years ago is close to the median today," said Divnich. "The same applies for that hot new cell phone three years ago that offered color display and e-mail support, even though today a cell phone that offers upgraded features such as touch-screen, 3 megapixel camera and streaming video support is about the same price. The same is true for vehicles and personal computers as well."

Microsoft resets Xbox 360 price points

Divnich explained that the $249 to $299 price point is the "sweet spot" where the industry can expand at a comfortable rate, while still delivering profitability for console manufacturers.

"The truth about consumer goods, something Sony and Microsoft have finally realized, is that you design your product around the price threshold consumers are willing to pay — just because you can cram nine processors into your console, it doesn't mean consumers will pay a premium for it."

Divnich also commented on speculation that new Xbox 360 hardware line-up could "hinder or steal" Wii sales in the short-term.

"There is a significant difference between demographics for the Xbox 360 and the Wii. EEDAR does not believe the new Xbox 360 hardware line-up will hinder or steal Wii sales in the short-term. However, as the casual software library for the Xbox 360 grows and hardware prices fall (lower than $299), the Xbox 360 could begin to steal market share among the mainstream, casual and price sensitive consumer," stated Divnich. "Whilst the Xbox 360 and Sony PlayStation 3 are now equals at the $299 price point, technologically the Xbox 360 is not at the same level as its Sony competitor. 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."

As such, Divnich predicted that Microsoft was likely to reposition the Xbox 360 Elite closer to a $249 price point - enabling the company to "pressure" Sony and attract potential Wii consumers.

Microsoft resets Xbox 360 price points

"From a strategic standpoint this would then allow Microsoft to introduce the new Natal model in 2010/2011 at the $299 price point and still have an option for consumers cheaper than the Sony PlayStation 3. If sales of the Wii hardware, Wii Fit, Wii Sports Resort and Guitar Hero are any indication of the Wii consumers purchasing habits, then the new user interaction capabilities associated with the Xbox 360 and Natal will be very appealing to the Wii demographic."

Finally, Divnich recommended that Nintendo drop its Wii console to $199.

"In order to maintain [their current] 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. 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," added Divnich.