When Microsoft (NASDAQ:MSFT) introduced the Xbox One with a lavish media event in fall 2013, much of the hype focused not on gaming but on using the console to control your television. The company demonstrated how, through the Kinect motion sensor, which was built into the new console, users could flip back and forth between television, games, and other content using hand gestures and voice commands.
The launch event was an attempt to establish the Xbox One as an entertainment hub to rule the living room. The Kinect, which had been an add-on peripheral with the previous-generation Xbox 360, was key to the strategy -- so crucial that Microsoft made it a mandatory purchase for Xbox One buyers. This pushed the price for the new console to $499, $100 higher than the $399 price tag on Sony's (NYSE:SNE) competing PlayStation 4 console.
The strategy did not work and Sony's console consistently outsold Microsoft's by an approximately two-to-one margin. (Sony reported selling 10 million devices as of August; Microsoft has been cagey with sales figures, but reported shipping 5 million units as of April.)
Kinect might be cool and allow for all sorts of neat functionality that appeared to have come straight out of science fiction, but customers apparently weren't willing to spend an extra $100 for it. Because of the lagging sales, Microsoft in June, under new CEO Satya Nadella, unbundled Kinect from Xbox One and lowered the console's price to $399.
Now, just a couple months after dropping Kinect, the company announced that it's coming back as a stand-alone device for $150. That, of course, leads to the question: If people weren't willing to pay $100 extra up front for Kinect with the Xbox, why would they pay $150 for it later?
Did dropping Kinect work?
Though Microsoft has been less than forthcoming with sales details for the Xbox One, the company did make a statement on the Xbox blog in June.
Over the past month, we've seen a strong spike in interest in our Xbox One console options, including the new $399 offering, and the amazing lineup of games announced during E3. Since the new Xbox One offering launched on June 9th, we've seen sales of Xbox One more than double in the US, compared to sales in May, and solid growth in Xbox 360 sales.
While the Microsoft note came only a few weeks after the Kinect-free $399 offering was launched, it certainly suggests that the cost of Kinect was something keeping customers from buying Xbox One.
What is the new Kinect deal?
Since offering the cheaper, Kinect-Free Xbox One, Microsoft has continued to sell the more expensive version of the console bundled with the motion sensor. The company had not offered Kinect as an add-on peripheral for people buying the $399 bundle, but it promised that eventually it would. Last week, the company posted news of the release date for the device on the Xbox blog.
We've always believed in the magic Kinect brings to Xbox One and today we're excited to confirm that, beginning in October 7, fans will be able to purchase a stand-alone Kinect sensor for Xbox One. The stand-alone Kinect sensor comes with Dance Central Spotlight, the latest in the dance series from developer Harmonix, which will be available as a digital download and features a soundtrack of 10 hot tracks. Kinect with Dance Central Spotlight will be available at retailers for $149.99.
The announcement returns Kinect to the status it has with Xbox 360, except at a price $50 higher than the original $99.99 the 360 version of the peripheral originally cost (it can be found for less on sale now). The value of Dance Central Spotlight -- which at full retail would cost $59.99 -- does effectively lower the price on the device.
Why is Microsoft doing this?
Kinect, which I own for the 360, enhances the Xbox experience, and the 360 is much less optimized for the device than is the Xbox One. Though on the surface it seems silly to believe customers will pay more for the Kinect after the fact, they just might if Microsoft releases a game or added feature based on the motion-sensing technology that makes people want the device.
Nothing about the Xbox One at launch made people want to pay for the Kinect when they could buy a motion-sensor free PS4 for $100 less. Down the line, however, once a customer owns an Xbox One, he might be intrigued by some of its existing features and pushed over the top by a hot game. It's not a guarantee, but it happened with the 360 and it could happen again.
Sales of the original Kinect for the 360 suggest that people like the motion sensor, it just may have been a hard pill to swallow to pay $499 up front when the PS4 was sitting on the next shelf for $399. In February 2013, GameSpot reported that Microsoft claimed sales of 24 million Kinects -- a pretty big chunk of the Xbox 360 universe of roughly around 76 million consoles cited in the same article.
The same pattern seems very likely for the Xbox One and the new stand-alone Kinect. Customers will buy a console and a game (or more) at first, then add Kinect at a later date. Having a hot game that makes use of the technology would certainly push sales of the device, but over time, it may sell anyway.
The biggest drawback of the new Kinect is the $149.99 price versus the $99.99 cost of the 360 version. That may slow sales, but Microsoft has shown a willingness to drop prices or get clever with bundles if cost proves the only obstacle to consumers buying a product.
The stand-alone Kinect will likely not be a big hit out of the box, as there simply aren't that many Xbox One consoles today without the device in people's homes. Over time, however, the device should be a solid hit.
Daniel Kline is long Microsoft. He is debating buying an Xbox One. 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.