Since launching Xbox One last November at a $499 retail price, Microsoft (NASDAQ: MSFT) has been playing catch-up to Sony (NYSE: SNE), which has had much more success with its $399 PlayStation 4. Microsoft has already done some price cutting and more might be on the way.
Since both consoles offer very similar features and neither has had a true breakout hit game title big enough to tilt the balance, many industry observers, myself included, believe that price has been the main differentiator between the two. A difference of $100 may not seem like much, but if consumers are given a choice between two comparable products and one costs $399, while the other costs $499 and comes with something you don't really want (in this case Xbox One's Kinect motion sensor), it's obvious which one people will buy.
Sony publicly claimed in a mid-August blog post to have sold over 10 million PS4s globally, while Microsoft has been less direct with its own sales totals. Still, a number of gaming websites, including GameSpot, have used various clues provided by Microsoft to estimate that Xbox One had sold 5 millions units as of the same mid-August time frame.
Microsoft, had it not insisted on bundling Kinect with Xbox One and charging $100 more, would likely have sold a lot more consoles by now. Because of the botched launch strategy, the company has spent the past few months testing different packages, price points, and special offers in order to jump-start sales and catch up to Sony.
Now, it appears that the company, which has announced lower Xbox prices in Europe, may be willing to make aggressive moves to stop PS4 from building an insurmountable lead.
What is Microsoft doing?
In June, Microsoft began selling a Kinect-free version of Xbox One for $399 in the U.S. (£349 in Europe), matching Sony's base price and configuration. Since that time the company has also offered a number of different packages in both the United States and Europe that included a game at that base price. That effectively drops the overall price by roughly $59.99 (the price of a game) since very few people would purchase a new console without buying at least one game.
Though a variety of deals have been offered that lowered the effective price, Microsoft has held a hard line with the $399/£349 base cost. Now, GeekWire has reported that a new promotion in Europe has cut the base price there to £330, which GeekWire says is about £20 cheaper than the PS4. Amazon.com's United Kingdom site was even taking pre-orders on an Xbox One bundle that included a headset and a free download of the highly anticipated game Sunset Overdrive for £329, as of Sept. 24.
It's important to note that, as of this writing, £330 is worth about $420, so in some ways, Microsoft has more room to play. Still, the price cut, which could end at any time, shows that Microsoft is willing to undercut Sony in an attempt to gain market share.
Will a price cut be coming in the U.S.?
Since dropping the base price to $399 in the United States, Microsoft has seen some success. The company claimed in a blog post that sales more than doubled in the first month or so after the price cut went into effect in June, but that was not enough to stop PS4 from claiming its sixth straight month of selling the most consoles. The same relative pattern was true in the most recently reported month, August, during which DualShockers reported that NPD said Xbox One console sales "nearly doubled compared to July," but Sony was still the sales leader.
Parity pricing has helped put Xbox One back into the conversation, but with PS4 now being perceived by many as the market leader, Microsoft needs to do more. Sony offers bundles which include a console and a game for $399 as well, so if Microsoft wants to make a run in the U.S. this holiday season, it needs to go cheaper.
If Microsoft lets Sony pull further ahead, game creators will lose interest in developing titles for Xbox One. If that happens, it's essentially a death knell for the console, so Microsoft has to act quickly and aggressively. Following the lead of what it's doing in Europe, Microsoft needs to lower the base price for Xbox One in the United States this holiday season. Yes, that will cost it a few dollars in the short run, but that money is trivial compared to the opportunity cost lost if customers opt for the PS4 instead.
Daniel Kline owns shares of Microsoft. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com 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.