The Microsoft Angle: Profitable, with a Sony-Style Price Cut

Microsoft's Xbox 360 program is part of the company's Entertainment and Devices Division (EDD), and the company has reported a $426 million profit for that division for the fiscal year ending June 30, 2008. While other entertainment ventures are contained within the EDD, the Xbox 360 accounts for much of the division's $1.5 billion in revenue. Were it not for the $1.1 billion cost to extend warranties on failing Xbox 360 hardware, the division would have recorded a modest loss last year.

A profitable year for the EDD is a step forward for Microsoft's gaming ambitions, but the current hardware sales situation requires attention.

According to NPD Group figures, the Xbox 360 weekly sales rate dropped for the fourth straight month in June 2008, and Microsoft responded in July by cutting the price of its 20GB Xbox 360 model by $50. Last year Microsoft was facing similar stagnation in hardware sales and responded then with a price cut. To get an idea of what happened then and what is happening this year, consider the following graph. It depicts Microsoft's weekly sales rate for January to August 2007 (in red) and January to June 2008 (in blue).



Clearly the price cuts in August 2007 had an immediate and strong effect on Xbox 360 sales. However, those were permanent price cuts across the board to all models. Microsoft's cut this year is more akin to the price adjustments that Sony instituted a year ago (when it dropped the 60GB model to $500 and introduced an 80GB model at $600). To the potential Microsoft consumer, the Xbox 360 pricing structure will remain the same ($280 - $350 - $450) while the standard Xbox 360 model will have a better perceived value when its hard drive size increases to 60GB.

While it is not a perfect analogy, we can look to Sony's sales last year for how this kind of adjustment may play out in hardware sales. Here are the weekly rates for Sony's PlayStation 3 in 2007.



The bump in sales is clearly visible in July, with some residual demand in August, but by September 2007 Sony's PS3 sales were practically back where they had been prior to the adjustments. Sony ultimately responded with a real price drop in October 2007 with the introduction of the $400 40GB PS3 and the $500 80GB PS3, and since that time the system's sales have been far stronger.

Last fall Microsoft had what it called “the greatest holiday lineup in video game history” and primed the retail pump with a strong price cut. Microsoft must consider a similar cut soon (no later than October 2008, perhaps after Madden but before Gear of War 2) or risk sitting in third place for almost the entire year.

Next: Nintendo