Can Even Microsoft Afford to Buy the Gaming Market?

This is the day of the big discount: all of Microsoft's Xbox 360 units have officially dropped price by $50, giving the company the cheapest entry point for the would-be gamer. But this smacks of desperation in a whole lot of ways, for example, like this being the second price drop Microsoft has tried this year alone. When you consider the number of units they sell normally and how financially badly that Microsoft does in this market, you have to wonder if even with those deep pockets it's possible to buy enough Christmas cheer.

The Xbox 360 Arcade, the model without a hard drive, is now $50 cheaper than the "perpetually 'sold out' $250 Wii and 80GB PS3 selling for double the price."

Last year Microsoft sold 4.6 million Xbox 360s, largely driven by the availability of Halo 3 -- about 1.3 million in December alone. Sonysold 2.6 million PS3s and Nintendo sold 6.3 million Wii units. Nintendo is dominating the market because it's cool. There are different types of games, people like being able to move around to direct their actions. By mid-year, except for one month, the Wii has been the top selling console since its introduction, at least in the US.

The Arcade was only about $250 before, so if it couldn't attract enough attention compared to the Wii, is $50 going to be enough of a difference? Not when retailers can't keep enough units on the shelves even before the holiday season. As for Sony, Microsoft already sold more then them last year, and that was after the PS3 price drop.

What Microsoft realizes is that success isn't about the hardware. Gamer preferences are about two things: the actual gaming experience and the games available. Microsoft is losing badly on the former; Nintendo has blown everyone else out of the water with the wireless, motion-sensitive control. In fact, the company has largely held both the number one and number two spots for game console unit sales, with Nintendo DS being second.

As for games, the Xbox 360 floated on Halo 3 sales last year, because that was the only platform for the wildly popular first person shooter game. That's not happening this year, so Microsoft is falling back on what is generally the last resort of a desperate vendor: a big price slash.

Figuring on the old rule of thumb, that 60 percent of sales happen in fall during the holiday season, that's 2.76 million units at the lower price. At $25 less revenue per unit (given that probably half of the money is cash the resellers don't see with the new list price), that's a loss of $69 million at last year's volume. Given that Microsoft revenue in its Entertainment and Devices Division was $6.08 billion and it still lost $1.89 billion, the additional money gets lost in rounding.

I've mentioned this number before and admit that it draws me the way traffic accidents magnetize many heads. Microsoft has been losing money in this area for years, and over the last few, at least, the loss has been getting larger, not smaller. How long does any company -- and its investors -- want to subsidize product lines that don't carry their own weight?

Graphic courtesy Erik Sherman.