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Cheaper Thrills From Microsoft

Leave it to Microsoft (Nasdaq: MSFT  ) to jump the gun on making headlines before this morning's launch of the annual Electronic Entertainment Expo video game industry trade show.

The software giant is lowering the price of its entry-level console. The Xbox 360 with a 20-gigabyte hard drive was marked down by $50 to $299 on Sunday, or within firing distance of Nintendo's (OTCBB: NTDOY.PK) market-leading Wii.

This doesn't mean that price alone is dictating the Wii's popularity. Everything from the system's innovative motion-based controller to its catalog of audience-widening titles has been credited with putting the Wii atop both the Xbox 360 and Sony's (NYSE: SNE  ) PS3 on the monthly sales chart. However, Microsoft's battle is more against Sony than it is with Nintendo at this point. And Sony, for now, isn't flinching on the price front.

Plenty is at stake in the console competition these days, especially when digital delivery is granting the system makers a little more pricing flexibility. In the old days, companies sold their consoles on thin -- if not negative -- margins, knowing that they would make it up in software royalties. That plan remains, but now the companies stand to benefit as die-hard gamers pay to download mini-games, episodic installments, and add-ons.

Microsoft is paying $50 million to Take-Two Interactive (Nasdaq: TTWO  ) for a pair of follow-ups to its smash hit Grand Theft Auto IV. The episodes will be delivered digitally through the Xbox Live Marketplace.

Naturally, Microsoft would prefer to have as many installed systems out there as possible, making this weekend's price cut a logical move, even if it means taking a bigger hit on the hardware side.

It also should come as no surprise to find Microsoft rolling out a new 60-gig model at the old $349 price point. Now that so many high-margin titles are being distributed digitally, it's in the company's best interests to put out chunkier hard drives.

Over the next few days, the trade show will tantalize gamers with new titles and industry developments. Microsoft's price cut is a treat for buyers, but it's really all about being a treat for Microsoft down the road.

Other ways to get into the game:

Microsoft is a Motley Fool Inside Value pick. Take-Two Interactive Software is a Rule Breakers recommendation and Nintendo is a Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz doesn't have as much time to play video games as he used to, though he has played the six top titles for the month of May. He does not own shares in any company mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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