Microsoft (NASDAQ:MSFT) has done everything it can to jump-start sales of its flagging Xbox One console, and it still lags well behind Sony's (NYSE:SNE) PlayStation 4. Now the company has announced a holiday price cut that pushes the effective price of the gaming system below $300.
Pricing has been a problem for Microsoft since it launched Xbox One in November 2013 at roughly the same time Sony released PS4. At launch Xbox One came bundled with the Kinect motion sensor and was priced at $499.99. PS4 did not have a motion sensing device and cost $399.99.
At the time, Microsoft was banking on the idea that its console was more than just a gaming system. Much of the launch press event was built around entertainment and using Xbox One as a way to not just play games, but to control the television viewing experienced. Kinect was a huge part of that, but consumers rejected the idea of paying $100 extra for the motion-based features.
In June, after Sony had built a sizable lead, Microsoft dropped the Kinect and lowered the price of its console to $399.99, matching its rival. That led to a sales increase but still kept Xbox One behind PS4 in monthly sales.
The cut brought price parity, but as we head into the crucial holiday season Microsoft has gone a step further and lopped another $50 off the price of its console beginning Nov. 2. That makes the base price $349.99, but the actual number gets even lower when you consider the price is being offered on a number of packages which include a free game. Since few people would buy a gaming console without picking up at least one title to play on it, this effectively pushes the price down by roughly another $60.
It's a bold strategy, but it's something Microsoft needs to do if it does not want to see Sony carry the holiday season and build an insurmountable lead.
How bad is it for Microsoft?
Neither Sony nor Microsoft regularly releases sales figures for its consoles, but in September IGN's State of the Xbox said that PS4 had sold 10 million units to Xbox One's 5 million. That's in line with the public statements both companies have made. Those numbers certainly grew in September and October, but an article from BGR.com in early October suggests that Sony maintained its 2-to-1 sales lead.
Why is Microsoft doing this?
While Xbox One is actually outselling its predecessor, the Xbox 360, at this point in this sales cycle, that won't matter if Sony continues to double Microsoft's sales. When the consoles launched they were on even footing with Microsoft perhaps having a slight edge with game developers because it has deeper pockets. The risk for the Xbox One maker comes in if the major game companies decide that since Sony has more audience it makes economic sense to develop top titles just for PS4.
Currently, both consoles have exclusive games, but those are negotiated deals the companies often pay handsomely for. That was the case for Electronic Arts' (NASDAQ:EA) Titanfall, an Xbox One exclusive, which, while terms have not been released, it's clear the company paid dearly for EA being willing to give up the potential sales to PS4 owners.
At the UBS Global Technology Conference last year, EA CFO Blake Jorgensen explained that the Titanfall deal was, as IGN phrased it, "a basic business agreement, and, for EA, it made sense to keep the next-gen title on Microsoft platforms."
"There's lots of single-platform titles," Jorgensen was quoted as saying. "Obviously, you work with the first-parties to make sure the economics make sense for all sides, and we made that decision on Titanfall."
The risk of falling behind for Microsoft is that not only will the price for exclusives go way up because developers will have to be compensated for limiting themselves to a much smaller universe, but that some game makers will drop Xbox One altogether.
Will the price cut work?
While Sony has a large lead, Microsoft has shown signs of life since it dropped the Kinect and matched Sony's pricing. Cutting the price even further may have a huge impact over the holiday season, especially for families deciding its time to upgrade their game consoles.
The hard-core gamer knows whether he prefers Xbox One or PS4 (and he may buy both ultimately) but mom and dad buying a Christmas gift may be more cost-conscious. If you're standing in a store and a PS4 plus a game costs $449.99 (the lowest price for the console plus a new game that I could find from Amazon or Best Buy) and Xbox One bundled with a game costs $349.99, then the choice might be obvious.
This is a daring strategy for Microsoft, but it's one that's likely to work at least well enough to gain some ground over the holidays and fight its way back into the competition. If Sony was smart, it would match the price cut, but it's unlikely to do so because it has been struggling as a company overall and may not be willing or able to sell consoles at a loss just to gain market share.
Microsoft can afford to do exactly that, which is why it could be able to pass Sony in sales, or at least keep Xbox One as a viable platform.
Daniel Kline owns shares of Microsoft. He is thinking about buying an Xbox One once the new price kicks in. 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.