Digital Nerd

Friday, August 19, 2005

Nice round up on this weeks Xbox pricing saga

Via Engadget:

Xbox 360 Console bundle

Let’s the games begin continue!

It’s been quite a busy week for both Microsoft and Sony. Earlier this week Microsoft released final pricing for its Xbox 360 system. Sony “responded”, in kind, by slapping a big helping of FUD on the table (via an Amazon pre-order page). It’s, of course, possible that Sony had nothing to do with the very-well-timed pre-order page. However, the battlefields of these wars are riddled with this type of chicanery.

Seriously though – does ANYONE expect to be able to walk into a store in March and buy a PS3 for $299? I suspect that the answer is no, but that’s alright; it’s all part of the gamesmanship that’s at the heart of the console wars.

Don’t get me wrong; Microsoft is no stranger to these games and currently they’re living through the flip-side of such creative fact-dispensing. The introduction of 360’s two-tiered pricing has left many scratching their heads (usually with the middle finger). The “Core” system is a bit shy on some of the, uh, core elements. Xbox Live? Not without an extra purchase of a memory card. Original Xbox games? Be prepared to buy the hard drive. Wireless controllers? Nope.

No wireless? No hard drive? No Xbox Live. Excuse me – these now-options were billed as being at the heart of the system. Understandably many are frustrated to hear that their wallets will be lightened as a result of this news. So the

question becomes: “Why did Microsoft do it?” Oh sure – it’s easy to say that it’s a PR move – get people thinking $299 and ooch them up to the $399 model. It’s a technique that car salesmen have been using since, well, forever. After all, it’s hard to deny the value one gets for his/her additional Franklin, and while it’s probably true that the appearance of the $299 price point played a large part in their decision, it just might be more interesting to look at the long-term benefits of such a move.

Namely, one must look at the economics of hard drives. The problem with including a hard drive is, of course, that the floor-price of hard drives rarely comes down. That’s not to say that you can’t buy more for your money. You’re purchasing power does, in fact, increase by quite a bit every year. For instance, at the time of this writing you can purchase a 160 gig hard drive for just 60 dollars. This is twenty times the size of the original Xbox’s hard drive. The problem is that this increase in purchasing power is asymmetric. The same massive curve doesn’t happen at the floor. For instance, that 8 gigabyte hard drive in the original Xbox will still cost you $20 today. There has been very little movement at the floor level. In fact, there was even a period of time when Microsoft apparently substituted 20 gigabyte hard drives in the original Xboxen because they were essentially the same price.

Over the course of the next four years, Microsoft will be expected to keep lowering the price. The problem, as they undoubtedly discovered with the original Xbox, is that the hard drive can add as much as $20 to the cost. While $20 might not seem like a lot of money, in the consumer electronics world where decisions about 5 cent parts are scrutinized and debated, $20 is a big chunk of change.

It’s all about the COGs (Cost of Goods) and it becomes quite hard to lower the end cost if you’ve got one rather large chunk that never seems to get all that much cheaper.

By establishing the “Core” system as one without a hard drive, Microsoft will be able to lower the price of the core system while retaining the freedom to tweak the premium package in such a way as to derive additional revenue. Expect the “Premium” option to have a less drastic price fall. Instead, expect to see the premium option come with larger hard drives, next generation optical drives, etc.

The good news is that such two-tier pricing increases the likelihood of a PS3 launch price drop. Until then why don’t we all just agree that the Xbox 360 costs $399.


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10:36 PM  

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