360 Price Cut Upon PS3 Launch? Analysts Say "Not Likely"

RC Cola · Jul 26, 2006

http://www.next-gen.biz/index.php?option=com_content&task=view&id=3515&Itemid=2

It’s the rumor that won’t die.

DigiTimes.com reported yet another rumor today that Microsoft would be reducing the price of its premium Xbox 360 pack from $399 to $299, this time citing unnamed sources at Taiwanese OEM component makers. The publication’s sources claim that Microsoft has negotiated reduced Xbox 360 production costs “to prepare for the price cut,” in order to better compete against the PlayStation 3, which launches in fall.

Microsoft officially denied a fall price drop in late May, and again in late June. Even in the same DigiTimes.com article today that reports on the rumor, the site said that Microsoft called the claims “misinformation.”

Our sibling site ComputerandVideogames.com also quoted a Microsoft rep today, who said, "We do not have plans to lower the price of the Xbox 360 before the end of the year."

Next-Gen went to Wedbush Morgan Securites’ analyst Michael Pachter, and Lazard Capital Markets’ Colin Sebastian to get more background on why a price drop simply wouldn’t make sense for Microsoft at this point.

Pachter noted that Microsoft brass has informed the Xbox division that it must turn a profit or at least break even in fiscal 2007, which ends June 30 next year.

He explained, “That means that price cuts on the Xbox 360 will come only if the box costs less to produce, ship, and market than the wholesale price. Our best guess is that the box currently costs around $400 - 450 to produce, and it's likely that the company can get that down to below $400 later this year.“

Pachter continued, “The retail margin is around $10 - 15 per box, so the wholesale price of the $399 SKU is around $385 - 390. In other words, Microsoft doesn't make any money on the hardware.”

He did concede that a price drop prior to the PS3 release is “possible,” but it would put the Xbox division in an even tougher position in terms of turning a profit in fiscal 2007. Pachter exhibited the potential challenge with some fundamental math.

“…The company plans to sell 10 million Xbox 360 hardware units over the next year, so a price cut in November would likely impact 8 million of these, costing the company $800 million. At a software royalty profit of around $10 per unit, the company would have to sell 80 million incremental software units in order to be in the same place as without a price cut.“

He added, “Our model has Microsoft selling only around 60 million total units of software this fiscal year, so in order to break even on a price cut, they would have to sell 140 million pieces of software. Remember, we're talking about profitability for FY:07, not over the life of the 360.”

Pachter also said that a software bundle from Microsoft would be the more likely route the company would take in order to create perceived value among consumers, and avoid further hardware losses.

Next-Gen reported earlier this week on an expected Project Gotham 3 Xbox 360 bundle for the holidays.

Pacther summed up his thoughts, saying, “I think that the likelihood of an Xbox 360 price cut this calendar year is extremely low.”

Sebastian reiterated Pachter’s comments, stating he’d be “surprised” if a price cut did occur this holiday in North America or Europe, as the console’s sales are still solid. According to The NPD Group, Microsoft sold 277,000 units in June in the US.

Both Pachter and Sebastian pointed out that the price gap between the Xbox 360 and PS3 is already substantial, further exhibiting the pointlessness of a price cut at this time. Indeed, Xbox boss Peter Moore realized this after E3, when he told gaming and gadget blogs Joystiq and Engadget, “We had a price drop ... when Sony announced their price.”

Sebastian, who correctly predicted a PS2 price drop earlier this year, added, “A price cut is much more likely next year, in my opinion, when there will be more production cost efficiencies, and when the competitive landscape with the lower-priced Nintendo Wii is better understood.”

The fact that DigiTimes.com’s sources equate component and production cost negotiations with a retail price drop should raise some flags on its own. Companies are always looking for ways to reduce manufacturing and production costs in nearly all industries, but these reported negotiations, even if successful, don’t necessarily mean that consumers will see the savings.

As Pachter noted, cost reductions on the production side are in line with Microsoft’s goal to break even by June of next year.
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I almost posted the Digitimes rumor, but I caught this article before doing so. This article kind of does all the analysis for me.

It also has some interesting info that I wasn't aware of. For example, I didn't know that Microsoft wanted the Xbox division to get out of the red by June of next year. If that is true and not just some nice goal to reach, then yeah, a price cut this year might be too difficult to overcome. MS might even have some problems getting there without one.

It would have been interesting to see a $200/$300 360, a $200-$250 (or whatever) Wii, and a $500/$600 PS3 during the holidays.

oomp · Jul 26, 2006

I was in a Game Stop at Lunch today and heard the same. The employee said the X-BOX rep told them there would be no change in price this year.

UTweezer · Jul 26, 2006

i was at gamestop yesterday and preorders start in sept for what it's worth.

oomp · Jul 26, 2006

UTweezer said:

i was at gamestop yesterday and preorders start in sept for what it's worth.
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For PS3? They told me first week of October today, but had told me September before. This is so up in the air it will be a nightmare for retailers and potential buyers...

UTweezer · Jul 26, 2006

oomp said:

For PS3? They told me first week of October today, but had told me September before. This is so up in the air it will be a nightmare for retailers and potential buyers...
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yes, the PS3. Yea it's a diff. story every week.

you can already preorder them at liksang, but im not sure i want to give my CC info to them like that....

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360 Price Cut Upon PS3 Launch? Analysts Say "Not Likely"

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