Microsoft (NASDAQ:MSFT) is losing the console war, but taking a page from wireless carriers or from Amazon could give it a way to get back on top.

Though neither company releases specific sales data on a regular schedule, media reports suggest that Sony's (NYSE:SNE) PlayStation 4 has outsold Microsoft's Xbox One by a 2-1 margin. As we head into the crucial holiday season the numbers stand at roughly 10 million PS4s sold to only about 5 million Xbox Ones.

Microsoft has made every effort to reverse the slide including unbundling the Kinect motion sensor from its console and dropping its base price to $399 to match Sony. The company has also aggressively offered deals including bundles with games, headsets, and other goodies, as well as other promotions. Heading into the holiday the company has gotten even more aggressive, lowering its base prices by another $50 to $349 and even offering that price on some bundles, which include a game.

And while the impact of the holiday deal has yet to be seen, dropping Kinect, lowering prices, and adding value with bundles has not yet turned around Xbox One's fortunes. According to VGChartz, which tracks console sales, Sony sold 178,000 PS4s globally during the week of Sept. 14 while Microsoft moved 94,000 Xbox One consoles during that period. That roughly continues the 2-1 trend, which Microsoft shows no sign of being able to break out of.

Because of that, the company needs to do something radical in order to prevent Sony from building an insurmountable lead and what would be more radical than dropping the price of its console to $0?

The Xbox One holiday bundles Source: Microsoft 

Why would Microsoft do this?
Before considering the how, it's worth examining why Microsoft should consider making its console free. Selling consoles is not really about selling the console, it's about controlling the living room. If a company has its box, be it a game console or some other device, on your TV it essentially has a storefront in your house. That store allows it to sell everything from apps to movie rentals, and other content. Most importantly in the case of Microsoft or Sony is that it allows for the direct download of games, which is increasingly becoming how new titles are purchased. 

How would Microsoft do this?
There are two paths which Microsoft could pursue to be able to give away its console.

The first would be to follow the model of the wireless companies which offer subsidized phones for much less than full retail value (and even free sometimes). In the case of the mobile phone providers, they give the phone away in exchange for higher monthly subscription fees. 

Microsoft could do the same and offer a free console tied into its premium Xbox Live Gold accounts, which currently cost $59.99 annually full retail (though it can be found cheaper through retailers other than Microsoft). The company could, as the wireless carriers do, mark up the monthly/annual service plan in exchange for providing a free console. That would open it up to the huge audience of gamers who want a next-gen console but do not have the money to spend up-front.

The second option would be for Microsoft to offer an ad-supported version of Xbox One. Amazon (NASDAQ:AMZN) has done this with its Kindle with Special Offers, which offers versions of the e-reader with ads at a lower price. Microsoft could do the same, requiring users to watch a video before playing a game (in the fashion of YouTube) and inserting ads in other relevant spots.

Microsoft can afford it
Giving away a $399 ($349 through the holidays) console would be a bold move, especially when the consoles are sold nearly at cost in the first place. That means Microsoft would lose a significant amount of money on each console it gives away, but it's reasonable to think it could recoup the loss partly through increased Xbox Live God revenue or partly through ads.

The real gamble for Microsoft would be whether the recipients of a free Xbox would spend enough money over the eight-to-10-year lifespan of the console on games, apps, and other purchases to offset whatever loss the company takes on giving away Xbox One. If a decent percentage of the cost can be recovered from subscription or ad revenue, which it likely could, then Microsoft could make this happen and deal PS4 a death blow.

Microsoft can afford to front the cash and get paid back over years while Sony, which has financial troubles in other divisions and has forecast a huge loss this fiscal year, likely could not. 

Giving away Xbox One would be a bold move, but it's one that would likely change the game and make Microsoft the console leader for years to come.