Microsoft's Brilliant Play

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Microsoft (Nasdaq: MSFT  ) is starting to think like a wireless carrier -- and that's a compliment.

The Verge is reporting that the world's largest software company is about to offer its Xbox 360 bundle -- the version that pairs up the four-GB model of the leading gaming console with the popular Kinect motion sensor -- for just $99.

There's a catch, of course. This is the same bundle that retails for $299 at the moment.

Taking a cue from wireless carriers, which subsidize smartphones in exchange for two-year connectivity agreements, Microsoft offers the $99 bundle only to gamers willing to pay $15 a month for two years for an enhanced version of Xbox Live Gold.

Work the math, and it doesn't seem like such a great deal. Paying $15 a month for two years adds up to -- fittingly enough -- $360 on top of the $99 bundle. In fact, it costs more than buying the $299 bundle and adding a $60-a-year Xbox Live Gold membership (without a string attached).

However, for young gamers who find it easier to pay in monthly installments than to save up $300 upfront, the new deal makes perfect sense.

We also don't know what enhancements will come with the subsidized version. Deal or not, Microsoft will have to make this a service worth $15 a month. Netflix (Nasadq: NFLX) CEO Reed Hastings does sit on the Microsoft board of directors, so a little additional streaming content wouldn't hurt. Microsoft can also include digital credits every month for games, movies, and music downloads.

Ultimately, this is about inviting more people into its ecosystem. Gamers will make the most of their monthly memberships, transforming the Xbox 360 into the centerpiece of their home entertainment setups.

However, the smartest move here may be locking up gamers for two years.

It will be Nintendo (OTC: NTDOY.PK) -- and not Microsoft or Sony (NYSE: SNE  ) -- hogging the spotlight at next month's E3 show. The struggling gaming pioneer is the only one committed to releasing a new console platform later this month. Pricing and release date details for the next generation Wii U will probably be made public next month.

Buzz is building for the next Xbox, but it's not likely to hit the market until late 2013, or possibly even 2014. Getting gamers to make a two-year commitment to the current model will result in fewer gamers hopping onto Nintendo's new console. If Sony beats out Microsoft in putting out its next system, the same thesis applies.

Microsoft is getting ahead of the noise, and that should keep the leading video game console on top of the competition.

Play on
I've been covering Microsoft since the 1990s, and I've generally had a lukewarm opinion as an investor. However, I entered a bullish CAPScall on Microsoft in Motley Fool CAPS earlier this year, reversing my earlier bearish pick.

If you haven't read about the two words that are giving Bill Gates and Steve Ballmer fits, it's a free report, so you may as well check it out now.

The Motley Fool owns shares of Microsoft and Sony. The Fool has created a bear call spread position in Sony. Motley Fool newsletter services have recommended buying shares of Microsoft, Netflix, and Nintendo. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Netflix. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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10/24/2016 4:00 PM
MSFT $61.00 Up +1.34 +2.25%
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