Console Pricing Racing to Bottom

(MoneyWatch)  The gaming console market has been a bright point for high tech, managing to sell even during last fall's disappointing sales season for consumer electronics. But there was a factor at work at the time: lowered margins. And it seems that the trend is continuing.

Engadget reports that Best Buy is dropping the street price of the Nintendo Wii to $199. Back in August, Sony finally came out with a price drop on the PS3. And, ironically, Caris & Co. analysit Curtis Shauger sees slowing Xbox sales as good news because they dilute earnings. (Interestingly, he says that Microsoft is still losing money on each Xbox sale.)

The units may be flowing, but the entire industry is beginning to approach a precipice. For years each company operated on the concept of selling units at a loss for some amount of time, generally years, and eventually making profit over the long haul through the combination of falling costs of manufacturing and royalties on the game titles. But that depends on increasing profits per unit over time. The question is whether the price drops necessary seemingly necessary to drive sales will eventually allow that to happen. There's no room for problems, like if you make a console that keeps frying and you have to issue mass replacements, as Microsoft has had to do -- more than once.

And that's the hidden problem. Lower income and prospects of profit mean more pressure on costs. That can result in inadequate engineering and design time, rushing through manufacturing, and going for bargains wherever you can find them. Although the pricing may keep gamers happy and the vendors thinking that they can wait out the problems, this could be setting up the entire industry for a disastrous crash.

Illustration via stock.xchng user nookiez, site standard license.