How will Microsoft and Sony respond to the Wii U launch?

The upcoming Wii U price won't simply determine the console's own future. Once that price has been announced, it will have immediate and irrevocable effects on how consumers view the Xbox 360 and PlayStation 3.
The upcoming Wii U price won't simply determine the console's own future, says Gamasutra analyst Matt Matthews. Along with a Wii U launch date and details on hardware configurations, I will be watching news from the Nintendo press event this week to find out the official launch price for the new system. If the base model launches above $300 in the U.S., Nintendo's role in the console market will be at significant risk. On the other hand, at $250 the system could be extremely compelling to mainstream consumers. But the Wii U price won't simply determine its own future. Once that price has been announced, it will have immediate and irrevocable effects on how consumers view the Xbox 360 and PlayStation 3. Much of the current malaise in the U.S. video game market can be blamed directly on the stubbornly high prices of those two leading systems. The Xbox 360 hasn't seen a proper price cut since September 2008, when the base model was reduced to $200. The entry level PlayStation 3 model was cut to $300 back in August 2010 and to $250 in August 2011 but has now gone for over a year with no further reduction. That puts the base Xbox 360 at 54 percent more expensive and the base PS3 at 92 percent more expensive than the PlayStation 2 at a comparable point in its lifetime. When Nintendo plays its big card this week, we can expect Microsoft and Sony to relent and begin competing on price again.

Advantage: Microsoft

Microsoft has the advantage, since it began laying the groundwork earlier this year for a service-subsidized hardware program: $100 for an Xbox 360 4GB system with Kinect, after agreeing to a two-year, $15 per month Xbox Live Gold membership. Initially available only at Microsoft stores, the program has expanded to select Best Buy and GameStop locations. Is the program working? Until Microsoft or one of its retail partners gives an indication, we can't really know. However, The NPD Group, which tracks video game sales across retail and online segments, did provide indirect information which is – at the least – suggestive. According to NPD Group data provided to me, the Xbox 360 sold for an average $258 in August 2012. That's the lowest average I've seen for any month so far this year, the fourth successive monthly decrease, and is within $2 of the average right before the November 2010 launch of Kinect. xbox360.jpgI suspect we're seeing several effects here. The market is generally weak in 2012 and is often seasonally weak in August. On top of that, the number of consumers willing to spend $300 on a 2005-era console with a 2010-era add-on is shrinking every day. Somewhere in there, the $100 system with service is probably also driving down the average price, but I doubt it is the only or even the main factor. However, if Microsoft and other big-box stores like Wal-mart can work out the credit check details required for this kind of service plan, I expect consumers to respond very positively. In that case, I don't see Microsoft making dramatic cuts in its hardware prices. In correspondence with Michael Pachter, industry analyst for Wedbush Securities, he suggested that a $300 Wii U bundled with a game would push Microsoft to respond with a $250 Xbox 360 4GB bundle with Kinect and a game. That sounds about right to me, but the optics for such a bundle are less clear to me if the Wii U has a bare-bones model at $250 without a game.

Sony: At Least Fifty

Sony's situation is a bit more straightforward, since their entry-level system is still at $250. Even if the Wii U starts at $300, that's too close. The main thing Sony will need to do is drop the entry-level system to $200. The other thing Sony has often done is pack software and accessories into a bundle to increase its perceived value. In other times, that might have helped some, but I think this is the wrong time for that approach. For example, if it were to try to bundle its PlayStation Move add-on with every system while keeping hardware prices at their current levels, I'm fairly certain consumers would be uninterested. What Sony needs is as big a gap as it can afford between the Wii U and the PS3, and the bundling won't really help. Prior to the last price cut (from $300 to $250 in August 2011), the average price for the system was $312, and that average immediately dropped $40 the next month to around $272, where it has remained with some slight variations. According to official NPD Group data, the average price of the PS3 during August 2012 was $266, which is the second lowest it has been all year. If the price gets cut to $200, and all models get a comparable $50 cut, then I think we can expect the average price to drop by at least another $40, to around $220. I think it's possible that at that level it could grab some consumer interest, as happened with the drop to $300 with the introduction of the original PlayStation 3 Slim. ps3.jpgWedbush's Michael Pachter agreed with my assessment that Sony will be forced to move, but had his own angle: Sony will be forced not only by Nintendo's Wii U pricing, but also by Microsoft's. If his prediction of a $250 Xbox 360 4GB with Kinect comes to fruition, then Sony will have no choice but to cut to $200. That's spot on, and Pachter's observation brings into sharp focus for me just how much Sony's position in this industry has changed. Remember, it was Sony which relentlessly cut its original PlayStation prices and forced Sega into price cuts it could ill afford back in the late 1990s. It was Sony who used its one year head start over the competition to cut its PlayStation 2 prices in early 2002, forcing Microsoft into an uncomfortable situation as it could not bring down the original Xbox hard drive and GPU prices quickly enough. Now as a new generation begins, it is Sony that is forced to cut prices as it endures the consequences of a $600 console launch nearly six years ago.

Nintendo: Wii at $100, Wii U at $300

Finally, Nintendo will have to clear the deck of Wii stock as it makes way for the Wii U, and that means that there should actually be two price announcements coming up. The Wii U will get an official first price, and the Wii will likely get its final price. Going into the holiday, Nintendo can clear out its old stock of Wii systems by cutting the systems that are currently $150 down to $100. The conventional wisdom is that the $100 Wii did exceedingly well last holiday as a Wal-mart exclusive, and I don't see any reason they can't clear the shelves by making that an official price for all remaining systems. That cut would be a real cut, by the way, since the Nintendo Wii is selling for an average of $147 now, according to official NPD Group data from August. Because the company has so few options on system pricing, the average would likely drop to under $100 immediately. That would give Nintendo plenty of space between its legacy system and the new Wii U. I expect Nintendo to follow Microsoft's and Sony's leads into offering a range of systems at different prices. A $250 model would be cutting the margin close, perhaps too close for Nintendo who is still smarting from the forced Nintendo 3DS price cut a year ago. If such a system is offered, I expect it to be like the original 20GB PlayStation 3: absolutely no frills and limited stock. The main Wii U model will most likely be $300, possibly with a game packed in. Ideally, Nintendo should offer a model with a voucher to download a game, because this would help jumpstart consumer interest in the company's online offerings. It would also have the benefit of cutting costs for Nintendo, but it isn't clear to me yet whether Nintendo is ready to step that boldly into the online arena. Once Nintendo has announced its intentions later this week, I'll have a column on the official prices along with some more data.

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