Microsoft (NASDAQ:MSFT) recently announced its newest Xbox One with some interesting pricing updates. The new model replaces the original's 500GB hard drive with a 1TB one, and it includes a new wireless controller with a 3.5mm headphone jack. The console will launch in the U.S. on June 16 for $399 and will initially feature an enticing bundle with Halo: The Master Chief Collection for a limited time.
Meanwhile, the original 500GB model will receive a permanent price cut to $349, and the new controller will also be sold separately for $60. Microsoft will also ship the $25 Xbox Wireless Adapter this fall, which will connect the new controller to Windows 10 PCs, laptops, and tablets.
While these new features should please current Xbox gamers, one question still stands: how will Microsoft's new Xbox fare among its competition?
Xbox One vs. PS4 by the numbers
According to Vgchartz's latest numbers, Microsoft sold 12.6 million Xbox Ones as of May 16. That puts it ahead of Nintendo, which sold 9.7 million Wii Us, but far behind Sony (NYSE:SNE), which has sold 22.7 million PS4s.
Microsoft and Sony both launched their newest consoles in November 2013, but the Xbox One immediately fell behind the PS4 due to the price difference. The Xbox One launched at $499, while the PS4 only cost $399. Microsoft eventually lowered the price by dumping the Kinect motion sensor and offering cheaper bundles.
Perhaps Microsoft learned an important lesson on pricing from that experience. With the newest model and prices, the Xbox One is definitely an attractive option, since the PS4 only has a 500GB hard drive. From another angle, the older Xbox One's price cut to $349 now offers gamers the same storage as a PS4 for $50 less.
How much does hard drive space matter?
Hard drive spaces only matter if there are games to install. However, the average Xbox One and PS4 owner has only bought about four games so far, according to Vgchartz.
Xbox One and PS4 games, excluding DLC, have an average installation size of about 40GB. Therefore, a 500GB hard drive will accommodate about 12 games, indicating that there still isn't a huge need for a 1TB model. That desire might never arise, considering that the Xbox 360 and PS3 owners only bought an average of 11 games per console.
And beyond the numbers, the Xbox One still suffers from a lack of compelling exclusive titles. As of today, gamers are still waiting for proper sequels (not remastered editions) of popular Xbox franchises like Halo, Fable, and Gears of War to arrive.
Why Microsoft really needs the Xbox One
Companies traditionally use gaming consoles as "loss leaders." This means that Microsoft and Sony sell their consoles at thin margins or losses to take a cut of future software sales. On a $60 game, the console maker generally gets a $7 cut.
But beyond software sales, the Xbox One is an ecosystem play for Microsoft. That's why it initially promoted it as a home computer for both playing games and making Skype calls or watching shows in the living room.
The Xbox One won't run Windows 10, but it will share the same ecosystem with Windows 10 devices. "Universal apps," which run on Windows PCs, tablets, and Windows Phones, can also run on Xbox Ones. This enables players to collaborate on the same apps and play multiplayer games across all four platforms.
Windows 10 devices will also be able to stream Xbox One games over a local Wi-Fi connection, similar to Sony's Remote Play feature. Xbox Live features like chat, achievements, and gaming video clips will also be integrated into Windows 10. That tight ecosystem integration might convince Windows 10 users to buy an Xbox One instead of a PS4. The Xbox One will also finally connect living rooms to the rest of Microsoft's "One Windows" ecosystem.
The key takeaway
Microsoft's introduction of a "new" Xbox One is just a continuation of a long series of price cuts over the past year. However, Microsoft will need more than a price advantage to sell more consoles than Sony. It needs more exclusive games and next-gen sequels like Halo 5, Fable Legends, and the new Gears of War to turn the tide. Bigger hard drives, on the other hand, won't really move the needle.