Things aren't looking good for Microsoft's (NASDAQ:MSFT) Xbox One. After what was admittedly a very strong debut, sales of the console have slowed to a crawl. Last month, according to research firm NPD, rival Sony's (NYSE:SNE) PlayStation 4 outsold Microsoft's console in the U.S. by a ratio of 2 to 1.

Is the runaway success of the PlayStation 4 simply overshadowing Microsoft's latest console, or is the Xbox One not doing as well as Redmond expected? The latter is looking increasingly likely, as retailers such as Target, Wal-Mart, and GameStop (NYSE:GME) have begun to offer heavy incentives on the Microsoft console.

Pushing the Xbox One
If you're in the market for the Xbox One, I'd suggest purchasing it from Wal-Mart or Target. If you buy Microsoft's machine from Wal-Mart, the big-box retailer will throw in a free game worth $50. If you'd prefer to spend the money on something else, Target will give you a gift card for the same amount.

In addition to offering $10 off the purchase of a second wireless controller, GameStop is letting cash-strapped customers reserve the console on layaway.

Good luck finding a PlayStation 4
In stark contrast, Sony's rival PlayStation 4 is virtually impossible to find. Of the six GameStops I called in my area, not a single one had the machine in stock, and none of GameStop's employees could tell me when their next shipment would arrive.

They did, however, offer to ship a PlayStation 4 directly to my house when it turned up -- assuming that I was willing to purchase a nearly $700 bundle that comes with games and an extra controller.

Too expensive and too weak
I had no interest in purchasing that bundle, and I doubt many gamers would. Indeed, the PlayStation 4's greatest selling point remains its price advantage: At just $400, it's a full $100 cheaper than Microsoft's Xbox One.

The PlayStation 4 is also slightly more powerful. Metal Gear Solid V, a game coming to both Sony's and Microsoft's next-generation consoles, will look better when played on Sony's machine.

To many gamers, a minor difference in graphics quality might not matter much -- but combined with the $100 price difference, it may be too much for Microsoft's console to overcome.

Price cut coming?
The Target and Wal-Mart initiatives basically amount to an unofficial $50 price cut, suggesting that Microsoft may need to reduce the Xbox One's MSRP. There are rumors that Microsoft is working on a cheaper version of the console; if recent sales trends are any indication, that cheaper Xbox One can't come fast enough.

On equal footing, Microsoft's console might hold its own against Sony's system, but at what expense? Microsoft could sacrifice its controversial Kinect add-on, or, as has been rumored, roll out a version of the console that does not include a disc drive.

Although cutting out the disc drive would not, by itself, reduce the manufacturing cost by $100, Microsoft would ultimately see more revenue in the long run. Gamers who purchased a digitally dependent Xbox One would have no choice but to buy their games directly from Microsoft's online store, cutting GameStop and other retailers out of the equation.

But Microsoft had better do something. With excess Xbox One inventory driving retailers to drastic action, the company is far behind Sony in the current console war.

The war for your living room begins now
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Sam Mattera is short shares of GameStop. The Motley Fool owns shares of GameStop and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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