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Armchair Analysis: The Price Cut Conundrum

Posted by: Peter Skeritt at 3/8/2011 11:54 PM
Michael Pachter, noted video game industry analyst, came out on Monday and put out the word that price cuts are needed in order to stimulate sales. I predicted something similar back in January, and recent developments have indicated that these cuts are coming for at least two of the three major platforms. Pachter is correct in that something is needed to get hardware moving again in general, but his claim that Microsoft will be the first to drop prices seems a bit odd. 

Here's what we know so far:

160GB PlayStation 3 units have recently been selling with various promotions. GameStop had two of these, including one with a $50 gift card with purchase and another with a free copy of LittleBigPlanet2 with purchase. We're also seeing Killzone 3 bundled with some 160GB hardware packages for only $300, which is a $60 value. It's realistic to use these promotions to draw the conclusion that Sony is working up to a price drop for 160GB PlayStation 3 units. The best guess-- and the number that makes the most sense given the promotions that we've seen-- is a $50 price drop to $249.99. 

As for Nintendo, we've seen a few retailers dangle new Wii hardware for $180, including GameStop and Amazon. Dropping the price of the Wii makes sense given that sales of the console have been consistently on the decline. Even if, as I suspect, Nintendo unveils information about its next platform in June... the Wii is still Nintendo's short-term answer for staying in the console race. NIntendo is also still looking to the release of The Legend of Zelda: Skyward Sword for the Wii sometime in Q4, although it can be argued that the game's Wii release isn't completely set in stone. 

That brings us to Microsoft, and here's where our predictions diverge. 

Pachter believes that Microsoft will move to cut prices because it's "in the driver's seat". While this is a possible scenario, it's just as likely that Microsoft knows that its competition is ready to cut prices and will be ready to respond when it happens. There really isn't any solid reason why Microsoft should strike first here; Xbox 360 sales are stronger than ever, there's continued (though waning) interest in Kinect, and demand for the new revision of Xbox 360 hardware remains high. With momentum clearly on its side, cutting prices first would be a curious strategy. Instead, reactive price drops make more sense to me... and it's extremely likely that Microsoft is ready for when that time comes. 

The time frame for these cuts remains a mystery, although Pachter and I both agree that the cuts are likely to occur in June at E3. The timing makes sense, as E3 has been the site of many pricing announcements. If Microsoft's press event leads off, as it has in years past, it's possible that Pachter's prediction could ring true, especially if Microsoft wants to make a big splash. I suspect that, no matter what Microsoft does, Nintendo and Sony will announce their cuts at their respective press conferences. 

We'll certainly see how it all plays out as the big trade show is about three months away. If hardware sales continue to decline, the chance certainly exists that a preemptive cut could take place... but we'll re-evaluate the chances of that after NPD numbers for February are released soon. In the meantime, your feedback is always welcome. Do you agree that price cuts are coming? Should they be more than we think? Would Microsoft do well to fire the first shot here? Leave some comments below and let us know!

Source: Gamasutra