thoughthead

When will the 360 get a price drop? When will larger Hard Drives become available for the Xbox 360? I believe the answers to these questions are intimately related. And I also believe that understanding how they are related will provide us with a better idea of when we can expect to see these things happen.

In order to understand the motivations behind the decision of when we’ll see a price drop one needs to have an understanding of the Xbox division’s financial situation. In order to understand the current financial situation of the Xbox division of Microsoft you have to start by looking at the Xbox 1.

Understanding the Xbox 1
Those who know the internals of the Xbox 1 will tell you it’s pretty much just a PC in a fancy box. It featured a Pentium III processor a GeForce2 graphics chip an essentially off the shelf hard drive and a slightly modified DVD drive, a lot of the glue that held it together was custom but heck even the controller ports were nothing more then funny shaped USB ports. This was an awesome design in many ways because Microsoft was able to deliver the console from planning to market very quickly and still have it be a very solid platform, it was also awesome because developers had a much easier time bringing many favorite PC games over to the Xbox, and any console moder will tell you it was awesome because many of the internal parts could be swapped out with superior PC parts with only slight modifications necessary. This however was bad for a number of reasons. Microsoft didn’t own the rights to the Pentium III CPU (Intel did) and they also didn’t own the rights to the GeForce 2 GPU (nVidia did), which basically left them at the mercy of the companies that DID own the technology. Including a hard drive was also a large burden because despite it’s small size there is a lower price plateau that no matter how little space the drive has the price just wont go lower, and that bottom end price is still relatively high in comparison to most components in a console. Some crafty maneuvers were done to help cut costs, like blocking DVD playback until you bought the “kit”, this allowed them to offload the DVD licensing costs to the remote, making the Xbox Live service and making the headsets require a hardware adapter to plug into the controller. Ultimately though the Xbox 1 never reached a point where Microsoft could make a profit on the console itself, they lost money on every last unit sold. This was due in part to Sony forcing Microsoft into price drops by dropping the price point of the PS2 but also due to the fact that companies like Intel and nVidia controlling the costs of the major chips that went into the console.

The Next Generation: Xbox 360
When Microsoft built the Xbox 360 they learned from the mistakes of the Xbox 1 rather then locking themselves into specific parts owned by other companies they commissioned IBM and ATI to develop unique CPUs and GPUs respectively for the Xbox 360, Microsoft would retain ownership of these chips and thus the price was only limited by the manufacturing costs as opposed to being artificially set by a 3rd party that controlled the tech. The hard drive being removable also gave them more flexibility in segregating those costs from the rest of the unit. At launch estimates pointed to the Premium Xbox 360 unit costing up to $125 more per unit then they were actually selling for. That is to say if the unit was selling at $399 it actually cost Microsoft $524 to manufacture it. A similar scenario to the Xbox 1, one in which they hope to make up those losses, and then some, in the sale of games and accessories. Most consoles do reach a point where they start turning a profit, but the Xbox 1 never reached that point. Nintendo almost always turns a profit on each console right at launch, while companies like Sony and Microsoft take a hit around the console launch. The PS2 is estimated to be at a point where Sony actually makes $40 on each unit sold. It is also estimated that right now Microsoft is no longer loosing money on Xbox 360 consoles but actually making about $75 on each premium unit; that’s about a $200 cost reduction since launch.

If it’s cheaper to make it why haven’t we had a price drop?
While the Premium Xbox 360 units might be turning a small profit right now, the Xbox division is still in the red. The Xbox 1 never made a profit, and that is part of the reason it was dropped so quickly after the Xbox 360′s arrival, it was impossible for them to ever reduce the costs enough to make it profitable. And while the Xbox 360 is actually turning that negative trend around, they’re still deep in the red from the Xbox 1 and the up front costs of developing the Xbox 360 platform, not to mention the substantial losses they were taking on the Xbox 360 when it first launched.
You also have to ask the question, what motivation does Microsoft have to drop the price anyway? If you look at their current situation in the market they’re sitting quite pretty. Having launched a year in advance they’ve got substantial next gen market share, Sony’s price point is substantially higher, which means their sales are slow to catch up and the Nintendo Wii is slow to make headway due to production shortages. The Xbox 360 is actually selling at a good pace at it’s current price and so far the competition hasn’t slowed it down much. Dropping the price would certainly boost their market share but it would do so at the cost of further putting the division in the red. Right now Microsoft doesn’t need the extra market share, what they need is to make the Xbox division profitably and this is the best opportunity they’ve had to make that happen since it’s inception.

So When will we see a price drop?
Microsoft wants to stay put and enjoy the profits while they can, but they can’t stay there forever. It’s been known for quite some time that they plan on moving their chips over to the 65nm process which will shrink the size of the chips, allowing them to be produced cheaper, and require less expensive cooling equipment. If this is combined with a substantial redesign of the console’s interior they could easily drop manufacturing costs another substantial amount. It is my belief that the price drop will not happen until after the redesign occurs, due to the desire to keep the console profitable, and at it’s current estimated manufacturing costs they can’t drop the console price and still be profitable. I also believe that since the move to the new process is rumored to be happening relatively soon, the price drop probably will not occur at the same time, but instead sometime later as a more strategic move. The reason for this is that they will be able to accelerate their drive toward profitability by going towards 65nm and staying at their current price for as long as they can. The next likely time frames for a strategic price drop are the PS3′s launch in Europe and the upcoming holiday season. but I’ll get into those more in detail later.

What does this have to do with a bigger hard drive?
Many may recall the cry of “FOUL” when the Xbox 360 was released and the price of a meager 20GB hard drive was priced at a ludicrous $99. At the time it was only marginally overpriced because once it was realized that it was a 2.5in form factor SATA drive it only seemed slightly over priced considering similar drives for laptops ran in the $70 range. Today however the price is actually ludicrous, the 20GB Xbox 360 hard drive still costs $99 but the price of similar drives in PCs is now closer to $30 or $40 (if you can even find them that small). The reason being that the over priced hard drive is a big part of the reason Microsoft is currently turning a profit on the premium Xbox 360 units. Releasing a larger hard drive now would have the same effect as a price drop. Basically there would be four senarios.

1. The larger HDD is released and included with the Premium unit. Microsoft no longer makes a profit on the premium units because the hard drive eats that profit.

2. The larger HDD is sold separately from the Premium unit and is priced at a reasonable point for it’s size. This would devalue the 20GB hard drive and in turn devalue the Premium package because the price per gigabyte would be much smaller on the larger drive, even if they dropped the stand alone price of the 20GB drive the Premium package would still be worth less by comparison but at the same consumer cost. Most likely this would drive more people to the Core unit and buying the larger hard drive separately. And unlike the Premium, the Core unit is estimated to still sell at a loss: thus Microsoft loses their profitability.

3. The larger HDD is priced near the same price per gigabyte ratio of the 20GB drive. This of course wouldn’t sell at all considering a 120GB drive would wind up costing about $600. I can’t imagine anyone who wants a bigger hard drive that badly.

4. Drop the price of the console as well as the 20GB drive to keep the relative value of everything in check. As noted before, they wouldn’t want to do this yet because they want to keep the console profitable.

Once you consider all of this it’s clear how directly the release of a larger hard drive is tied to the price of the console itself.

When will we see a larger hard drive released?
My prediction for a larger hard drive is that similar to my price drop prediction: we wont see a larger hard drive until after the move to the 65nm process. I also believe that Microsoft is keeping tight lipped about a larger hard drive because of the effects it would have on the market would be similar to the effects felt if consumers knew a price drop was coming. That is to say the market would slow up as people hold off while they wait for the price drop (or in this case the larger hard drive release) to happen.

Strategically I feel that the release of a larger hard drive will come at the same time as a console price drop, and that it will be a surprise when it happens due to the implications it carries with it. I don’t think we’ll see either happen until the move to 65nm at the earliest. We might see it happen with the PS3 launch in Europe if Microsoft feels they need the boost to combat against Sony, maybe even a Europe exclusive price drop at the PS3 launch until this holiday. Most likely I think we’ll see it happen this holiday season.

The reason I feel it will happen this holiday is because that is the time when Nintendo and Sony will be rolling out the big guns to boost their market share. The Wii will be widely available, and the PS3 will have a much larger library, both will have more mature online services, and both with have more impressive 2nd wave games to help move their systems. although Microsoft will have the advantage of an even more mature online service an even broader library and even more impressive 3rd wave games, it will take even more then that to keep the Xbox 360 in the minds of gamers looking for a next gen console. Halo 3, Forza 2, and Mass Effect makes an amazing exclusive game trifecta for the holiday but Nintendo will be rolling out a new Mario, Sony MGS4 and other big names, a price drop with a larger hard drive would make a strong game lineup into a devastating combo for boosting game sales through the holiday season, all without losing profitability. It just makes the most sense.