At one point, it looked like Microsoft was doomed to failure -- insisting on bundling its Kinect motion sensor with the Xbox One forced the company to sell the package for $100 more than the $399 Sony charged for its PlayStation 4. Higher prices likely played a major part in consumers picking the PS4 over the Xbox One, and by August, when both consoles had been on the market for about nine months, Sony had outsold Microsoft by a 2-to-1 margin.
Less than a year into the lifecycle for the new consoles, Sony had Microsoft on the ropes, but the company failed to deliver a knockout blow. Xbox One first showed signs of mounting a comeback in June when the decision was made to drop Kinect, matching Sony with a $399 base price.
That move brought a sales increase, though Sony was still winning the monthly sales battle. More importantly, cutting the price showed Microsoft that cost -- not features or software -- was driving consumers. That led the company to get aggressive for the holiday season, reducing the Xbox One to $349 and selling bundles with free games, headsets, and other giveaways at that price.
Sony failed to counter with a price cut of its own, allowing Microsoft to get back into the game.
Xbox One is now the sales leader
Microsoft announced earlier this month (citing figures from NPD) that Xbox One has not only outsold PS4 in November and December, it bested the pace of sales for its predecessor, the Xbox 360, at the same point in its lifecycle. The company also cited NPD data showing people weren't just buying consoles in record numbers, they were also snapping up games.
"Xbox One sold more games throughout November and December in the U.S. than any other current-generation platform," Xbox Wire Editor in Chief Will Tuttle wrote on the Xbog blog.
Two months topping the sales charts does not guarantee Microsoft will stay on top, but the cash-rich company has the money to continue to undercut its rival, which is struggling in nearly all of its other business areas. Sony could have knocked Microsoft out early by building such a lead that not owning a PS4 made you an oddball. Now, Microsoft is much better equipped to slug it out over the long-term than its rival.
Microsoft brings the price cut back
After the holidays, Microsoft made the curious decision to drop its price cut and move the price of the base Xbox One back to $399. That seemed like a foolish move when the lower price seemed to be the main driver of sales growth. Fortunately, the company realized the error of its ways (or perhaps saw a sales slowdown) and brought back the $349 price as of Jan. 16th.
The company is calling the latest price cut temporary.
"Building off a record-setting holiday, we are excited to announce a new promotion in which fans in the U.S. can buy an Xbox One at a special price of $349," Xbox Corporate Vice President of Marketing Mike Nichols said in the release.
In reality, Microsoft has made it nearly impossible to return to $399. It's one thing to offer a lower price during a short window, but the company charged $349 for much of November and all of December, effectively changing consumer perception. Console prices go down over time, and it's unlikely $399 will ever be the base price again.
Sony won't (or can't) do what needs to be done
Though neither company is particularly forthcoming with exactly how many consoles it has sold, Sony still has the overall lead and could regain the monthly sales crown. The problem is that Microsoft has established that price is the first factor the majority of consumers consider, and Sony has been unwilling (or unable) to budge on its $399 base price.
Sony has attempted to counter with special bundles. The company currently offers customers a choice between four popular titles as a free digital download if they buy a PS4 at $399, but that offer is not likely to succeed. Past sales figures suggest that at the same price, consumers will pick PS4 over Xbox One. Sony should have matched the $349 price, which might not have knocked the Xbox out but would have at least made Microsoft the clear number two.
Now, Sony needs a price cut, or it could fall into second place as momentum clearly sits with Microsoft. It might be hard for Sony to swallow this financial pill, but moving hardware at a smaller margin allows the company to build the user base that will continue to buy software, apps, movies, and more down the road.
Daniel Kline owns shares of Microsoft. He also owns an Xbox One though he pretends it's for his son. The Motley Fool owns shares of 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.