Last Call for Microsoft's Xbox One?

Microsoft's price cut is wrong on a few different levels.

Jun 8, 2014 at 5:00PM

It may be too late to level the playing field, but tomorrow is the day Microsoft (NASDAQ:MSFT) finally decides to battle rival Sony (NYSE:SNE) at the $399 price point. The Xbox One will match the price of Sony's PlayStation 4, but this isn't really a $100 price cut. Microsoft is doing what Sony did last November, stripping out the camera-based controller as an included accessory to make it cheaper to produce.

That's a pretty big deal, and not just because it burns developers that have been making games under the assumption that every new Xbox console comes with voice and visual recognition. The push to match Sony on price finds it fighting a battle without understanding the cause of the war.

Yes, the Xbox One has been getting smoked by the PS4 since both systems were introduced a week apart in November. The PS4 had a slight edge in unit sales early on, but the gap has been blown wide open lately. Shortly after Sony announced that it had sold more than 7 million PS4 systems to consumers earlier this year we had Microsoft reveal that it had sold more than 5 million Xbox One consoles to retailers. In other words, we're talking a chasm that is at least 2 million consoles wide plus all of the Xbox One systems sitting unsold to consumers on retailer shelves. 

Being a fading silver medalist is a pretty big deal in the console war, because you need the support of software developers to justify these steep upfront investments on behalf of diehard gamers who are choosing between platforms. If you don't think that's a big deal, consider Nintendo (NASDAQOTH:NTDOY) and its sorry state. The Wii U hit the market a year earlier than its competitors, but it sold a mere 3.5 million units in its first fiscal year of availability. It cleared just 2.7 million Wii U systems in its latest fiscal year, so all that means is that the Xbox One may even technically be a bronze medalist here in terms of cumulative sales of the current generation.

Nintendo's fate should scare Microsoft. After all, it announced a price cut on the Wii U halfway through the Japanese gaming pioneer's fiscal year and unit sales still dropped. This means that a price cut isn't always enough. However, the fact that Nintendo's Wii U has been cheaper than the Xbox One and PS4 and is still a flop suggests that this isn't a game of limbo where the winner is the one that can go the lowest with a pricing gun. All that a price war does is obliterate margins for an industry that's already struggling to sell the games that hardware companies need to generate high-margin royalties. 

Maybe the majority of gamers chose PS4 over Xbox One for more than just the opportunity to save $100. One can argue that Microsoft didn't make a lot of friends by initially suggesting policies that would restrict users to connectivity requirements or brick secondhand games. Microsoft eventually backed away from those tactics, but it seems as if there are plenty of diehard gamers out there that just don't trust Mr. Softy.

That's not going to get any easier once the market begins to realize what Microsoft is doing in promoting the Xbox One. Have you seen the new commercial?

It stars Breaking Bad's Aaron Paul -- and that's good -- but then it goes on to show him using a lot of Kinect-based features in an ad that closes with the new $399 price point. The fine print spells out that the Kinect is sold separately, but how many people will buy it come Monday only to realize that Paul sold them some bad meth via bad math? 

Adding insult to injury, the Kinect as an add-on accessory reportedly won't be available for months. The spot is bad in so many ways, and a company that probably thought introducing a cheaper Xbox on the eve of the industry's critical E3 conference would be a winning move is going to get raked over the coals for its iffy marketing.

Wish Microsoft luck. It's going to need it.

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Rick Munarriz owns shares of Netflix. The Motley Fool recommends and owns shares of Apple, Google (A and C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. 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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