thoughthead

When the 360 launched it did so at a price higher than most people were used to paying for a console. By the time the PS3′s price was announced the 360′s price tag didn’t seem all that bad, though, the Wii reminded us that a new console can still have a reasonable price. There’s a lot of rumors flying around about when we’ll see price drops happening this generation. Here are my predictions…

Recently Bloomberg quoted both David Hufford, and Peter Moore of Microsoft talking about “Sweet Spot” pricing for a console.

Respectively:

We are well aware that the sweet spot of the market is really 199 bucks.

If we don’t make that move, make it early and expand our demographic, we will wind up in the same place as with Xbox 1, a solid business with 25 million people … What I need is a solid business with 90 million people.

Microsoft is notoriously tight lipped when it comes to announcing price cuts, or anything really. Almost every revelation of new information is carefully crafted to be exactly as they intended to say it and said exactly when they wanted it to be said. There’s no way either of these people would have said anything about price cuts unless they intentionally planned on it. This is especially true for comments about what they feel the sweet spot pricing is and that they need to cut pricing soon. I think it’s clear to most people that a price cut needs to happen soon , and more importantly it needs to be significant. The big question is when and by how much?

It’s pretty apparent that this generation Microsoft is applying all of the notes they took on Sony’s business practices last generation. Many of the same marketing movies and time tables for new releases and the like fall pretty closely in line with how Sony ran the Playstation business during the PS2 era. This is of course embellished with the slightly different tastes of the Xbox clientèle as well as lessons learned from the faults of the Xbox 1. So looking at that, what does the PS2 tell us about when the Xbox 360 will see a price cut? Well according to wikipedia (which seems pretty accurate based on what I remember of last generation) there was a timespan of 565 days from the consoles launch of October 26th 2000 at a price of $299, until it’s first price drop which happened in May of 2002 knocking $100 off the price to put it at the “sweet spot” of $199. The Xbox 360 launched in November 22nd 2005, meaning 565 days would put the price drop at June 10th 2007. Since that date has already passed it stands to reason that they’re not following the PS2 exactly, but the recent comments about price cuts coming in around this time seems to be just too much of a confidence.

When will the price drop?
There are a number of dates Microsoft could use to announce a price drop. Depending how closely they’re following the PS2 time line it could be before the end of the month. The problem with that is there really isn’t any platform they can use for such an announcement. Typically a price drop is announced as part of an event or in conjunction with some other big release. The only way I could see them announcing a price drop this month is if they also planned to announce something big like a move to 65nm or video marketplace rolling out in Europe. Though nether of those seem plausible as I feel 65nm will be a rather silent release and the video marketplace will likely come in conjunction with another major dash update…. we could be surprised though, I can’t see the future I can only make educated guesses.

Looking at the event calendar GDC has already come and gone, there is the Hollywood and Games summit later this month, though it doesn’t seem like that big of a show to make such an announcement, E3 is in July though again it’s not that big of a platform anymore. PAX is in August which has grown to be one of the bigger conferences, The Tokyo Game Show in September and of course the Xbox Show which will undoubtedly be titled X07 this year, and that is usually held in September or October.

With the conferences in mind I think the announcement will depend greatly on which direction Microsoft wants to go. If they want to dramatically build their user base they’ll Announce it at PAX, this will drive sale strong from August through the holidays As the initial drop will draw sales and the release of Halo 3 in September will continue sales strongly through Black Friday where the holiday shopping and other releases will carry it through to the start of the next year. Alternatively if they’d rather go for more profit rather then more users they’ll hold X07 in October (after Halo 3′s release) and use that as a platform for announcement. That will let them milk console sales at the current price from people buying it for Halo 3 and then dropping the price just before the holiday rush. This scenario has the best mix of boosting both profit and sales but it also has the highest risk of aggravating the large group of people who paid full price just weeks before when Halo 3 launched. If they’re going for all profit they’ll stay at the current price through the holidays and then announce next year during GDC. This will allow them to milk full console price through the entire holiday season and then boost sales a bit when game sales start to wind down for the post holiday slump.

Judging by the recent comments from Peter Moore about their perceived importance of a larger user base I’d say an announcement at PAX makes the most sense. As a general rule price drops are effective immediacy or within a day or two of the announcement. This is because the announcement of a price drop essentially stops sales dead in their tracks. No one wants to pay an extra $100 if they can just wait until a price drop date that has already been announced. Making it immediate doesn’t effect daily sales negatively. Also announcing before the holiday rush reduces the number of people aggravated for having paid full price just days before the drop since that’s when daily console sales are the lowest.

What about the price point?
I think it’s fairly easy to predict a price point because they’ve pretty much already told us what it will be. I’m fairly confident we’ll see an Xbox 360 for $199. I’d say you have a very good chance of seeing the Core console at that price. The Premium and Elite units have always been priced according to the Hard Drive price points in relation to the Core console. A clean $100 drop across the board makes the most sense; Core at $199, Premium at $299, and Elite at $379. Unless they dramatically change the pricing of the hard drives I don’t think the price relationships between the consoles will change all that much.

What about other consoles?
If Nintendo drops the price of the Wii it will probably only be by $50 and that’s only if the 360 Core goes all the way down to $199. If they do this you’re likely to see Wii Sports sold separately. I don’t really think Nintendo will do this. They have strong sales at their current price and I don’t think a 360 price drop will really effect their momentum all that much. Most of the people interested in a Wii want one because it’s nothing like the PS3 and 360 and that’s something a price drop just wont change. I also think Nintendo wouldn’t want to seem reactionary. So if they do drop in response to Microsoft then it will be at a great enough delay as to seem disassociated. In any case it’s still too early for a Wii price drop, especially considering it’s still difficult to find one to even buy if you wanted to, I highly doubt we’ll see the Wii drop this year.
While it’s still technically too early in the PS3′s life for a price drop, a price drop is disparately needed to push their sales stronger, this will be even more true if Microsoft drops their price. Since Sony stopped producing the 20GB model the only PS3s available are at the $599 price point. If Microsoft drops their price $100 across all models that will put the cheapest PS3 at a whopping three times the price of the lowest Xbox 360. You could buy 3 core units, or a Premium and a Wii and still have money left over for games. I don’t think Sony has any desire to drop in reaction to a Microsoft announcement, they like being in control of those kinds of things; though, they may not have much of a choice considering the price disadvantage that would occur if Microsoft drops. Sony is really a big question mark right now. It really depends on if they’re going to ignore their competitors and play things out the way they’ve been going, or if they’re going to make the right business moves to drive sales over profit. They could go one of three ways. 1. They could see the Xbox 360 price drop coming and pre-emptily drop the PS3′s price, this would force Microsoft to drop sooner then planned and cause a bit of an upset, it would also help re-affirm Sony’s power in the game market and their ability to control competitors. 2. They could play it safe and wait for Microsoft to drop first. This will allow them to milk as much as they can at the current price point before having to drop just to keep sales moving at a constant pace. or 3. They could ignore a Microsoft price drop, continuing to claim that the hardware is indeed worth the price their asking and not drop the price until they’re good and ready to do it on their own terms.

I really can’t predict what Sony will do with the PS3′s price. In many respects they’re unpredictable given their current market position. Nintendo and Microsoft are much more predictable in this regard as they’re in much more comfortable market positions and their direction is clear. If this all plays out the way I think it will, we’ll see the 360′s price drop $100 across the board before the end of the year (likely in August). We’ll see the PS3′s price drop around the same time by roughly the same amount, and the Wii wont see a price drop until sometime next year.