Microsoft raises ante in price wars

A price war took hold of the US gaming market on Tuesday when Microsoft followed Sony¡¯s move last month to reduce the price of its core console.

The decision to cut the price of the Xbox 360 reflects slowing momentum for a product that plays a key role in the company¡¯s broader consumer strategy, according to analysts.

It is also expected to turn the console back into a loss-making product for Microsoft, although the company should still be on track to hit its target of finally breaking through into profitability in the games business in its current fiscal year, they added.

Microsoft announced on Tuesday that it would cut $50 from the price of the most popular model of the console, to $349. Two other configurations of the Xbox 360 will be cut by $20 and $30.

The timing of the cut, be0…2fore the busy autumn season, was earlier than expected, analysts said, and pointed to competition in part of the market from the cheaper Wii console from Nintendo.

Last month, Sony sliced $100 from the $599 price tag of its basic PS3 console.

Average monthly sales of the Xbox 360 dropped to 200,000 in the first six months of this year, from about 700,000 in the first 14 months the machine was on the market, said Matt Rosoff, an analyst at Directions on Microsoft. ¡°It¡¯s the cornerstone of Microsoft¡¯s home entertainment strategy,¡± he added, making it vital for the company to ship the machine in higher volumes.

Microsoft said that the price cut had been timed to coincide with the release next week of Madden NFL 08, the latest in a popular series of big-selling football games from Electronic Arts.

According to the company, the lack of any earlier price cut since the launch of the console in November 2005 makes it the longest period a new machine has been able to hold its original sale price. But the fact that the Xbox was launched nearly a year before rival consoles from Sony and Nintendo meant that it was under no pressure for much of that time to consider any competitive action, said Van Baker, analyst at Gartner.

While Microsoft had reached break-even on the Xbox 360, ¡°it will probably go negative again¡± with the price cut, said Charles di Bona, an analyst at Sanford C Bernstein. The launch of the latest version of the big-selling Halo game in late September, however, should lift the company¡¯s games business to its first quarterly profit for the first time since the previous version of Halo, as well as its first ever full-year of profits, he added.

A broader trend in the games business, where growth is coming increasingly from casual and ¡°social¡± games, could have contributed to the slowing momentum for sales of consoles aimed at the traditional ¡°hard core¡± market of young males, some analysts said.

¡°The gaming environment is radically different from the last two or three generations of consoles,¡± said Richard Doherty, an analyst at Envisioneering.

Console makers are being forced to fight harder for audience time as their users adopt newer online and gaming habits, from social networking to the different experience embodied in the controller to the new Wii console, he added.

Thanks to the broader appeal of the Wii and its presence in hand-held games, Nintendo seemed better positioned for these trends than Microsoft or Sony, Mr Doherty said.