NEWS - Monday, October 30, 2006

Xbox 360 Price Drop Is Still A Ways Off

One reason is that Microsoft continues to lose money on the Xbox 360 -- albeit to a lesser degree than it has in the past. But more notably, the Redmond company’s game console is already positioned to have a price advantage over Sony’s PlayStation 3 when the competing machine is launched next month. Versions of Microsoft’s console sell for $300 and $400, compared with the announced prices of $500 and $600 for the PlayStation 3. In addition, Sony has said it won’t be able to supply as many of its new consoles initially as it hoped. A Microsoft spokesman said last week that the company has "no plans to adjust the price of the Xbox 360 this year." Unless the company alters course, that would rule out a price reduction for the upcoming holiday shopping season. "They’ll hold off dropping the price as long as they possibly can," said Matt Rosoff, analyst at independent research firm Directions on Microsoft. In contrast, Microsoft reduced the price of the original Xbox by $100 six months after its debut. But this time around, the situation is different. In addition to the PS3’s price difference, the Xbox 360 has a yearlong head start. The situation gives Microsoft "the luxury of waiting" to reduce the price, said Michael Pachter, an analyst at Wedbush Morgan Securities. Microsoft has said its goal for the Xbox 360 is to break even on the hardware over the life of the console, putting its video-game business in a position to make money overall through the sale of games. Robbie Bach, president of Microsoft’s Entertainment and Devices Division, said in July that he expects the video-game business to become profitable in the company’s 2008 fiscal year. The Entertainment and Devices Division as a whole showed financial progress in Microsoft’s first-quarter earnings report last week, which the company credited largely to the Xbox 360 business. The division posted revenue of more than $1 billion for the quarter, a 70 percent increase. Meanwhile, the division reduced its loss to $96 million, from a $173 million loss in the same quarter a year before. Chris Liddell, the company’s chief financial officer, told analysts that the Xbox 360’s financial picture was improving in part because of reduced manufacturing costs. Such expenses decline as component costs go down over the life of a console. "We are seeing lower cost-per-console. We’re coming down the manufacturing cost line, and in fact we’re doing better than what we had hoped for," Liddell said. Microsoft says it has sold 6 million Xbox 360s since the console was released, and it expects to increase that number to 10 million units by the end of the upcoming holidays.


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