Microsoft's Xbox One Is Now $399 Away From $0

Microsoft's price cut isn't all that it's cracked up to be.

May 14, 2014 at 8:05PM

It's time for another price war in the video game console realm. Microsoft (NASDAQ:MSFT) is announcing that it will introduce a cheaper Xbox One system come June 9, sacrificing a pretty important feature to achieve a $100 price cut.

There's no mistaking the timing of this announcement and why die-hard gamers will have to wait four weeks for the price break. June 9 happens to be the day before the gamer-centric E3 conference kicks off in Los Angeles. Why announce it now instead of springing it on fans on the eve of E3? Won't that freeze existing Xbox One sales through the next few weeks? Well, with the sales gap widening between the Xbox One and market leader Sony's (NYSE:SNE) PlayStation 4, the early announcement also stalls potential PS4 sales. This also provides Microsoft with the perfect scapegoat when Xbox One sales fall off a cliff in May. And they will. 

Unfortunately, the feature that Microsoft will forgo to match the more successful PS4 on price is the motion-based Kinect controller that has been promoted as its most prominent accessory. This is a tactic that Sony knows all too well. It waited for Microsoft to announce that the Xbox with Kinect would retail at $499 during last year's E3 before revealing that the PS4 will sell for $399 without its motion-based camera controller.

Microsoft may have assumed that it would continue to be the market leader with the Xbox One the way it was with the Xbox 360, but Sony's eating Mr. Softy's lunch since both next-gen consoles hit the market in November. Sony recently announced that consumers have snapped up 7 million PS4 systems since its launch. Microsoft followed by announcing that it had sold 5 million to retailers. In other words, the gap isn't just 2 million consoles. It's that in addition to all of the Xbox One boxes sitting on retailer shelves. 

A price cut will help increase demand. How can it not? However, it will find Microsoft once again burning developers. Software companies have been developing for the Xbox One platform under the assumption that every owner has a Kinect controller. It's bundled with the system. That will naturally change come June, and it's not making matters any better by announcing that stand-alone Kinect sensors won't be available until later this fall. Upsetting publishers is never a smart idea, especially when you're falling deeper into second place. Obviously, Microsoft hopes that the price cut will increase its installed base, creating a larger pool of potential buyers for the developers putting out Xbox One games.

That will make it easier for software companies to forgive Microsoft, but desperate actions also introduce a new icy layer of distrust. If Microsoft doesn't play this right it will lose both camps.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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