Game Consoles Getting Cheaper?

Activision (Nasdaq: ATVI  ) CEO Bobby Kotick is no stranger to runaway success. His company's a video game powerhouse, buoyed by hit series like Tony Hawk and Call of Duty, as its recently hiked current-quarter guidance indicates. But Kotick says his company's games would really take off if two of the top consoles slashed their currently lofty prices.

$199? Are you outta your mind?
Kotick told Reuters last week that the prices of Microsoft's (Nasdaq: MSFT  ) Xbox 360 and Sony's (NYSE: SNE  ) PlayStation 3 will have to fall to at least $199 if they hope to capture the sort of mass-market attention gained by Nintendo's (OTC BB: NTDOY.PK) less expensive, more profitable, and ever-successful Wii.

Kotick said that the Wii, at $250, "is now setting a standard and an expectation," with consumers seemingly indifferent to its less sophisticated graphics. If the Xbox and PlayStation want to keep up with the Wii's success, Kotick believes they'll have to cut their prices within the next 24 months.

Nintendo's been able to sell Wiis just about as fast as it can produce them. And unlike its console rivals, which sell costly hardware at a loss in hopes of making money off software, Nintendo actually turns a profit from each Wii sold. In addition to Activision, rivals such as Electronic Arts (Nasdaq: ERTS  ) and Take-Two (Nasdaq: TTWO  ) are eager to create games for such a popular console.

Snip, snip, snip
While both Sony and Microsoft have trimmed their console prices several times over the past year, sales continue to lag expectations. With a current price tag of $399 for the PS3 and around $280 for the least expensive Xbox 360, the Wii remains the main attraction for price-conscious consumers. Its cheaper price increases its appeal to a market of nontraditional, family-oriented gamers.

What does all this mean for your investments? If you're looking to cash in on the video game craze, don't waste your time focusing on console sales. Microsoft just made money in its console division for the first time since the success of Halo 2 in 2005, thanks to the success of its Halo 3 game. (See a pattern here?)

Beset by price cuts and dependent on hit titles for profitability, the console market makes me content to keep my investment dollars sidelined. Any drop in the popularity of megahit games could send sales crashing down, in a division where profit seems to be the exception, not the rule. This Fool would rather look elsewhere.