ANALYSIS: What a 360 Price Cut Means for Wii, PS3

Five analysts who believe that an Xbox 360 price cut is incoming speculate on what such a move means for PS3, Wii and the Xbox business's profitability goals.

A purported Kmart ad began tearing through the Internet last week, showing a "new low price" of $299 for the 20GB Xbox 360 Pro model, and a July 6 shelf date. Such a price tag suggests a $50 price drop for the Xbox 360 model even before the E3 Media and Business Summit, taking place a week later. While Microsoft won't confirm the price drop, gaming sites are abuzz with speculation.

Now, five top industry analysts have told Next-Gen that they believe an Xbox 360 price drop is not only imminent, but likely required if Microsoft intends to fend off competition from rival PS3.

"We believe Sony will be forced to follow suit [with their own price cut], although we suspect they may wait a little bit," said Arvind Bhatia with Stern Agee. "A price cut sometime between July and September is possible [for PS3]."

A price cut would expectedly increase the PS3's installed base, and create an opportunity to sell more high-margin software to offset hardware losses. But still, a reactive PS3 price cut may go against the PlayStation businesses' recently restated "profitability first" mantra. For now, Sony will wait and see how an Xbox 360 price cut will affect PS3 sales and share, says Lazard Capital Markets' Colin Sebastian.

"In the event of decelerating PS3 unit sales trends, we believe Sony might rethink its strategy on PS3 pricing, but for now, the hope is that a stronger software lineup as opposed to price concessions will drive hardware adoption," he said.

Wedbush Morgan's Michael Pachter said that Sony will have to keep pace with a reduced-price Xbox 360 by either cutting the price, or by making "some strides in marketing."

"The gap of $100 may be a fair price to pay for [PS3's] built-in wireless Internet connectivity and Blu-ray, but [Sony's] done a terrible job of explaining that to consumers," he said.

Janco Partners' Mike Hickey said Xbox 360 price-cutting pressure would be a timely move, hitting Sony as the company concentrates on profitability.

He said, "We continue to believe the Xbox 360 has a distinguished value proposition from the PS3, but Microsoft could use price as a competitive weapon, particularly after Sony reiterates focus on profitability."

Of course, Sony's profitability isn't the only dollars-and-cents issue here. Microsoft's traditionally bleeding console business has only now begun to maintain quarter-after-quarter profits, and with a hardware price drop, the company would slash any hardware margin that it might be currently enjoying.

But Pachter believes that the 20GB Xbox 360 now costs Microsoft less than $300 to produce, and with strong sales of high-margin software (monthly software attach rates have surpassed seven units), the firm has some breathing room.

"...If Microsoft can convert more people to Xbox Live, they will more than overcome the 'lost' $50 profit on hardware. My guess is ... they can afford a $50 [hardware] cut," he said.

Jesse Divnich with Electronic Entertainment Design and Research (EEDAR) concurred that Microsoft has made "great strides" in cost-reducing the Xbox 360 hardware, so if the firm can afford to bring down the price, it should.

"Bottom line, if Microsoft wants a stronger position to generate long-term revenue, they need to get their system in as many homes as possible," he said.

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