As console fans already know, Microsoft again is dropping the price of the Xbox One -- this time to $349. To call the move one of desperation hardly overstates the case at this point. Sony is dangerously close to running away with this generation of console sales, with the PS4 having blasted past 10 million in August and showing no signs of slowing down. And while Microsoft has taken steps to recover from its stumbles out of the gate, fixing the DRM issues, unbundling the Kinect, etc. most sources have it being outsold by a 2:1 margin (see chart below). Still, questions remain: Is a $50 price edge what Microsoft needs to catch Sony? Does the race matter at this early stage? Should anyone shopping think twice about Xbox One? Let's break it down.
Price probably won't be enough
As Dave Thier noted, the Xbox One has already had a pricing edge thanks to bundles yet PS4 is still outselling it. Perhaps more disturbing for Microsoft, however, is that outside of the U.S., Sony is flat out destroying its rival. VGChartz has the PS4 leading by nearly 4:1 in Europe in a recent week and more than 10:1 in Japan. Jason Evangelho thinks that Xbox One has the better holiday lineup and that will carry the day. But commenters expressed their skepticism. Perhaps more importantly, though, maintaining any superiority will be tough. Given the similarity of the hardware between the two consoles, porting games is easier than ever and that limits exclusives mostly to games controlled by Sony and Microsoft or those effectively bought and paid for. There is a significant exception to that rule, though, which ought to frighten Microsoft (read on).
History shouldn't reassure Microsoft here
ExtremeTech recounts that way back when, Xbox 360 was in a similar position vis a vis the Playstation 3 and yet ultimately Sony caught and passed Microsoft. But there's a lot of difference between then and now and it's not reassuring for Redmond. The Xbox 360 launched a full 18 months before the PS3 and sold well in the absence of current-generation competition. With Sony's holiday 2006 launch, it ended that year nearly 9 million units behind Microsoft, who had already moved more than 10 million Xboxes.
Moving forward, Sony won 2007, 2009, and 2010 and fought Microsoft to a virtual draw in 2008. By that time Microsoft's lead was whittled to 51-48 million. Though the Xbox would win 2011 strongly, it was smashed in 2012 and by 2013 Sony had pulled ahead. Critically for both really, once the two were on the market Xbox 360 and PS3 were competitive throughout their lives. It was never true that one dominated the other on anything resembling a level playing field. The silver lining for Microsoft is that Sony was farther behind that Microsoft is now; the dark cloud is that Microsoft has a shrinking window to catch up.
The Fight For The Future Of Video Games is a warts-and-all look at the clashes between the video game business and its passionate fans.
Should Sony play the price game too?
While Microsoft has the deep pockets here, it's not out of the question for Sony to match Microsoft at this price action. Xbox only gets a price cut in the U.S. for now and only for the holiday season. I'm speculating here, but it seems like matching would cost Sony on the order of $75-100 million. It's couch-cushion change for Microsoft and real money to Sony but it might be worth it. A further move down to $299 seems unlikely in response, yet even the match would negate any advantage for the Xbox One. And that might be enough to act as a near knockout blow. Microsoft is unusually vulnerable here to two forces that its deep pockets don't entirely protect it from.
Eventually, Xbox could become small enough developers lose interest ...
So far, that day hasn't come, but it could. Ars Technica speculates that at perhaps 25-30%, Xbox One ceases to be an automatic port for publishers. It appears that Microsoft is close to the edge of that cliff right now; Sony would be foolhardy not to try and push it off. The profits from owning half of this generation of console gaming are ultimately not that great for Sony (it's unclear based on historical data whether they're much above zero for Microsoft). But they might be sufficiently high for Sony if they could own most of the profits to make it worth trying to win early.
... and for the first time, Microsoft itself could lose interest
Though CEO Satya Nadella has made a point of saying nice things about the Xbox division, it's hard to see how any part of Microsoft's devices business is strategic to his vision of "mobile first, cloud first" -- most especially a tethered-to-the-living-room game console. If Microsoft continues to struggle with Xbox One, perhaps Nadella comes to the same conclusion that some observers already have: It's time to cut it loose. Xbox might thrive on its own, it might not. What it wouldn't be able to do in all likelihood is engage in price wars any more than a financially beleaguered Sony.
It's somewhat surprising, in fact, that Nadella signed off on this recent round of price cutting. Microsoft took pride in the fact that Surface showed a positive gross margin for the first time (though the division surely lost money) and then goes and pushes a discount on Xbox that seems certain to generate some red ink. Yes, the company can afford it given the billions in the bank. But the whole endeavor feels more pointless than ever. A Microsoft that is bent on selling consumer goods obliquely might benefit from having the Xbox brand. But the actual Microsoft profit engines come from cloud services and Office, increasingly sold as a subscription not as packaged software.
Perhaps that's the backdrop against which the Xbox One gets this Hail Mary in this fourth quarter, the literal one, as opposed to the proverbial one, representing the closing minutes of the game. If Microsoft doesn't see the sharp uptick in sales against the PS4 it's hoping for, it might just resign itself to defeat in the console wars. Maybe that will clear the playing field for it to give on fighting for hardware more generally, too.
