Microsoft (NASDAQ: MSFT) has clearly decided that lower prices are the way to go in helping the Xbox One make up its sales deficit to Sony's (NYSE: SNE) PlayStation 4.
The company, which lowered the price in June to $399 by dropping the Kinect Motion Sensor from its console (and thus matching the PS4 base price), has announced a one-week promotion that effectively lowers the price another $59.99. For the week of Sept. 7 through Sept. 13, people who buy an Xbox One will also receive one free Xbox game of their choice, which is significant because popular titles, including recent releases like Activision Blizzard's (NASDAQ: ATMI) Destiny, usually sell for $59.99 (though that one can be found for a few cents cheaper on sites like Amazon).
Microsoft is offering the deal on all its Xbox One bundles, including ones that already come with a game. The company explained the pricing on the Xbox blog:
The offer is valid for any retail Xbox One game, and the offer is good for our Xbox One system bundles, too -- so if you want to pick up the Xbox One Madden NFL 15 Bundle or Forza Motorsport 5 Bundle, you're getting another free game of your choice priced at $59.99 or lower on top of it!
Sony has sold a console bundled with specific games in the past at various prices. Currently, the company has a deal to buy a PS4 and a copy of Destiny, which Amazon and Wal-Mart, among others, are selling for $449.99 -- only a $10 break over buying both separately.
If price is the determining factor for people choosing to buy a console, then this deal from Microsoft makes Xbox One the cheaper console. The free game deal may also feel more like actual savings than promotions that bundle controllers or other accessories, because anyone buying a new console is almost certain to buy at least one game at the same time.
Why is Microsoft doing this?
Based on numbers Sony has publicly released and ones Microsoft has hinted at, the PS4 has sold around twice as many consoles, (10 million) to roughly 5 million for Xbox One, Time reported. Microsoft needs to close the gap, or developers may lose interest in releasing titles on the platform. That's a long way from happening as we are less than one full year into the release cycle for the current generation of consoles, but it's a reasonable fear.
It's also important to note that Sony's console has been available for months in 72 countries and territories around the world, according to the news magazine, and Xbox One, until last week, was only for sale in 13. That changed beginning Sept. 3, as Microsoft announced on the Xbox blog that it was adding 29 new markets for Xbox One.
More markets should increase sales of the console globally, but the free game promotion -- which is only valid in the U.S. -- could kick-start demand domestically. The last generation of consoles was a three-company race between Microsoft, Sony, and Nintendo (NASDAQOTH: NTDOY). Nintendo is already struggling this time around with its Wii U being seen by many as a failure. Microsoft, which makes money from games sales as well as app and other content purchases on Xbox Live, not console sales, needs to maintain or grow its base of installed customers.
Every Xbox installed in someone's home essentially serves as a mini store for the company. If people buy PS4s instead of Xbox Ones, those stores either close (if the person switched from an Xbox 360) or never open in the first place.
Will it work?
Dropping the Kinect and lowering the starting price for Xbox One has helped Microsoft sell more consoles, though it has not been specific as to how many.
"Since the new Xbox One offering launched on June 9th, we've seen sales of Xbox One more than double in the U.S., compared to sales in May," the company wrote on it Xbox blog in mid-July. Though no further sales data was provided, that news suggests price was stopping people from buying the console, and was maybe even sending them to PS4.
Offering a free game for one week in September will likely not be a long enough sample time to dramatically cut into Sony's lead. What it could do, however, is provide Microsoft with data to decide whether it should offer the same promotion during the holidays. If the deal increases sales, then Microsoft could decide to go all-in and offer it between Thanksgiving and Christmas. Should that happen, then Sony may be forced to offer a similar promotion.
This is a great deal for consumers and has the potential to push prices lower in general. It's also hard to see it as bad for Microsoft since the company can afford to lose money on console sales as long as it keeps building its user base.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard 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.